Edited version of private ruling

Authorisation Number: 1011790946214

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Ruling

Subject: GST and reimbursements from a non-resident

Question

Are you liable to pay the goods and services tax (GST) when you receive reimbursements of the expenses you have incurred from a non-resident company, company A?

Advice

Yes, you are liable to pay GST when you receive reimbursements of the expenses you have incurred from the non-resident company, Company A.

Relevant facts

You are a private company incorporated in Australia and your business activity is repairs and maintenance. You are registered for GST.

You have advised the following:

You have a verbal agreement with Company A (an overseas based company) to supply the following services in Australia:

· Repair and maintenance services of the products Company A has sold and that are still under warranty;

· After-sales services, including coordinating field service, technical support, answering customer questions. In this instance:

o You receive service request phone calls and emails from customers and answer questions.

o You call end users to diagnose problems and instruct contracted service providers to go to sites to repair or replace faulty products. You compensate the service providers.

o Occasionally you go to the sites and do repair or replace work using your staff.

o You order replacement inverters and spare parts from company A.

o You handle logistics and storage of the returned products and the replacement products.

· Facilitate communication with customers.

In this instance you collect, summarise customers' requests and relay to Company A. You visit customers on behalf of Company A.

These services are done on a daily basis and it is the Australian distributors and owners of the products that receive the above services.

You state that the Company A has authorised you to act on their behalf in the particular matters from time to time and the arrangement in place is summarised as follows

· You were set up solely for performing the repairs and maintenance services of the products that are within the product warranty period when company A sells their products to their Australian customers.

· All the disbursement made by you for providing your services on behalf of Company A will be reimbursed by Company A.

· Company A is providing you with all backup units and replacement components for service use in Australia.

The major costs for the provisions of these services include salary, superannuation, warehouse/office rental, compensation to service providers, tariff and fees for importing the replacement products, shipping and handling, accounting and legal services fee, consultant fee, utilities, travel and so on. You issue an invoice to Company A and request for reimbursement of all the expenses you have incurred. You have provided us with copies of the invoices and bank statements showing payments of the reimbursements.

The accounting department of the overseas company reimburse you exactly the same amount according to the invoices you have provided. The reimbursement amount is the total of expenses incurred in Australia including staffs' wages. The staffs are not employees of the overseas company.

Currently there is no legal relationship between you and the overseas company. You and the overseas company are separate entities for taxation purposes and the overseas company does not own your company.

You state that Company A is not registered for GST and is not required to be registered for GST. Third parties, Australian distributors contact Company A for the purchase of the products, import them and sell them with installation to customers in Australia. Once the product is purchased, the customer is to complete the warranty card and submit it to the appointed installer for their signature. Company A provides a factory warranty from the date of the purchase to the Australian customers.

Company A informs the Australian distributors and the later inform their customers that you are the contact person for any repairs or maintenance to be done to the products that are still under warranty. Thus when any repair or maintenance is required the Australian distributors or owners of the products contact you. Company A does not have any representative or agent in Australia.

You import the backup units and replacement components which Company A provides to you free of charge as the owner and you are responsible to pay for the GST on the importation at customs. These units and components are to be used solely for the servicing and maintenance of the products.

You state that the factors that indicate that an agency relationship exists between you and Company A are:

· you bear no significant commercial risk and do not act in your own name;

· you are not remunerated for your services by way of commissions and you are not entitled to keep any part of the remuneration secret from another party;

· you do not decide the price of things that you might sell to third parties; and

· if any problem arose after the servicing and maintenance of the products, Company A eventually bears the risk.

Reasons for decision

Reimbursements

Before we determine whether you are liable to pay GST on the reimbursements you receive from Company A, we first need to determine whether these reimbursed expenses are incurred in the ordinary course of providing your services to Company A or on behalf of Company A.

Paragraphs 48 and 49 of Goods and Services Tax Ruling GSTR 2000/37 (available at www.ato.gov.au) provide guidance on agency relationship and disbursements and state.

Agency relationship and disbursements

48. Agents may incur expenses on a client matter both as an agent of the client and as a principal in the ordinary course of providing their services to the client. For example, in most cases, even though agreements between solicitors and clients may not use the term agent or agency, it is clear that the clients have authorised the solicitors to act on their behalf in the particular matter. When the solicitor acts as an agent for the client, the general law of agency applies so that the solicitor is 'standing in the shoes' of the client.

49. If a disbursement is made by a solicitor and incurred in the solicitor's capacity as a paying agent for a particular client, then no GST is payable by the solicitor on the subsequent reimbursement by the client. This is because the goods or services to which the disbursement relates are supplied to the client, not to the solicitor, by a third party. Also, the reimbursement forms no part of the consideration payable by the client for the supply of services by the solicitor. However, if goods or services are supplied to the 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 or services, whether the reimbursement is 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 are of the view that these reimbursements are not income to you because you are acting as an agent and on behalf of Company A when performing your services and the reimbursed money is the recovering of expenses. Hence, there is no GST payable as there is no actual supply between you and Company A.

We disagree with your view because based on the information you have provided, the reimbursements you receive from Company A clearly indicate they are consideration payable for the services you supply to Company A and not for expenses incurred on behalf of Company A since:

· The purpose of all the expenses that you incur (for example rental of office, furniture desks, kitchen items, salaries for your staff and so on) is to enable you to carry on your business activity in Australia and perform your services. The fact that you are providing your services to the distributors and owners of the products on behalf of Company A does not mean that the reimbursed expenses that you have incurred are automatically for Company A though these expenses may relate to the performance of your services. In this instance, you are the one in receipt of these acquisitions, and instead of having a fixed dollar amount as consideration paid to you for your services to Company A, you agree to be reimbursed for all your business expenses.

· We acknowledge that you are acting on behalf of Company A when you supply your services and provide them in Australia. Since Company A is not located in Australia and therefore cannot provide some services, for example repair and maintenance of the products under warranty, directly to the Australian distributors and/or owners of the products themselves, they therefore have engaged you in order to be able to provide to the Australian distributors and/or owners of the products the services that they would like to be done in Australia. These reimbursed expenses that you incur while providing your services to the Australian distributors and/or owners of the products are directly related to your business and therefore incurred by your business. Accordingly, these reimbursed expenses are income you have earnt while making your supplies to Company A.

The next step is to determine the GST status of your supply since the reimbursements are consideration payable for the supply of services you make to Company A.

GST status of your supplies

Characterisation of supplies

A supply may be characterised as consisting of one or more things or parts. That is the supply may be regarded as commercially distinct in its own right or it may be regarded as having several identifiable parts.

Taking into consideration all the facts given, we consider that there are two equally dominant purposes (with each having an aim in itself) within the verbal agreement you have with Company A and these supplies of services need to be individually recognised. You make two supplies:

1. Repair and maintenance services of the products that are still under warranty; and

2. After-sales services (including coordinating field service, technical support, answering customer questions and facilitate communication with customers).

We acknowledge that you collect, summarise customers' requests and relay to Company A as part of your services. However we consider this service is integral to your main supply of after sales services and does not need to be separately recognised for GST purposes since it contributes to the supply of after-sale services as a whole.

The next step is to determine the GST status of these two supplies:

GST status of the two supplies

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), a supply is a taxable supply if:

(a) you make the supply for consideration; and

(b) the supply is made in the course 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.

The two supplies that you make satisfy paragraphs 9-5(a) to 9-5(d) of the GST Act as:

(a) you make the supplies for consideration; and

(b) the supplies are made in the course of an enterprise (business) that you carry on; and

(c) the supplies are connected with Australia as they are made through a business that you carry on in Australia; and

(d) you are registered for GST.

However, the supplies will be taxable supplies to the extent that they are not GST-free or input taxed. There is no provision under the GST Act that will make these supplies input taxed.

The next step is to examine whether these supplies are GST-free and therefore excluded from being taxable supplies.

GST-free supply

Subsection 38-190(1) of the GST Act specifies the circumstances where the supply of things other than goods or real property, for consumption outside Australia is GST-free.

Of particular relevance to your two supplies is item 2 in the table in subsection 38-190(1) of the GST Act (Item 2).

Item 2 provides that a supply that is made to a non-resident who is not in Australia when the thing supplied is done will be GST-free where:

(a) the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia; or

(b) the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered.

Accordingly, where the provisions in either (a) or (b) above are met, the supply will be GST-free if the non-resident is not in Australia when the thing supplied is done.

Not in Australia in relation to the supply

For a supply to be GST-free under Item 2, there is a precondition that the non-resident must not be in Australia in relation to the supply when the thing supplied is done.

Where the thing supplied is a service, when the service is done refers to the period of time during which the service is performed.

Goods and Services Tax Ruling GSTR 2004/7 (available at www.ato.gov.au) provides guidance on when a non-resident is not in Australia when the thing supplied is done.

A non-resident company is in Australia if the company carries on its business or activities in Australia:

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

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

Further, a non-resident company is in Australia in relation to the supply if:

· the supply is solely or partly for the purposes of the Australian presence; or

· the presence of the company is involved in the supply, unless the only involvement is minor.

Paragraph (a) of Item 2

The requirements in paragraph (a) are met if the thing supplied is neither work physically performed on goods situated in Australia when the work is done, nor directly connected with real property situated in Australia.

Goods and Services Tax Ruling GSTR 2003/7 (available at www.ato.gov.au) provides guidance on when a supply is physically performed on goods and when a supply is directly connected with real property.

A supply is a supply of work physically performed on goods where something is done deliberately to the goods to change them or to otherwise affect them in some physical way. The repair of goods is an example of work that is specifically performed on goods.

For a supply to be a supply of work physically performed on goods, the work physically performed does not have to bring about a fundamental change to the attributes of the goods. For example, cleaning goods is a supply of work physically performed on goods even though the cleaning does not make them into fundamentally different goods - the change is simply the difference between dirty goods and clean goods.

Where activities do not change or affect goods in a physical way, there is no supply of work physically performed on goods. For example, a supply of transporting goods is not work physically performed on goods because the supply only changes the location of the goods, not the goods themselves.

Paragraph (b) of Item 2

Under paragraph (b) of Item 2, a supply other than goods or real property is GST-free if the non-resident acquires the services in carrying on their business and is neither registered nor required to be registered for GST.

The supplier must be satisfied, on reasonable grounds that the non-resident is not required to be registered for GST before they can treat their supply as GST-free under paragraph (b) of Item 2. The supplier can check the GST registration status of an entity that they deal with by checking the Australian business register at www.abr.gov.au

Where the supplier is not in a position to be aware of these circumstances, enquiries should be made of the non-resident. The Commissioner accepts that reasonable grounds to be satisfied, if the non-resident has provided a written statement, declaring that they are not required to be registered. This is only accepted where the supplier has no reason to believe the statement is not accurate.

Limitation - subsection 38-190(3) of the GST Act

The scope of Item 2 is limited by subsection 38-190(3) of the GST Act which provides that a supply covered by Item 2 is not GST-free if:

· it is a supply under an arrangement 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.

Goods and Services Tax Ruling GSTR 2005/6 (available at www.ato.gov.au) provides guidance on the application of subsection 38-190(3) of the GST Act.

Subsection 38-190(3) of the GST Act applies if there is a supply of something, being a supply that is made to a non-resident and covered by Item 2, and the same supply is provided, or is required to be provided to another entity in Australia.

The word 'provided' is used in subsection 38-190(3) of the GST Act to contrast with the term 'made' in Item 2. In the context of section 38-190 of the GST Act, 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.

Accordingly, a supply is provided to another entity if the contractual flow is to one entity (the non-resident recipient) while the actual flow of that supply (for example, the doing of the thing supplied) is in whole or in part, to another 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 entity) and the actual flow of the supply is to another entity.

A clear understanding of the exact nature of the supply is essential in determining whether that supply is provided to another entity. It is only by having regard to what is in substance and reality being supplied that it is possible to identify to which entity that supply is provided.

The focal point in working out whether a supply is provided to another entity is the facts and circumstances of the doing of the thing supplied. By the supplier examining what it is required to do and in what circumstances, the supplier is able to objectively determine to whom the supply is provided.

Repair and maintenance services of the products that are still under warranty

From the facts given, the supply is made to Company A, a non-resident that is not in Australia at the time of the supply and this supply satisfies the requirements of paragraph (b) of Item 2 as Company A acquires the services in carrying on their business and is neither registered nor required to be registered for GST.

However, the supply is not GST-free to the extent that subsection 38-190(3) of the GST Act negates that GST-free status.

From the facts given, subsection 38-190(3) of the GST Act will negate the GST-free status of the supply as:

· you make the supply under an arrangement with a non-resident company; and

· when you do the repair and maintenance services it is the Australian distributors and owners of the products who are in receipt of the supply. Hence the supply is provided to another entity in Australia.

Your supply of repair and maintenance services is therefore not GST-free under Item 2 by virtue of subsection 38-190(3) of the GST Act. Your supply is a taxable supply and you will be liable to pay GST on this supply. This view is supported by the Goods and Services Tax Determination GSTD 2006/2 'does an Australian entity make a taxable supply when it supplies repair services under a warranty given by a non-resident manufacturer' which is available at www.ato.gov.au

After-sales services

From the facts given, this supply satisfies the requirements of Item 2 as:

· Company A is a non-resident company that has no presence in Australia. As such Company A is not in Australia in relation to your supply of services. The supply is therefore made to a non-resident that is not in Australia at the time of the supply; and

· the after-sales services is neither a supply of work physically performed on goods situated in Australia when the supply is done nor a supply directly connected with real property situated in Australia.

However, the supply is not GST-free to the extent that subsection 38-190(3) of the GST Act negates that GST-free status.

From the facts given, subsection 38-190(3) of the GST Act will negate the GST-free status of the supply as:

· you make this supply under a verbal agreement with a non-resident company; and

· when you make the supply, the actual services are provided to the distributors and owners of the products who are in Australia since they are the one mainly in receipt of the after-sales services.

Your supply of after-sales services to Company A is therefore not GST-free under Item 2 by virtue of subsection 38-190(3) of the GST Act. Your supply is a taxable supply and you will liable to pay GST on this supply.

Summary

Based on the information received, the reimbursements you receive are consideration for two specific supplies (repair and maintenance service and after-sales service) and as these two supplies are taxable supplies under section 9-5 of the GST Act, you therefore are liable to pay GST.

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