Edited version of private ruling

Authorisation Number: 1011613521066

Subject: Supplies made pursuant to Service Agreement

Question:

Are supplies of support, maintenance and system consulting services made by A to B but provided to C GST-free for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act')?

Answer:

No, supplies of support, maintenance and system consulting services made by A to B but provided to C are not GST-free for the purposes of the GST Act.

Relevant facts and circumstances:

The Parties:

A is GST registered and has its premises in Australia. A has entered into a Service Agreement (see below) with B.

B is a company registered in Germany with its registered office in Germany and does not have an office or any representation in Australia.

C is a company incorporated in Australia.

Service Agreement:

B has sold software to C and agreed to provide consulting and support services to C.

B has subcontracted to A the obligation to provide the consulting and support services to C. Pursuant to a Service Agreement A agrees to provide to B the following services:

I. Support and maintenance services for C

II. …

III. 24hrs support services for C

IV. System consulting services for C

A agrees to provide those services in line with agreements between B and C.

Clause 2 of the Service Agreement provides that B shall pay A a monthly flat fee plus all reimbursable expenses including GST that may apply, together with such other amounts in respect of other goods and services agreed to be provided, including any GST on these amounts.

Ruling request:

In the ruling request A advised that A performs the services pursuant to the Service Agreement in Australia, i.e. A provides the consulting services to persons who are in Australia (i.e. C) and provides IT support services in respect of IT systems which are located in Australia.

Pursuant to clause 2 of the Service Agreement A issues invoices to B which include GST.

Recently B queried whether the services supplied by A are subject to GST.

Subsequent e-mail:

In an e-mail A confirmed that B does not have an office or any representative in Australia and that the services supplied by A pursuant to the Service Agreement are used and enjoyed by C in Australia.

Reasons for decision

Summary:

Section 38-190 of the GST Act determines whether supplies of things, other than goods or real property, are GST-free. The supply made by A to B pursuant to the Service Agreement is not GST-free under Items 1, 3, 4 or 5 in subsection 38-190(1).

Although the requirements of Item 2 in subsection 38-190(1) are satisfied, the supply nevertheless is not GST-free because subsection 38-190(3) of the GST Act applies.

Detailed reasoning:

GST-free supplies:

Section 9-5 of the GST Act provides that an entity makes a taxable supply if the supply is made for consideration, is made in the course or furtherance of the entity's enterprise, is connected with Australia, and the entity is GST registered. The supply made by A to B pursuant to the Service Agreement appears to satisfy all these requirements, but section 9-5 further provides:

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

Part 3-1of the GST Act sets out the GST-free supplies, including subdivision 38-E which deals with exports and other supplies that are for consumption outside Australia. Within subdivision 38-E section 38-190(1) deals with supplies of things, other than goods or real property, for consumption outside Australia. Pursuant to the Service Agreement A supplies support and maintenance and system consulting services (which are things other than goods or real property). We therefore consider that section 38-190 is the applicable provision for determining whether the supply made by A to B is GST-free.

Subsection 38-190(1) sets out five types of GST-free supplies, three of which are clearly inapplicable to the supply made by A - Item 1 (a supply that is directly connected with goods or real property situated outside Australia); Item 4 (a supply made in relation to rights); and Item 5 (a supply constituted by the repair, renovation, modification or treatment of goods from outside Australia whose destination is outside Australia).

Item 2 in subsection 38-190(1):

Item 2 in subsection 38-190(1) applies to a supply that is made to a non resident who is not in Australia when the thing supplied is done. 'Non-resident' is defined in section 195-1 of the GST Act as an entity that is not 'Australian resident'. 'Australian resident' is defined as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 ('ITAA'). Goods and Services Tax Ruling GSTR 2004/7 explains whether a company is 'non-resident' for the purposes of Item1 (Paras 121 -123):

A company that is a non-resident

121. A supply that is made to a company is a supply to a non-resident if the company is not a resident of Australia, as defined in subsection 6(1) of the ITAA 1936, for Australian income tax purposes.

122. As defined in that subsection a company is a resident if the company is incorporated in Australia or, if not incorporated in Australia, it carries on business in Australia and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

123. Thus if, for example, a company is incorporated in Australia under the Corporations Act 2001, it is a resident of Australia

The Service Agreement describes B as a company registered in Germany with a registered office in Germany. A has advised that B does not have any office or presence in Australia, which makes it unlikely that B has its central management and control in Australia or its voting power controlled by Australian-resident shareholders. We therefore consider that B is a 'non-resident' for the purposes of Item 2 in subsection 38-190(1).

Item 2 in subsection 38-190(1) further requires that B is 'not in Australia' when the thing supplied by A is done. GSTR 2004/7 explains (Paras 181 and 184) that this requirement:

…is in effect a proxy test for determining where the supply to that entity is consumed. The presumption is that if the non-resident or other recipient of the supply is 'not in Australia' when the thing supplied is done, the supply of that thing is for consumption outside Australia and is GST-free, provided the other requirements of the item are met.

As the Australian location of the entity to which the supply is made at the relevant time is a proxy test for identifying when consumption occurs in Australia, we consider that the expression 'not in Australia' should be interpreted in the context of the supply in question. The expression 'not in Australia' requires, in our view, that the non-resident or other recipient is not in Australia in relation to the supply. This means that a non-resident or other recipient of a supply may satisfy the 'not in Australia' requirement if that entity is in Australia but not in relation to the supply

GSTR 2004/7 sets out the test for where a company is 'in Australia when the thing supplied is done' as follows (Para 241):

241. We consider, therefore, that a non-resident company is in Australia for the purposes of item 2 and paragraph (b) of item 4 if that company carries on business (or in the case of a company that does not carry on business, carries on its activities) in Australia:

(a)  at or through a fixed and definite place of its own for a sufficiently substantial period of time; or

(b)   through an agent at a fixed and definite place for a sufficiently substantial period of time.

Item 2 in subsection 38-190(1) requires that these tests be satisfied 'when the thing supplied is done'. GSTR 2004/7 provides (Para 199) that where the 'thing done' is the supply of a service, 'when the thing is done' refers to the period of time during which the service is performed. A confirmed by e-mail that B does not have an office or any representation (such as an agent) in Australia. Consequently we consider that B is not 'in Australia' when the thing supplied is done as required by Item 2.

The next requirement of Item 2 is expressed in the alternative, i.e. paragraph (a) or paragraph (b) must be satisfied. Paragraph (b) of Item 2 requires that the non-resident (i.e. B) acquires the thing in carrying on the non-resident's enterprise, but is not GST registered or required to be GST registered. 'Enterprise' is defined in section 9-20 of the GST Act to include an activity or series of activities done in the form of a business. The ruling request states that B is the vendor of the software system in relation to which A provides the services, that C purchased the software from B, and that A performs the services under a subcontract with B (the Service Agreement). We therefore consider that B acquires the services from A in carrying on B's enterprise and we have confirmed that B is not GST registered. We therefore consider that the requirements of paragraph (b) in Item 2 are satisfied.

As the requirements of Item 2 in subsection 38-190(1) are satisfied, the supply made by A to B pursuant to the Service Agreement is GST-free unless subsection 38-190(3) applies.

Subsection 38-190(3):

Subsection 38-190(3) provides that a supply covered by Item 2 is not GST-free if it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident and the supply is provided, or the agreement requires it to be provided, to another entity in Australia.

In our view the first requirement in subsection 38-190(3) is satisfied as A makes the supply of services pursuant to an agreement (i.e. the Service Agreement) entered into with a non-resident (i.e. B). As discussed above, 'non-resident' is defined in section 195-1 of the GST Act as an entity that is not 'Australian resident', 'Australian resident' is defined as a person who is a resident of Australia for the purposes of the ITAA, and B is not 'Australian resident' as B is incorporated in Germany and does not have its central management and control in Australia or its voting power controlled by Australian-resident shareholders.

In relation to the requirement in subsection 38-190(3) that the supply is provided, or the agreement requires the supply to be provided, to another entity in Australia, Goods and Services Tax Ruling GSTR 2005/6 explains the meaning of 'provided' as follows (Paras 59-61):

59. The word 'provided' is used in subsection 38-190(3) to contrast with the term 'made' in item 2. In the context of section 38-190, the contrasting words indicate that if a non-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.

60. The example in the Explanatory Memorandum accompanying the Bill that introduced subsection 38-190(3) illustrates this. In that example, non-resident parents contract for the supply of education services to be provided to their children in Australia. The contractual flow of the services is to the parents, while the actual flow of the services is to the children. The supply is made to the parents (non-residents) and provided to another entity, each child, in Australia.

61. Thus the expression 'provided to another entity' means, in our view, that in the performance of a service (or in the doing of some thing), the actual flow of that supply is, in whole or part, to an entity that is not the non-resident entity with which the supplier made the agreement for the supply. The contractual flow is to one entity (the non-resident recipient) and the actual flow of the supply is to another entity.

Thus, although the 'contractual flow' of the services supplied by A pursuant to the Service Agreement is to B, it is necessary to determine whether the 'actual flow' of those services is to another entity (i.e. C).

To determine the 'actual flow' of a supply, GSTR 2005/6 first requires (Para 261) the nature of that supply to be established, i.e. whether it is a supply of a service, a right, or some other thing. In the present case the Service Agreement describes the supplies as support and maintenance services and consulting services and the ruling request states that B is the vendor of the software system in respect of which A performs those services. GSTR 2005/6 contains the following example of the characterisation of consulting services in relation to software:

Example 1 - characterisation of a supply of software and technical support services made by an Australian supplier to a non-resident company and provided to an Australian customer

264. US Co, a non-resident parent company, provides credit card and related payments system software world-wide to entities in the financial services industry. It adapts the software to the particular needs of each client. This software is supplied by the granting of a licence to use the intellectual property. The licence allows the financial service entities receiving the software to modify or adapt or copy the software as they like. These licences are granted outside of Australia.

265. US Co does not carry on business in Australia either through a place of business of its own or through an agent acting on its behalf.

266. US Co's contracts with its customers require US Co to provide technical support for the software supplied. As US Co has no presence in other countries, the non-resident company contracts with its global subsidiaries to perform the support services in relation to the software.

267. Aus Co, a GST registered Australian subsidiary of US Co, provides such technical support services in relation to software licensed by US Co to financial services entities in Australia.

268. The issues considered below are the characterisation of the thing supplied by Aus Co to US Co, and the impact that characterisation has on the GST treatment of the supply.

269. The facts are illustrated diagrammatically as follows:

Characterisation of the supply by Aus Co to US Co

270. Various rights are granted under the contract made between Aus Co and US Co. However, performance of the contract by Aus Co involves providing a service to the customers of US Co in Australia. In this circumstance, we do not consider that the supply by Aus Co to US Co could be characterised as anything other than the supply of a service. The fact that the service is provided to the financial services entities in Australia by Aus Co and not by US Co does not, in our view, transform the character of the supply made by Aus Co to US Co from a service to a right. Also, the character of the supply by Aus Co to US Co remains the same irrespective of whether the supply by US Co to the Australian financial service entities is determined to be a composite supply of rights or a mixed supply of rights and services to the Australian customer.

In the present case the ruling request states that B has sold software to C, has agreed to provide consulting and technical support services, and has engaged A pursuant to the Service Agreement to provide the consulting and technical support services to C. We consider that these facts fall within the Example set out above and that A supplies services pursuant to the Service Agreement, notwithstanding that B may have agreed to supply both services and rights (i.e. software) to C.

As noted above, 'provided' refers to the 'actual flow' (as opposed to the contractual flow) of the services supplied by A. Clause 1(a) of the Service Agreement specifies that A 'shall provide the following services to B:'

I. Support and Maintenance Services for C

II. …

III. 24 hours Support Services for C

IV. System Consulting Services for C

The repeated use of 'for C' in the Service Agreement indicates that the 'actual flow' of the services supplied by A is to C, making it necessary to determine whether C is 'in Australia'. GSTR 2005/6 provides (Para 402) the following test for whether a company is 'in Australia' for the purposes of subsection 38-190(3):

Consistent with GSTR 2004/7 we consider that a company, corporate limited partnership or trust is in Australia (irrespective of its residency status) if the entity carries on business, (or in the case of an entity that does not carry on business, carries on activities), in Australia at or through a fixed and definite place of its own, or through an agent at a fixed and definite place, for a sufficiently substantial period of time.

The Constitution of C requires C's head office and principal operational centre to remain located in Australia (clauses 1.2 and 1.2). We therefore consider that C is in Australia for the purposes of subsection 38-190(3).

In our view the requirements of subsection 38-190(3) are satisfied (i.e. A supplies the services under an agreement (the Service Agreement) entered into with a non-resident (B) which requires the services to be provided to another entity in Australia (C)) and the supply made by A pursuant to the Service Agreement is not GST-free.

Item 3 in subsection 38-190(1):

Subsection 38-190(3) only qualifies Item 2 in subsection 38-190(1). Item 3 in subsection 38-190(1) provides that a supply which is made to a recipient who is not in Australia when the thing supplied is done and the effective use or enjoyment of which takes place outside Australia is GST-free except in the case of a supply of work physically performed on goods situated in Australia or a supply directly connected with real property situated in Australia.

The first requirement in Item 3 is that the supply is made to a recipient who is not in Australia when the thing supplied is done. 'Recipient' is defined in section 195-1 of the GST Act as the entity to which the supply is made, i.e. B. This was also a requirement of Item 2 and we referred above to GSTR 2004/7 which sets out the test for whether a company is 'in Australia when the thing supplied is done' as follows (Para 241):

241. We consider, therefore, that a non-resident company is in Australia for the purposes of item 2 and paragraph (b) of item 4 if that company carries on business (or in the case of a company that does not carry on business, carries on its activities) in Australia:

(a)   at or through a fixed and definite place of its own for a sufficiently substantial period of time; or

(b)   through an agent at a fixed and definite place for a sufficiently substantial period of time.

As stated above, A advised that B does not carry on activities in Australia at or through a fixed and definite place of its own or through an agent. Item 3 in subsection 38-190(1) also requires that these tests be satisfied 'when the thing supplied is done' and GSTR 2004/7 provides (Para 199) that when a service is done refers to the period of time during which the service is performed. We therefore consider that the first requirement in Item 3 in subsection 38-190(1) is satisfied, i.e. A makes a supply to a recipient (B) who is not in Australia when the thing supplied is done.

The next requirement in Item 3 in subsection 38-190(1) is that the effective use or enjoyment of the supply takes place outside Australia. Goods and Services Tax Ruling GSTR 2007/2 provides (Para 42) that, in determining where a supply is used or enjoyed it is first necessary to establish the entity to which the supply is provided. In the discussion of subsection 38-190(3) above, we concluded that although the supply made by A is 'made' (i.e. contractual flow) to B, it is 'provided' (i.e. actual flow) to C.

Having established that the supply is provided to C, GSTR 2007/2 provides (Para 43) that it is necessary to consider whether the use or enjoyment of the supply by C takes place outside Australia and (Para 48) that provision of a supply to an entity at a particular location is the same as 'effective use or enjoyment' of the supply at that place. By e-mail A advised that the services are provided for use and enjoyment in Australia. Consequently the effective use or enjoyment of the services provided to C does not take place outside Australia, the requirements of Item 3 in subsection 38-190(1) are not satisfied, and the supply is not GST-free under Item 3 in subsection 38-190(1).

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