Goods and Services Tax Determination

GSTD 2007/3

Goods and services tax: if a non-resident entity owns residential rental premises in Australia and an Australian accountant makes a supply to that entity consisting of advice about the premises and tax return preparation services, is that supply wholly or partly GST-free if made on or after 1 April 2005?

• Please note that the PDF version is the authorised consolidated version of this ruling and amending notices.
  From 1 July 2015, the term 'Australia' is replaced in nearly all instances within the GST, Luxury Car Tax, and Wine Equalisation Tax legislation with the term 'indirect tax zone' by the Treasury Legislation Amendment (Repeal Day) Act 2015. The scope of the new term, however, remains the same as the now repealed definition of 'Australia' used in those Acts. This change was made for consistency of terminology across the tax legislation, with no change in policy or legal effect. For readability and other reasons, where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Relying on this Determination This publication is a public ruling for the purposes of the Taxation Administration Act 1953. If this Determination applies to you, and you correctly rely on it, we will apply the law to you in the way set out in this Determination. That is, you will not pay any more tax or penalties or interest in respect of the matters covered by this Determination. [Note: This is a consolidated version of this document.]

1. If a non-resident owns residential rental premises in AustraliaA1 and an Australian accountant makes a supply to that entity consisting of advice about the premises and tax return preparation services, the supply is not GST-free. Even if the supply made by the Australian accountant to the non-resident property owner is GST-free under table items 2 or 3 of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act),^[1] subsection 38-190(2A) negates the GST-free status of that supply.

2. The GST-free status is negated under subsection 38-190(2A) because the acquisition of the advice and tax return preparation services by the non-resident property owner relates (directly or indirectly, or wholly or partly) to the making of a supply of real property situated in Australia that would be input taxed under Subdivision 40-B (lease, hire or licence of residential premises) or Subdivision 40-C (sale or long-term lease of residential premises).^[2]

3. Even if the acquisition of these services also relates to the making of supplies that are not input taxed supplies of real property, the supply is not GST-free. There is no apportionment under subsection 38-190(2A). For example, if the tax return preparation services relate to income returned from sources other than the making of input taxed supplies of real property or the advice includes other matters such as share investments, the supply of services to the non-resident property owner is not partly GST-free. Therefore, if the requirements of section 9-5 are met, the supply by the Australian accountant to the non-resident property owner is a taxable supply.

4. In practice, the Australian accountant may make a single supply of services comprising advice and tax return preparation services or two separate supplies, being a supply of advice and a supply of tax return preparation services. Whether there is a single supply of services or two separate supplies in any given case is determined according to the facts of the particular case and is not discussed in this Determination.

Background

5. A non-resident property owner commonly acquires a wide range of supplies in the course of renting or selling property situated in Australia. For example, the non-resident property owner may acquire real estate services, conveyancing services, repair services and accounting services.

6. Prior to 1 April 2005, supplies of such services made to a non-resident property owner were often GST-free under item 2 or 3 if the non-resident property owner was not in Australia in relation to the supply^[3] when the services were performed. By comparison, the same services were not GST-free if supplied to a resident property owner, or a non-resident property owner, who was in Australia in relation to the supply when the services were performed.

7. Subsection 38-190(2A) removes this anomaly by negating the GST-free status of a supply to a non-resident property owner if the acquisition of that supply relates, directly or indirectly, or wholly or partly, to the making of a supply of real property in Australia that would be wholly or partly input taxed under Subdivision 40-B or 40-C. Subsection 38-190(2A) ensures the same GST treatment applies to both non-resident and resident property owners who supply residential premises situated in Australia.

Explanation

8. Section 38-190 provides that in certain circumstances supplies of things, other than goods or real property, for consumption outside Australia are GST-free. A supply is GST-free if it meets the requirements of items 1 to 5. However, the GST-free status of the supply is negated if subsection 38-190(2),^[4] 38-190(2A) or 38-190(3)^[5] applies to the supply.

9. If a supply made by an Australian accountant consists of advice and tax return preparation services and that supply is made to a non-resident property owner who is not in Australia when the services are performed, the supply of the services is GST-free under paragraph (a) of item 2. The supply of advice and tax return preparation services is neither a supply of work physically performed on goods situated in Australia when the work is done, nor a supply directly connected with real property in Australia.^[6] Under paragraph (b) of item 2, a supply that is acquired by a non-resident who is carrying on an enterprise and who is not registered or required to be registered is GST-free even if the supply is directly connected with real property in Australia.

10. However, under subsection 38-190(2A), a supply made on or after 1 April 2005 that is covered by any of items 2 to 4 is not GST-free if:

•

the acquisition of the supply relates (whether directly or indirectly, or wholly or partly) to the making of a supply of real property situated in Australia; and

•

the supply of that property would be, wholly or partly, input taxed under Subdivision 40-B or 40-C.

11. The test in subsection 38-190(2A) is whether there is a connection between the acquisition of the supply and the making of a supply of real property that is input taxed under Subdivision 40-B or 40-C. It is not a requirement that the acquisition relates only to the making of supplies of real property that would be input taxed under Subdivision 40-B or 40-C. Subsection 38-190(2A) negates the GST-free status of a supply, such as the supply of advice or tax return preparation services to a non-resident property owner, even if the acquisition of those services also relates, directly or indirectly or wholly or partly, to the making of supplies that are not input taxed supplies of real property.

12. The phrase 'relates to', is not defined and takes its ordinary meaning. It has been held to be capable of wide meaning.^[7] In any case, that the phrase is intended to have a wide meaning and application is put beyond doubt by the words 'whether directly or indirectly, or wholly or partly' in subsection 38-190(2A), which amplify its scope.

13. The Explanatory Memorandum (EM) accompanying the Bill^[8] that inserted subsection 38-190(2A) further evidences Parliament's intention that the provision should have broad application. Example 9.2 illustrates that the acquisition of a supply of tax advice in the course of tax return preparation is not GST-free even though the acquisition of the advice only relates in part to the making of a supply of a rental property and the advice on the rental property only indirectly relates to the making of that supply. The EM also indicates (at paragraph 9.6) that the acquisition of architectural services for a particular property, real estate property management services, building insurance, legal services in preparing an instrument of mortgage over real property, public liability insurance and advertising services can relate (either directly or indirectly) to the making of supplies of real property.

14. The acquisition of tax return preparation services relates to the making of a supply of residential rental premises situated in Australia that would be input taxed under Subdivision 40-B or 40-C, if the tax return preparation services are performed, whether in whole or in part, to return income, deductions or other matters in respect of those premises. That an acquisition can relate to the making of input taxed supplies in an earlier period is consistent with the comments of Hill J in HP Mercantile Pty Limited v Commissioner of Taxation (HP Mercantile)^[9] concerning the requirement in paragraph 11-15(2)(a) that the 'acquisition relates to making supplies that would be input taxed'.

15. The acquisition of advice by the non-resident property owner relates to the making of a supply of residential rental premises situated in Australia that would be input taxed under Subdivision 40-B or 40-C, if the advice, whether in whole or in part, is about the residential premises. One example is advice concerning the capital gains tax implications if the property were sold. Another is advice about the effectiveness of the property as an investment as compared to other investments that the non-resident property owner could make.

16. Subsection 38-190(2A) negates the GST-free status of a supply if the acquisition of that supply relates to the making of supplies of real property situated in Australia that would be input taxed under Subdivision 40-B or 40-C. It is not a requirement that the input taxed supplies are actually made.^[10]

17. Further, satisfaction of the requirement that the acquisition of the supply relates to the making of a supply that would be input taxed under Subdivision 40-B or 40-C, does not depend on whether or not the non-resident property owner first meets the requirements of paragraphs 9-5(a) to (d). This is illustrated by Example 9.3 in the EM as in that example subsection 38-190(2A) applied in circumstances where the non-resident property owner was not registered nor required to be registered for GST.

18. Example 9.3 also makes it clear that there is no apportionment under subsection 38-190(2A) even if the acquisition of the supply is only partly related to the making of a supply of the residential premises that would be input taxed, or the property is only partly input taxed, under Subdivision 40-B or 40-C. However, even though subsection 38-190(2A) does not allow apportionment, a non-resident property owner is entitled to an input tax credit to the extent that the acquisition of the supply is a creditable acquisition.^[11]

19. The following examples illustrate the application of subsection 38-190(2A) to the supply of advice and tax return preparation services by an Australian accountant.

Example 1 – written advice about shares and Australian residential rental premises

20. Investor Co, a non-resident company, owns investments that comprise residential rental premises in Australia and also some shares in Australian companies. Investor Co acquires written advice on the tax effectiveness of these investments from an Australian accountant. Investor Co is not in Australia when the services are performed.

21. There is a single supply of written advice. The acquisition of the advice by Investor Co is partly related to the input taxed supply of the Australian residential rental premises and partly related to Investor Co's other investments in shares. Although the supply of advice by the Australian accountant is GST-free under item 2, subsection 38-190(2A) negates the GST-free status of the supply as its acquisition relates in part to the making of a supply of residential premises that is input taxed under Subdivision 40-B. Thus, the supply by the Australian accountant is not GST-free. The supply is a taxable supply if the other requirements of section 9-5 are met.

22. If Investor Co sought advice only about its investments in Australian shares, for example, whether to sell some shares and acquire other shares, the acquisition of the advice does not relate (directly or indirectly) to the making of a supply of real property in Australia and subsection 38-190(2A) does not negate the GST-free status of the supply as established under item 2.

Example 2 – tax return preparation services – Australian residential and commercial rental premises

23. John, a non-resident, owns a two-storey rental property in Australia. The ground floor is leased as a shop (commercial premises) and the top floor is leased as residential premises. John engages an Australian accountant to prepare his tax return and is not in Australia when the services are performed. The supply is therefore GST-free under item 2.

24. The acquisition of the tax return preparation services relates to the making of a supply of real property situated in Australia as the services are performed to return income, deductions or other matters in respect of that property. Although the supply of the tax return preparation services is GST-free under item 2, the acquisition of the tax return preparation services relates to the making of a supply of real property that is partly input taxed under Subdivision 40-B (that is, the top floor residential premises) and thus subsection 38-190(2A) negates the GST-free status of the entire supply. The supply of the tax return preparation services by the Australian accountant is a taxable supply if the other requirements of section 9-5 are met.

25. However, John may be entitled to an input tax credit to the extent that the acquisition of the tax return preparation services relates to the leasing of the commercial premises and is a creditable acquisition.^[12]

Example 3 – tax return preparation services and tax advice

26. Erica, a non-resident, owns a stratum titled unit in a serviced apartment complex. Erica leases the unit to Phil who resides in Australia and, in his own right, lets apartments in the complex to guests for short stays. Erica is therefore leasing residential premises to Phil, which is an input taxed supply under Subdivision 40-B.

27. Erica has an Australian accountant who prepares and lodges her tax return that includes her leasing income and deductions in respect of that unit and also income from some other investments in shares. When speaking on the phone to her accountant about the preparation of her tax return, she also seeks tax advice about her plans to invest in some Australian managed funds. In the same conversation, her accountant gives her a detailed understanding of the tax issues in relation to managed funds. Erica is not in Australia when the services are performed.

28. The facts indicate that there is a single supply of services which includes tax return preparation and advice. Although the supply of the tax return preparation services and advice is GST-free under item 2, the acquisition of the tax return preparation services relate, in part, to the making of a supply of real property that would be input taxed under Subdivision 40-B. Subsection 38-190(2A) therefore negates the GST-free status of the entire supply. The supply of the tax return preparation services and advice by the Australian accountant is a taxable supply where the other requirements of section 9-5 are met.

Example 4 – advice about shareholdings in an Australian company the only assets of which are residential rental premises

29. Mary, a non-resident, has shares in an Australian company the only assets of which are residential rental apartments in Australia. Mary acquires advice from an Australian accountant about her share investment and withholding tax. The acquisition of advice by Mary does not relate to the making of supplies of real property but relates to the holding of shares by Mary. If the supply of advice by the accountant to Mary is GST-free under item 2, subsection 38-190(2A) does not negate the GST-free status of that supply.

Date of Effect

30. This Determination applies to tax periods commencing both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10 Public Rulings).

31. [Omitted.]

Commissioner of Taxation
12 December 2007

© AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA

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Previous draft:

GSTD 2007/D2

References

ATO references:
NO 2007/6737

Related Rulings/Determinations:

TR 2006/10
GSTR 2003/7
GSTR 2003/8
GSTR 2004/7
GSTR 2012/5
GSTR 2025/1

Business Line:  ISP – GST

Legislative References:
ANTS(GST)A 1999 9-5
ANTS(GST)A 1999 9-5(a)
ANTS(GST)A 1999 9-5(b)
ANTS(GST)A 1999 9-5(c)
ANTS(GST)A 1999 9-5(d)
ANTS(GST)A 1999 11-5
ANTS(GST)A 1999 11-15(2)(a)
ANTS(GST)A 1999 38-190
ANTS(GST)A 1999 38-190(1)
ANTS(GST)A 1999 38-190(2)
ANTS(GST)A 1999 38-190(2A)
ANTS(GST)A 1999 38-190(3)
ANTS(GST)A 1999 Subdiv 40-B
ANTS(GST)A 1999 Subdiv 40-C
Tax Laws Amendment (2004 Measures No. 6) Act 2005
TAA 1953 Sch 1 Div 358

Case References:
HP Mercantile Pty Limited v Commissioner of Taxation
[2005] FCAFC 126
2005 ATC 4571
219 ALR 591
60 ATR 106

Other References:
Explanatory Memorandum to the Tax Laws Amendment Act (2004 Measures No 6) Bill 2004
Tax Laws Amendment (2004 Measures No. 6) Bill 2004