Edited version of private ruling

Authorisation Number: 1011571724374

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Ruling

Subject: GST and consultancy services

Issue 1

Question 1

Is the supply of consultancy services to an Australian entity (X) for research work performed outside Australia subject to GST?

Answer

No, the supply of consultancy services to X is a GST-free supply.

Issue 2

Question 1

Are reimbursed project expenses incurred in the course of supplying the consultancy services to X subject to GST?

Answer

No, reimbursed project expenses incurred in the course of supplying consultancy services to X are not subject to GST.

Facts

You are an individual who provided consultancy services to X for a few weeks.

X were engaged by an overseas entity (Y) to provide environmental compliance services for a marine seismic survey.

Seismic survey activities are regulated by international and national environmental guidelines in respect of sub-surface 'noise' to marine mammals.

You were contracted by X to perform the following research work for a few weeks :

· undertake marine mammal observations (MMO) from onboard the ships

· passive acoustic monitoring (PAM) for marine mammals using sound equipment which was fed into specific software for acoustic analysis

· conduct interviews of vessel staff to contribute to the Environmental Compliance Register (ECR)

All work was conducted from on board the ships.

The PAM and MMO services you supplied, as part of a team engaged by X, were to ensure the seismic vessel operations being conducted by Y complied with national guidelines.

Under these guidelines, for example, the MMO can make a request to the ship's 'chief' to alter the ship's seismic operations. The reports of each request were provided daily to Y, via your 'team leader', including whether or not the request to alter operations was complied with.

You worked with other team members engaged by X to prepare the ECR. The ECR provides Y with a 'progress' report on the compliance of the ships operations with various international and national marine environmental statutory and regulatory requirements.

During the period onboard the ships you could liaise directly with X by email if required, or via the 'team leader'

X did not have any representatives aboard the ships during the five-week period.

You are registered for GST and you are not an employee of X.

X is a company that is registered for GST.

You were reimbursed by X for project expenses such as air travel, accommodation, taxi fares and meal costs incurred on route overseas. These expenses were incurred both within and outside Australia.

You advise that the project expenses were equivalent to about 5% of the value of your consulting services.

Reasons for decision

Question 1

Under section 9-5 of the GST Act you make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is connected with Australia; and

(d) you are *registered or *required to be registered.

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

(*denotes a defined term under section 195-1 of the GST Act)

To be a taxable supply, all of the elements of section 9-5 of the GST Act must be satisfied.

In this case, you receive a payment from X for the supply of consultancy services. The supply is made in the course or furtherance of an enterprise that you carry on and you are registered for GST. Accordingly, paragraphs 9-5(a), (b) and (d) of the GST Act are satisfied.

Therefore, the supply by you will be a taxable supply where it is 'connected with Australia' and the supply is neither GST-free nor input taxed.

Section 9-25 of the GST Act outlines when a supply is connected with Australia. In particular, subsections 9-25(5) of the GST Act deals with supplies of things other than goods or real property.

Subsection 9-25(5) of the GST Act states:

A supply of anything other than goods or *real property is connected with Australia if either:

(a) the thing is done in Australia; or

(b) the supplier makes the supply through an *enterprise that the supplier *carries on in Australia

In your case, as consultancy services were performed overseas the requirement of paragraph 9-25(5)(a) of the GST Act is not met.

Paragraph 9-25(5)(b) of the GST Act is satisfied where the supplier makes the supply through an enterprise that the supplier carries on in Australia. As you have an Australian Business Number and are registered for GST you make a supply to X through an enterprise carried on in Australia and you meet paragraph 9-25(5)(b) of the GST Act.

Therefore, the supply satisfies all the elements of section 9-5 of the GST Act and will be a taxable supply unless it satisfies one of the GST-free provisions (Division 38 of the GST Act) or input taxed provisions (Division 40 of the GST Act).

In this situation, none of the input taxed provisions apply. However, section 38-190 of the GST Act may apply to make the supply GST-free.

Subsection 38-190(1) of the GST Act lists supplies of things other than goods or real property for consumption outside Australia that are GST-free.

Items 2, 4 and 5 in the table in subsection 38-190(1) of the GST Act are not considered relevant to your situation. However, your supply may be GST-free under item 1, or item 3, in the table in subsection 38-190(1) of the GST Act. We shall firstly consider 'item 3':

Item 3 - supplied used or enjoyed outside Australia

Item 3 in subsection 38-190(1) states:.

Item 3

a supply:

(a) that 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 of 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.

Paragraph (a) of Item 3 in subsection 38-190(1) of the GST Act applies to a supply of a thing, other than a supply of goods or real property, which is made to a recipient who is not in Australia when the thing supplied is done. A recipient, in relation to a supply, is the entity to which the supply was made.

In this case the recipient of your consultancy services is X, who is in Australia at the time of the supply being performed overseas. Therefore, your supply would be excluded from the application of Item 3 in subsection 38-190(1) of the GST Act by paragraph (a).

However, if a supply to a recipient fails the 'not in Australia' requirement in paragraph (a) of Item 3, it is necessary to consider whether subsection 38-190(4) of the GST Act applies. That subsection extends the scope of item 3 and states:

a supply is taken, for the purposes of item 3 in that table, to be a supply made to a recipient who is not in Australia if::

· it is a supply under an agreement entered into, whether directly or indirectly, with an Australian resident; and

· the supply is provided, or agreement requires it to be provided, to another entity outside Australia.

Firstly, you satisfy paragraph 38-190(4)(a) of the GST Act as your supply of consultancy services is set out in a contractual arrangement with X which is an Australian resident. We shall now consider whether 'the supply is provided to another entity outside Australia' and you satisfy paragraph 38-190(4)(b) of the GST Act.

Provided to another entity

In your situation, you make the supply of consultancy services to X, who were engaged by Y to provide environmental compliance services. Your role during the five-week period of the contract included undertaking marine mammal observations (MMO), passive acoustic monitoring (PAM) for marine mammals and conducting interviews of vessel staff to contribute to the ECR. All work was conducted while on board ships owned by Y.

The PAM and MMO services supplied were required by Y to ensure the seismic vessel operations they were conducting comply with national guidelines. For example, under these guidelines a MMO can request an immediate alteration to the ship's seismic operations. Such requests were collated and reported daily to Y.

The ECR provided Y with a 'progress' report on the compliance of the ships operations with various international and national marine environmental statutory and regulatory requirements.

In order to determine whether the supply is provided to another entity outside Australia and satisfies paragraph 38-190(4)(b) of the GST Act, we can take guidance from the principles outlined in Goods and Services Tax Ruling 2005/6 (GSTR 2005/6). Paragraphs 66 to 82 of the ruling discuss how to determine whether the supply is provided to another entity.

Firstly, GSTR 2005/6 distinguishes between the word 'provided' (as used in subsection 38-190(4) of the GST Act) and the word 'made' (as used in item 3). In the context of section 38-190 of the GST Act the contrasting words indicate that if an Australian resident contracts for a supply to be provided to another entity, the place of consumption should be determined with regard to the entity to which the supply is provided, not the entity to which the supply is made. Accordingly, we should look at the actual flow of services as distinct from the contractual flow.

GSTR 2005/6 then advises that to determine the actual flow of services it is necessary to understand both the 'character' and the 'nature' of the supply. Only by understanding the substance and reality of what is being supplied can we determine the entity to which a supply is provided and hence whether it is consumed outside of Australia.

From the information supplied, X were contracted by Y to provide environmental compliance services in respect of their seismic operations. Your team provided the ships with the necessary real time information to ensure the seismic operations were performed in accordance with national guidelines. While onboard the ships X's team also collated the necessary information to update the ECR which reports their compliance with other environmental statutory and regulatory requirements.

In our view your supply to X is being 'provided' to Y outside of Australia and not to X. Accordingly your supply meets the requirements of paragraph 38-190(4)(b) of the GST Act.

As your supply meets the requirements of subsection 38-190(4) of the GST Act it falls under the extended scope of paragraph (a) of item 3 in the table in subsection 38-190(1) of the GST Act. It now remains to consider whether 'effective use or enjoyment' takes place outside Australia and you meet paragraph (b) of item 3.

Effective use or enjoyment

The ATO's view on how to determine whether effective use or enjoyment of a supply takes place outside Australia is outlined in Goods and Services Tax 2007/2 (GSTR 2007/2). Paragraphs 39 to 43 of GSTR 2007/2 state:

Our approach to determining the place of effective use or enjoyment of a supply

39. Paragraph (b) of item 3 requires the place of effective use or enjoyment of a supply to be determined (that is, whether the place is outside Australia). As paragraph (b) refers to the 'effective' use or enjoyment of the supply, it is necessary to inquire as to the entity that has the actual use or enjoyment of the supply.

40. The requirement in paragraph (a) of item 3 refers to the recipient of the supply. The recipient of the supply is the entity to which the supply is made. A supply that is made to a recipient entity may be provided to another entity. If a supply is made to a recipient and provided to another entity, the entity that actually uses or enjoys the supply is that other entity. For example, if a supply of travel services is made to a company (recipient) and the travel is undertaken by an employee of the recipient, the supply is provided to the employee and it is the employee that actually uses or enjoys the supply.

41. A supply is made to a recipient and provided to another entity if in the performance of a service (or in the doing of some thing) the actual flow of that supply is to an entity that is not the recipient entity with which the supplier made the agreement for the supply. That is, while the contractual flow of the supply is to the recipient entity, the actual flow of the supply is to another entity.

42. Thus in determining where a supply is used or enjoyed it is first necessary to establish the entity to which the supply is provided (the providee entity). The providee entity is also the recipient if the supply is not provided to some other entity. However, if the supply is provided to some other entity that other entity is the providee entity.

43. Having determined the providee entity it is then necessary to consider whether use or enjoyment of the supply by that providee entity takes place outside Australia.

In your situation, the recipient of your supply is X, however, the providee entity is Y. Accordingly, as these providee entity uses or enjoys the supply outside Australia, paragraph (b) of item 3 in the table in subsection 38-190(1) of the GST Act is satisfied.

As you meet paragraphs (a) and (b) of item 3 in the table in subsection 38-190(1) of the GST Act you are making a GST-free supply.

As you are making a GST-free supply under item 3 it is no longer necessary to consider whether item 1 in the table in subsection 38-190(1) of the GST Act applies.

Issue 2 Question 1

Detailed reasoning

In this situation, the payment received from X consists of an amount for the consulting service you provide plus a separate amount as reimbursement for the project expenses you incur. Therefore, it is necessary to determine whether the reimbursement forms part of the consideration for the supply of your consulting service to X.

The treatment of disbursements and reimbursements is considered in Goods and Services Tax Ruling GSTR 2000/37 Goods and services tax: agency relationship and the application of the law. Paragraph 49 of GSTR 2000/37 provides that:

  …[I]f goods and services are supplied to a solicitor to enable the solicitor to perform services supplied to the client, GST is payable by the solicitor on any reimbursement by the client of expenses incurred on those goods and services, whether separately itemised or included as part of the solicitor's overall fee. This is because the reimbursement is part of the consideration payable by the client for services supplied by the solicitor.

You incurred expenses such as air travel, accommodation, taxi fares and meal costs to enable you to perform the consultancy services required under your contract with X. According to the principle in GSTR 2000/37, the reimbursement of these project expenses forms part of the consideration of your overall supply of consulting services to X.

As the reimbursement of project expenses is part of your overall consideration from X, it also forms part of the GST-free supply of your consulting services. Accordingly, it is not subject to GST.

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