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Edited version of your written advice

Authorisation Number: 1051275383260

Date of advice: 30 August 2017

Ruling

Subject: GST and supply of testing services

Question

Are the supplies of tests by the non-resident entity to Australian candidates GST-free supplies under item 4 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to the extent that the Australian candidates intend to use the rights associated with those tests at institutions or organisations outside Australia?

Advice

No. The supplies of tests by the non-resident entity to Australian candidates are not GST-free under item 4 in the table in subsection 38-190(1) of the GST Act. The supplies are taxable supplies under section 9-5 of the GST Act.

Relevant facts:

    ● You are an overseas entity and a non-resident of Australia for taxation purposes, and currently not registered for GST in Australia. You do not have any fixed place of business in Australia, including any physical or human resources in Australia.

    ● You provide testing services to candidates worldwide. There are a variety of tests offered.

    ● The tests are administered to private individual candidates in Australia. You consider that the majority of your supplies of the tests are supplied to citizens of countries other than Australia who are present in Australia for purposes such as studying. You would expect that the candidates are deemed to be residents of Australia for taxation purposes but in most cases not Australian citizens. This understanding is based on information about candidates collected at the time of the test registration.

    ● Whilst you have not historically collected details of the GST registration status of the test candidates, the candidates are private individuals and are not expected to be registered for GST. You expect the candidates would acquire the tests for private purposes. The candidates physically sit both tests in Australia.

    ● The tests assess proficiency in language and other specific skills/knowledge.

    ● After completing a test, the candidate receives an official score report which they can use for various purposes. For example after receipt of the score report, the candidate will provide their score report to institutions or organisations outside Australia.

    ● The test scores are accepted worldwide by institutions or organisations as evidence of a candidate's proficiency or specific prior knowledge.

    Candidates are able to obtain score reports and provide them to relevant institutions or organisations in a variety of ways. You have provided further details of the manner in which candidates obtain score reports.

    In addition, you enter into arrangements with the institutions or organisations both within and outside Australia. You provide the institutions or organisations with regular updates on test content and tools to verify candidate test scores. The institutions or organisations set their own admissions requirements for courses or other purposes, of which the candidate’s score may form a component part.

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 9-25

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

Detailed reasoning

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.

Is the supply of the tests a supply of rights?

Item 4 in the table in subsection 38-190(1) of the GST Act (item 4) is about supply that is made in relation to rights.

Goods and Services Tax Ruling GSTR 2003/8 provides guidance in identifying when supplies are capable of being covered by item 4.

According to GSTR 2003/8, a supply of a thing is a supply that is made ‘in relation to rights’ if it fits within one of the following three categories:

    1. supplies identified in paragraph 9-10(2)(e) of the GST Act

    2. supplies of things comprising a bundle of rights that derive their value exclusively, or almost exclusively, from those rights.

    3. supplies of services directly connected with rights.

We will now consider whether the tests are supplies that are covered by item 4.

Category 1 - supplies identified in paragraph 9-10(2)(e) of the GST Act

The creation, grant, transfer, assignment or surrender of a right are supplies identified in paragraph 9-10(2)(e) of the GST Act and these supplies are made in relation to rights for purposes of item 4.

According to paragraph 27C in GSTR 2003/8, while many transactions involve rights being supplies, a supply will only fit within category 1, if the essential character or substance of the supply, or a separately identifiable part of the supply, is one of rights. Category 1 does not cover a supply if the supply of rights is merely integral, ancillary or incidental to another dominant part of the supply where the supply is characterised by the dominant part. Example of supplies that fit category 1 includes supplies of intellectual property.

From the facts given the test measures the candidate’s language proficiency and other specific knowledge/skills. After completing a test, the candidate receives an official score report which they can use for various purposes.

In this instance we consider the supply you made is a supply of services. The supply of the tests does not fit within category 1 in this instance as it is not a supply identified in paragraph 9-10(e) of the GST Act. The supply is therefore not a supply in relation to rights for the purposes of item 4.

Category 2 - supplies of things comprising a bundle of rights that derive their value exclusively, or almost exclusively, from those rights.

Paragraphs 27E and 27F of GSTR 2003/8 state:

    27E. A supply of a thing which comprises a bundle of rights is a supply that is made in relation to rights for the purposes of item 4 if:

      ● the thing supplied derives its value exclusively, or almost exclusively, from those rights; and

      ● through the supply, the supplier either supplies the rights to the recipient or surrenders the rights.

    27F. In order to fit within category 2, a supply of a thing need not be properly characterised as a supply of rights for GST purposes, nor must it be a supply under paragraph 9-10(2)(e). The supply must, however, encompass rights and the value of the supply must be in the rights. For this to occur, any tangible thing that passes between supplier and recipient which evidences the rights (such as a bank note) must, without those rights, be worthless or of incidental worth.

An example of supplies that fits within category 2 is supplies of shares.

As determined in category 1, the supply of the tests is a supply of services. Category 2 in this instance does not apply to the supply.

Category 3 - supplies of services directly connected with rights

Paragraphs 28 and 28A in GSTR 2003/8 state:

    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 a 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.

Paragraph 79A of GSTR 2003/8 provides examples of services that are considered to fit within category 3 and state:

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.

You consider that the provision of the tests constitutes supplies of services that are directly connected with rights because:

    ● the provision of the tests is connected with the right for candidates to receive a benefit that can be used for various purposes because the provision of the tests is the necessary precursor to the right, and therefore directly relates to the creation of the right. The testing and the right obtained by candidates are fundamentally connected in so far as the right would not exist without the test.

    ● You enter into agreements with institutions or organisations to ensure that candidates will be entitled to receive benefits. In this way, you actively protect the value of the right, to ensure those rights conferred on the candidate can be exploited in the manner intended by the candidate.

In regard to ‘later use’ of a supply, paragraphs 129 and 132 of Goods and Services Tax Ruling GSTR 2007/2 provide the following:

    Later use of a supply by an entity

    129. If the nature of a supply is such that the supply is provided to an entity outside Australia and thus effectively used or enjoyed outside Australia, the fact that the results or outcomes of the supply are later used in Australia does not alter the outcome that effective use or enjoyment of the supply takes place outside Australia.

    130. For instance, if training services are provided to employees of a resident company who are outside Australia attending the training course, the later use in Australia of the skills and knowledge gained by the employees from those training services does not alter the fact that the training services are provided to the employees outside Australia and thus effective use or enjoyment of those services takes place outside Australia.

    131. Similarly, if a supply is provided to an entity in Australia, and that supply is later used outside Australia, that later use does not alter the fact that the supply is provided to that entity in Australia and thus effective use or enjoyment of the supply does not take place outside Australia.

    132. The enquiry is one of determining the exact nature of the supply having regard to all the facts and circumstances and then whether that supply, as properly described, is provided to an entity outside Australia or in Australia.

Paragraphs 133 to 136 of GSTR 2007/2 provide the following in regard to when another entity benefits from the supply:

    Another entity benefits from the supply

    133. If the nature of the supply is such that the supply is provided to an entity outside Australia and thus effective use or enjoyment of the supply takes place outside Australia, this outcome is not altered even if another entity in Australia benefits from the supply.

    134. Similarly, if a supply is provided to an entity in Australia, and another entity outside Australia benefits from that supply this does not alter the outcome that the supply is provided to an entity in Australia and thus effective use or enjoyment of the supply does not take place outside Australia.

    135. This can occur with, for example, the supply of advertising services. If the advertising services are made and provided to an entity in Australia, the fact that another entity outside Australia also derives a benefit from that supply does not alter the fact that the advertising services are provided to the entity in Australia and effective use or enjoyment of those services does not take place outside Australia.

    136. As stated at paragraph 132, the enquiry is one of determining the nature of the supply having regard to all the facts and circumstances of the supply, and then whether the supply, as properly described, is provided to an entity outside Australia or in Australia.

As determined, the supply of the tests is a supply of services.

The fact that after receipt of the score report, the candidate will provide their score report to institutions or organisations outside Australia for various purposes does not change the nature of the supply made by you to the candidate (supply of services). The candidates are only receiving services from you when receiving the official score report.

Similarly, where score reports are provided by other means at the candidate’s request, this action does not change the nature of the supply made by you to the candidate (which is a supply of services). The candidates are only receiving services from you when receiving the official score report.

Category 3 does not apply to the supply of tests.

Summary

The supply of the tests is neither a supply of rights nor a supply in relation to rights for the purposes of item 4. The supply is a supply of services.

We will now consider the GST status of the supply of services made to the candidate when the tests are done.

GST status of the supply of services

Taxable supply

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 as you make the supplies of tests 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 supplies of tests 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.

From the facts given the supplies of tests to Australian candidates in Australia are connected with Australia as:

    ● the tests are done at Australian centres in Australia (paragraph 9-25(5)(a));

    ● the tests are supplied to Australian consumers as you advised the Australian candidates (including individuals from overseas located in Australia) are residents of Australia for taxation purposes, they acquire the test for private purposes and they are not registered for GST (paragraph 9-25(5)(d)).

However, the supplies of the tests are not taxable supplies to the extent that they are input taxed or GST-free and you are not required to be registered for GST.

Input taxed supply

There is no provision under the GST Act that makes the supplies of the tests input taxed.

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.

Under item 3 in the table in subsection 38-190(1) of the GST Act (item 3) a supply is GST-free where the supply:

    a) is made to a recipient who is not in Australia when the thing supplied is done; and

    b) the effective use or enjoyment of which takes place outside Australia;

    other than a supply of work physically performed on goods situated in Australia when the thing supplied is done, or a supply directly connected with real property situated in Australia.

Item 3 is applicable irrespective of the residency of the recipients.

For the supply of supplies of tests to be GST-free under item 3 there is a condition that the individual must not be in Australia in relation to the supply when it is done.

For the purpose of item 3 we consider that the physical presence establishes whether that individual is in Australia when the thing supplied is done.

From the facts given, the candidates are in Australia when taking the tests. When the individual (non-resident and resident) is in Australia at the time of the supply, the individual is in Australia in relation to the supply when taking the tests in Australia. In this instance item 3 is not applicable to these supplies. The supplies are not GST-free.

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 connected with Australia are included when calculating the GST turnover.

From the facts given, the estimated annual turnover of the tests is above $A75, 000. In this instance you are required to be registered for GST.

The fact sheet ‘Australian GST registration for non-residents’ provides information on how a non-resident can register for GST. The link for the fact sheet is https://www.ato.gov.au/business/international-tax-for-business/in-detail/doing-business-in-australia/australian-gst-registration-for-non-residents/

Summary

The supplies of the tests to the Australian candidates are taxable supplies under section 9-5 of the GST Act.