Edited version of private ruling

Authorisation Number: 1011712497310

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Ruling

Subject: GST and supplies connected with Australia

Question

Are supplies of marketing services made by X to Y non-taxable on the basis that they are not connected with Australia?

Answer

Yes, supplies of marketing services made by X to Y are non-taxable on the basis that they are not connected with Australia.

Relevant facts and circumstances

XZ is the representative member of a GST Group that includes X. X is a non-resident company.

Both XZ and X are registered for GST in Australia with effect from 1 July 2000.

Supplies of marketing services by X

X makes a supply of marketing services to an Australian supplier, Y in relation to the sale of goods to overseas buyers as per an agreement.

The marketing services also include X acting as 'sales agent' for Y's sale of goods to its overseas buyers.

As consideration for X's supplies of marketing services, X receives commissions or fees from Y.

X carries out these services entirely in an overseas country.

X does not have any operations in Australia relating to its supplies of marketing services, but does carry on another enterprise in Australia.

X has a permanent establishment in Australia in relation to another enterprise

Related services provided by XZ to X

Under their Agreement, X has engaged XZ to assist with the marketing services provided to its customers in Australia.

The Agreement provides that XZ is to act as 'sales agent' for X in providing marketing services to X's customers. However, in practice, XZ provides only limited services as follows:

· Some assistance with marketing support services performed in the overseas country.

· Collection services to X in respect of the abovementioned commissions and fees received by X, and funds are remitted to X in the overseas country by XZ.

No marketing services, as such, are performed by XZ for or on behalf of X.

Your tax agent submits that XZ is not required under the Agreement to carry out any services in Australia.

Agreements

Details of the Agreements were submitted.

Your tax agent's contentions

XZ only acts as an agent in Australia to collect and process payments received. Any support XZ provides in relation to marketing is undertaken in an overseas country. No other services are performed by XZ in relation to X's role as a sales agent for Y's sale of goods to an overseas country.

The Agreement was entered into on the understanding that XZ would only provide certain services if these services are required by X's customer. On the basis that Y does not require these services, then XZ does not carry out the services in the Agreement.

On the basis that there is no connection between X's Australian operations and X's supplies of marketing services to Y, then the supplies are not made through an enterprise that X carries on in Australia.

Accordingly, the supplies of marketing services by X to Y are not connected to Australia and, consequently, the supplies are not taxable supplies for GST purposes.

Reasons for decision

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you make a taxable supply if 

(a) you make the supply for consideration

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

(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.

The issue to be considered in this case is whether your supplies are connected with Australia.

Paragraph 9-5(c) Is the supply connected with Australia?

Connected with Australia is defined at section 9-25 of the GST Act. As you are supplying services it is relevant to consider subsection 9-25(5) of the GST Act which provides that a supply of anything other than goods or real property is connected with Australia if:

(a) the thing is done in Australia, or

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

(c) …

Guidance provided in Goods and Services Tax Ruling GSTR 2000/31: supplies connected with Australia, is relevant to this discussion.

Paragraph 65 of GSTR 2000/31 provides:

Supply of a service

65. If the 'thing' being supplied is a service, the supply of that service is typically done where the service is performed. If the service is performed in Australia, the service is done in Australia and the supply of that service is connected with Australia under paragraph 9-25(5)(a)…

Further:

Provision of advice or information

71. If a supply is the provision of advice or information and the supply involves work to create, develop or produce that information or advice for the recipient, the supply is one of the performance of services. The advice or information is done where it is prepared, produced, or created, as the case may be. The supply of that advice or information is connected with Australia if the advice or information is prepared, created or produced in Australia.

X provides services to Y in relation to the sale of goods to an overseas country. This supply has been described by your accountant as a supply of marketing services and includes X also acting as 'sales agent' for Y's sale of goods to an overseas country.

The other services supplied by X to Y is carried out in an overseas country and supplied to Y direct from an overseas country by X. As such, these services are not performed in Australia. On this basis we accept that the supplies of marketing services are not 'done in Australia'. Consequently, we consider that paragraph 9-25(5)(a) is not applicable to your circumstances.

In considering whether X is carrying on an enterprise in Australia when it supplies services to Y (paragraph 9-25(5)(b) of the GST Act) we again refer to GSTR 2000/31 which provides:

The supply is made through an enterprise carried on in Australia

78. If a supply of a thing is not connected with Australia because the thing is not done in Australia, the supply is connected with Australia if, under paragraph 9-25(5)(b), the supplier makes the supply through an enterprise that the supplier carries on in Australia.

'When enterprises are carried on in Australia' is defined in subsection 9-25(6) of the GST Act which provides that an enterprise is carried on in Australia if the enterprise is carried on through:

· a permanent establishment (as defined in subsection 6(1) of the Income Tax Assessment Act 1936), or

· a place that would be such a permanent establishment if paragraph (e), (f) or (g) of that definition did not apply

Paragraphs 84 and 88 of GSTR 2000/31 state:

84. For a supply to be connected with Australia under paragraph 9-25(5)(b), a connection must be established between the Australian permanent establishment and the supply.

…

88. Thus, permanent establishment for the purposes of subsection 9-25(6) means a place at or through which a person carries on any business and, without limiting the generality of the foregoing, includes:

(a) a place where the person is carrying on business through an agent;

(b) a place where the person has, is using or is installing substantial equipment or substantial machinery;

(c) a place where the person is engaged in a construction project; and

(d) where the person is engaged in selling goods manufactured, assembled, processed, packed or distributed by another person for, or at or to the order of, the first-mentioned person and either of those persons participates in the management, control or capital of the other person or another person participates in the management, control of both of those persons - the place where the goods are manufactured, assembled, processed, packed or distributed.

In this case we consider that the terms of the Agreement lend support to a 'connection' between XZ and the supply by X.

In that agreement, a clause appoints XZ as agent for X's sales agency role regarding sales of goods to an overseas country. While another clause outlines various services that XZ shall render for and on behalf of X in connection with X's sales agency role for sales of goods to an overseas country.

It remains to be determined whether the supply is made 'through' that permanent establishment.

Paragraph 86 of GSTR 2000/31, which is reproduced below, provides some factors that indicate whether a supply is made through a permanent establishment in Australia:

86. There is no specific set of circumstances which must be satisfied before a supply is connected with a permanent establishment. Rather, each case will be determined on the basis of the individual facts and circumstances. However, some factors that will usually indicate that the supply is made through a permanent establishment include:

· the permanent establishment has the authority to sign contracts or accept purchase orders for the supply;

· the permanent establishment has the authority to make important decisions in respect of the supply;

· the permanent establishment physically makes for example, manufactures or produces, the supply;

· if the supply is a service, the service is provided by the permanent establishment;

· if the supply is the provision of advice or information such as a legal opinion, the permanent establishment provides that advice or information;

· if the supply is the grant, creation, assignment, transfer or surrender of a right, the permanent establishment grants, creates, assigns, transfers or surrenders that right.

Based on the Agreement XZ is X's representative and serves as a contact point for its Australian customer Y. It is appointed to have a relationship with Y including amongst other things, communicating with them in relation to overseas customers, sales offers, shipping arrangements and doing any other things as reasonably requested by X. XZ is remunerated for its services to X under the Agreement at a certain rate of commission.

Based on the description of XZ's role and activities as provided for in the Agreement, it would appear that X is carrying on an enterprise through XZ, a permanent establishment in Australia and that their supplies to Y are connected with Australia for the purpose of paragraph 9-5(c) of the GST Act.

Generally, where parties have a written agreement it is the content of that agreement that forms the basis for the understanding of the relationship between the parties.

Support for this conclusion is provided in Paragraph 222 of GSTR 2006/9 which is about 'Supplies' and provides:

Proposition 16: the total fact situation will determine the nature of a transaction, the entity that makes a supply and the recipient of the supply

222. Where the parties to a transaction have reduced their understanding of the transaction to writing, that documentation is the logical starting point in determining the supplies that have been made. An examination of any relevant documentation and the surrounding circumstances, which together form the total fact situation, is also important in determining whether the documentation captures the nature of a transaction for GST purposes.

However, your tax agent submits, that while the agreement bestows upon XZ the role of sales agent for X and outlines the agreed services to be rendered by XZ in relation to X's sales agency role, in fact XZ only acts on behalf of X in Australia to collect and process payments received from Y. Any support XZ provides in relation to marketing is undertaken overseas. No other services are performed by XZ in Australia in relation to X's role as a sales agent for Y's sale of goods to an overseas country.

Further, the Commission agreement was entered into on the understanding that XZ would only provide any services listed in the particular clause of the Agreement if these services are required by X's customers, in this case Y. On the basis that Y does not require these services, then XZ does not carry out the services.

While we consider that X's supplies would be connected with Australia under paragraph 9-25(5)(b) according to the terms of the Agreement between X and XZ we acknowledge that the parties' characterisation of the arrangement will also be relevant. As outlined in GSTR 2006/9 it is necessary to determine the true essence of the arrangement and not merely how it is described.

We have given due consideration to your tax agents submissions that the only activities undertaken on your behalf by XZ in Australia in relation to the services provided by you to Y relate only to that of a collection and processing agent. To that end, and based on the understanding that both X and XZ consider that their current arrangement is not as prescriptive as outlined in the Agreement we conclude that the marketing services supplied by X to Y are not connected with Australia under section 9-25 of the GST Act. As such the supply of marketing services to Y does not satisfy subsection 9-5(c) of the GST Act and is therefore not a taxable supply under section 9-5 of the GST Act in this instance.

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