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You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1051249981607

Date of advice: 9 August 2017

Ruling

Subject: GST and supply of investment management services

Question 1

Prior to 1July 2017, are the investment management services made by the non-resident entity to Australian residents not subject to the goods and services tax (GST) on the basis that the services are not connected with the Indirect Tax Zone under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice

Yes. Prior to 1 July 2017 the investment management services made by the non-resident entity to Australian residents are not subject to GST as the supply of these services is not connected with the Indirect Tax Zone.

Question 2

From 1 July 2017, are the investment management services made by the non-resident entity to Australian residents a GST-free supply in accordance with Item 4 (a) in the table in subsection 38-190(1) of the GST Act?

Advice

Yes. From 1 July 2017, the investment management services made by the non-resident entity to Australian residents are GST-free supplies under paragraph (a) of Item 4 in the table in subsection 38-190(1) of the GST Act where the Australian residents acquire the supply for private purposes.

Question 3

Is the non-resident entity required to be registered for GST for periods prior to 1July 2017, as well as for periods from 1 July 2017 onwards?

Advice

No, the non-resident entity is not required to be registered for GST for periods prior to 1 July 2017 and for periods from 1 July 2017 onwards where the non-resident entity makes its supply of investment management services only to Australian consumers.

Relevant facts

You are a non-resident entity with no physical presence, employees or agents in Australia, and are not registered for the Australian GST.

You are an investment management firm located outside Australia and carries on an enterprise of providing investment management services (Services) to a broad range of clients situated overseas and in other overseas jurisdictions. You have authority to make investment decisions at your own discretion, subject to any specific instructions from the Client.

The services you provide to your clients consist of managing the investment portfolios held directly by the clients. These Services include, amongst other things, buying, holding and selling securities, as well as holding these securities on behalf of the clients in the capacity of custodian. During the course of providing these Services, you also provide certain ancillary services, for example, investment research, administration and reporting services.

You provide your Services to a certain group of private individual clients that are Australian residents (hereinafter referred to as "Clients") and have provided us with a copy of the agreements you have with the Clients. You consider that it is likely these Clients are acquiring the Services for solely private purposes, and are not aware of these Services being in connection with any enterprise carried on by the Clients. The Services you provide only relate to investments in securities listed on foreign stock exchanges. You do not provide any services in relation to any investments that are traded on Australian exchanges.

The fees invoiced in respect of the Services provided to the Clients currently exceeds AUD $75,000 on an annual basis.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 38-190

A New Tax System (Goods and Services Tax) Act 1999 section 188-15

A New Tax System (Goods and Services Tax) Act 1999 section 188-20

Reasons for decisions

Note: Where the term 'Australia’ is used in this document, it is referring to the 'indirect tax zone’ as defined in section 195-1 of the GST Act.

Questions 1, 2, and 3

Detailed reasoning

GST is payable on a taxable supply. Under section 9-5 of the GST Act, an entity makes a taxable supply if:

    a) the supply is made for consideration; and

    b) the supply is made in the course or furtherance of an enterprise that the entity carries on; and

    c) the supply is connected with Australia; and

    d) the entity is registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

From the information received you satisfy paragraphs 9-5(a) and 9-5(b) of the GST Act when supplying the Services as you make the supply for consideration and the supply is made in the course of a business that you carry on.

Paragraph 9-5 (c) of the GST Act – connected with Australia

The connection with Australia is one of the elements required to be satisfied before a supply is a taxable supply.

Relevant to the supply of Services is subsection 9-25(5) of the GST Act.

A supply of something other than goods or property is connected with Australia under subsection 9-25(5) of the GST Act if any of the following applies:

    a) the thing is done in Australia;

    b) the supplier makes the supply through an enterprise that they carry on in Australia;

    c) the supply is of a right or option to purchase something that would be connected with Australia;

    d) the purchaser is an Australian consumer (from 1 July 2017).

An Australian consumer is a resident of Australia who is either not registered for GST or registered for GST and acquires the supply solely for private purposes.

Supply made prior to 1 July 2017

From the facts given, the supply of Services you make is not connected with Australia as:

    a) the supply is not done in Australia;

    b) the supply is made through a business that you carry on outside Australia;

    c) the supply is not of a right or option to purchase something that would be connected with Australia

In this instance, the supply of Services you make does not satisfy paragraph 9-5(c) of the GST Act. The supply is outside the scope of GST.

Supply made from 1 July 2017

You advised you supply your Services to private individual clients that are Australian residents and they would likely acquire the Services for private purposes.

In this instance the supply of your Services will be connected with Australia under paragraph 9-5(d) of the GST Act.

However, the supply of Services is not a taxable supply to the extent that it is input taxed or GST-free and you are not required to be registered for GST.

Input taxed supply

Subsection 40-5(1) of the GST Act states that a financial supply is input taxed and subsection 40-5(2) of the GST Act states that 'financial supply’ has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 1999 (GST regulations).

The table in regulation 40-5.12 of the GST regulations lists supplies that are not financial supplies and includes Management of the assets or liabilities of another entity, including investment portfolio management and administration services for trusts or superannuation, pension or annuity funds (item 12).

Your supply of Services is not an input taxed supply as it is not a financial supply under item 12 in the table in regulation 40-5.12 of the GST regulations.

GST-free supply

Subsection 38-190(1) provides the circumstances where a supply of things, other than goods or real property, is for consumption outside the indirect tax zone and is therefore GST-free.

Relevantly, item 4 in the table of that subsection outlines that a supply of rights is GST-free in the following circumstances:

    A supply that is made in relation to rights if:

      a) the rights are for use outside Australia; or

      b) the supply is to an entity that is not an Australian resident and it outside Australia when the thing supplied is done.

As the Services are being supplied to an Australian consumer, paragraph (b) of item 4 will not apply. As such, the supply of the Services will be GST-free where:

    ● the supply is made in relation to rights, and

    ● the rights are for use outside Australia.

Supply made in relation to rights

The agreements between the Australian client and you confirm that you have authority to hold and manage the overseas securities own by the Australian client, sell and purchase overseas securities on behalf of the Australian client and provide details what information you should give to the Australian client.

Goods and Services Tax Ruling GSTR 2003/8 provides guidance on 'when a supply of a thing is 'a supply that is made in relation to rights’.

Paragraphs 75 to 77 in GSTR 2003/8 state:

    Category 3 - Supplies of services directly connected with rights

    75. A supply of services (including the provision of advice or information) that has a direct connection with rights is a supply that is made in relation to rights for the purposes of item 4.

    76. The Commissioner considers that the context and the broad policy to tax domestic consumption expenditure both suggest that a reasonably close relationship must exist between a service and a right for the service to be covered by item 4. If this were not the case, and a more remote connection were sufficient, services supplied between Australian residents that would ordinarily be thought of as being consumed in Australia could, because of the remote connection, be rendered GST-free. Additionally, if a more remote connection were sufficient, there would be a disparity between services that are connected with tangible property (which would only be GST-free if they are directly connected with that property) and services connected with intangible property (which may be GST-free on the basis of the more remote connection).

    77. With this in mind, the Commissioner considers that a supply of services is a 'supply that is made in relation to rights' for the purposes of item 4 if the services are directly connected with rights. A service will be directly connected with rights if for example:

      ● the service facilitates a dealing in or exercise of the rights; or

      ● the service affects (or its purpose is to affect) or protects the nature or value (including indemnity against loss) of the rights

Further paragraphs 28 to 29 in GSTR 2003/8 state:

    Category 3 - Supplies of services directly connected with rights

    28. A supply of services (including provision of advice or information) that is directly connected with rights is a supply that is made in relation to rights for the purposes of item 4. A supply of services has a direct connection with rights if for example:

      ● the service facilitates a dealing in or exercise of the rights; or

      ● the service affects (or its purpose is to affect) or protects the nature or value (including indemnity against loss) of the rights.

    28A. Item 4 only applies to a service that facilitates dealing in rights if the essential character or substance of the dealing is one of rights. Similarly, item 4 only applies to services that affect or protect the nature or value of a thing if the essential character or substance of that thing is rights.

    29. Examples of supplies that fit within the three categories outlined at paragraphs 27B to 28 of this Ruling include supplies of intellectual property rights (category 1), supplies of shares (category 2) and supplies of brokerage services in relation to shares (category 3).

GSTR 2003/8 provides examples of where services are considered to fit within Category 3, providing the following table at paragraph 79A:

    Service

    Our view on why these services fall within item 4

    Legal services for the preparation for a contract for the sale of copyright.

    The services facilitate a change in the ownership of the rights.

    Legal service of preparing and lodging an application for registration of a trademark.

    The services directly relate to the creation of a right.

    Brokerage services in relation to the sale of shares.

    The services facilitate a change in ownership of the shares.

Further, GSTR 2003/8 provides examples of where services are not covered by Item 4, at paragraph 79C:

    Service

    Our view on why these services do not fall within item 4

    Technical support services, in relation to the development of software.

    The services are related to the creation of the software and are not directly connected to the rights associated with the software

    Legal services to establish an entity that will subsequently hold the rights.

    The services are related to the establishment of the entity and are not directly connected to the rights that the entity will hold.

    Advice about the taxation implications of buying or selling particular rights.

    The advice relates to an outcome of dealing with rights (and does not facilitate dealing in the rights, nor is it otherwise directly connected with rights).

    Demographic study or market research, for example, to determine the economic viability of exercising rights in a particular region or site.

    The services are connected with the various proposals which are being contemplated (they do not themselves facilitate a dealing in or exercise of the rights, nor are they otherwise directly connected with rights).

    Advice concerning foreign ownership requirements which may impact on the possible purchase of overseas shares.

    The advice is connected with a proposal which is being contemplated (and does not itself facilitate dealing in or exercise of the rights, nor is it otherwise directly connected with rights).

Having consideration of these examples, we consider that the Services you provide will be directly connected with the overseas securities owned by the Australian client. We can distinguish these services from those listed in paragraph 79C, due to you having complete control over the investments in the rights. The Services require you to determine the investment strategy for your clients, and then implement this strategy. There is a direct link between the investment advice provided and the rights, as you take full control of the investments and does not require the approval of the client to act on the advice.

Due to your total control over the investments, we therefore consider that the Services 'facilitate the change in ownership’ of the rights, which aligns with the examples provided above at paragraph 79A. This can be contrasted with the examples in paragraph 79C, where the services are further removed from the dealings in the rights, in that the advice may not be acted upon, and therefore would not be directly connected with the rights.

As such, the Services supplied by your under the agreements are directly connected to the overseas securities own by the Australian client. According to paragraph 29 in GSTR 2003/8 supplies of securities are characterised as a supply of rights for GST purposes. In this instance the supply of Services is a supply made in relation to rights for the purposes of item 4 in the table in subsection 38-190(1) of the GST Act (item 4).

Paragraph (a) of item 4

A supply that is made in relation to rights is GST-free under paragraph (a) of item 4 'if the rights are for use outside Australia'

Paragraphs 108A and 123A of GSTR 2003/8 state:

    108A. A supply does not fall within item 4 simply on the basis that the essential characteristics of the rights demonstrate that they may be used outside Australia. It is the intended use of those rights that determines if the supply that is made in relation to the rights falls within item 4. The extent to which the supply is taxable or GST-free is not affected by the actual use of the rights, other than as potential evidence of the intended use.

    123A. If a supply of services is made to a recipient in relation to rights that the recipient already owns, we consider that it is the intended use of the rights at the time the services are provided that is relevant. The previous use of the rights is not relevant, other than as potential evidence of the intended use. Accordingly, a supply of a service is not GST-free if it is made in relation to rights that, before the supply of the service, were used offshore, but following the supply are intended to be used in Australia.

Our view is it is the intended use of the rights attached to a security (share or bond) that is relevant in determining whether paragraph (a) of item 4 is satisfied. If it is evident that the security is to be used overseas, the rights that are attached to that security will also be for use outside Australia.

The investments in foreign securities made by you are listed on foreign stock exchanges and the payments and holdings of the investments in foreign securities are done and managed outside Australia. In this instance the rights that are attached to the foreign securities are for use outside Australia for the purposes of paragraph (a) in item 4.

The supply of Services to the Australian consumers is GST-free under paragraph (a) in item 4 to the extent that it is not negated by subsection 38-190(2) or 38-190(2A) of the GST Act.

Subsection 38-190(2)

Subsection 38-190(2) of the GST Act states that a supply covered by item 4 is not GST-free if it is the supply of a right to acquire something the supply of which would be connected with Australia and would not be GST-free.

This subsection does not apply as the supply of Services is not a supply of a right to acquire something the supply of which would be connected with Australia and would not be GST-free.

Subsection 38-190(2A)

Subsection 38-190(2A) of the GST Act states that a supply covered by Item 4 is not GST-free if the acquisition of the supply relates to the making of a supply of real property situated in Australia that would be wholly or partly input taxed under Subdivision 40-B (residential rent) or 40-C (sales of residential premises) of the GST Act.

From the facts given, this subsection does not apply to the supply of Services.

Summary

From 1 July 2017, the supply of Services in relation to purchase and sale of foreign securities on the foreign exchange is GST-free under paragraph (a) of item 4 where you are required to be registered for GST.

Paragraph 9-5(d) of the GST Act – GST registration

Under section 23-5 of the GST Act, a supplier is required to be registered for GST if:

    a) the supplier carries on an enterprise; and

    b) the supplier’s GST turnover (current and/or projected) meets the GST registration turnover threshold (currently $A75,000 and $A150,000 for non-profit organisation).

The supplier can choose to register for GST if its GST turnover is less than $A75,000.

Goods and Services Tax Ruling GSTR 2001/7 (available at www.ato.gov.au) provides guidance on the meaning of GST turnover.

The current annual turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. The projected annual turnover is the sum of the value of all supplies made in a particular month plus the next 11 months.

The GST turnover is the gross business income (not the profit). Supplies that are not connected with Australia and GST-free supplies made by a non-resident through a business that the non-resident carries on outside Australia are excluded when calculating the GST turnover.

Supply made prior to 1 July 2017

For supply made prior to 1 July 2017, as discussed above your supply of Services to the Australian residents was not connected with Australia.

In this instance you will not include the turnover of supplies not connected with Australia when calculating your GST turnover. You are not required to be registered for GST if it is the only supply that you make to Australian residents. The supply is outside the scope of GST.

Supply made from 1 July 2017

For supply made from 1 July 2017, your supply of Services to the Australian consumers is GST-free under paragraph (a) of item 4.

In this instance you will not include the turnover of these GST-free supplies when calculating your GST turnover as you make the supply through a business that you carry on outside Australia. You are therefore not required to be registered for GST. The supply is outside the scope of GST.