Edited version of private ruling

Authorisation Number: 1011811199175

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Ruling

Subject: GST and supply of services to a non-resident

Questions

1. Are you required to be registered for the goods and services tax (GST) when you supply your consulting services to the non-resident company?

2. If you are required to be registered for GST, is your supply of consulting services to the non-resident company under the service agreement GST-free?

Advice

1. Yes, you are required to be registered for GST when you supply your consulting services to the non-resident company.

2. From the facts given, your supply of consulting services to the non-resident company under the service agreement is a combination of taxable and GST-free supplies.

You are liable to pay GST on the taxable supplies and there is no GST payable on the GST-free supplies. You therefore need to apportion the consideration you receive for the taxable and GST-free supplies to find the consideration for the taxable part.

Relevant facts

You carry on a consulting enterprise in Australia and you are not currently registered for GST. You have an Australian business number (ABN).

You have provided us with a copy of a service agreement which you had with a non-resident company located outside Australia. In the service agreement you agree to supply your services to the non-resident company.

The service agreement provides the following:

· The non-resident company shall make all payments in Australian Dollars and you will be paid monthly.

· The non-resident company shall reimburse you for expenses reasonably incurred through the performance of services, and agreed in writing in advance relating to the services upon the production of appropriate evidence, including but limited to, economy class airfare, reasonable accommodation, ground transportation fare if necessary and relevant charges for phone/fax.

· The parties are independent contractors and the agreement shall not create a partnership or agency relationship between the parties hereto, nor either party shall have any right or authority to assume, create or incur in any manner any obligations or other liability of any kind, express or implied or on behalf of any other party on the basis of this agreement.

You advise the following:

· The non-resident company owns an Australian company, Company A. You were working for company A and you were made redundant due to the physical closure of Company A. After the closure, you entered into a service agreement with the non-resident company to supply your consulting services to them. Company A is still registered with ASIC as they currently have a department in Australia.

· The non-resident company has a subsidiary company, Company B in Australia. A manager at Company B is responsible for the administration of Company A. The only contact you have with Company B is to forward any mail that is still being inadvertently delivered to Company A's old mailbox. This involves forwarding mail to Company B once a week if there is any mail and destroying or returning to sender any junk or irrelevant mail.

· Your consulting services are done in and outside Australia and you report to the non-resident company weekly for the activities done under the agreement. The consulting advice you provide requires that you make site visits to the overseas country.

· The overseas activities you do relate to the production of products outside Australia. The consulting advice you provide requires that you make site visits to other countries.

· The non-resident company is not registered for GST.

· You have received reimbursement from the non-resident company and the reimbursements relate to air fares and expenses incurred while managing Company A's department in Australia.

The activities you perform in Australia relate mainly to Company A's department and are:

· Administration of somecertain procedures carried out by third parties in the department. You supervise the local members that are managing the procedures that are carried out in the department. You assist with the relevant work activities details of which were provided. You provide written updates to the non-resident company. The local staff members that are managing the procedures are in receipt of this supply at the time it is made and are employed by a third party.

· Managing local payments by paying on behalf of Company A any related expenses such as export expenses. The non-resident company reimbursed these expenses to you. You advise it is Company A that is in receipt of this service when this service is performed.

· Managing the disposal of Company A's assets. This activity relates to the sale of residual equipment and consumables warehoused on behalf of Company A where you collect the money and hold it on behalf of Company A. Company A is in receipt of this supply when this is done and their account is managed by Company B.

· Liaising with service providers in Australia. You are the Australian based contact person for Company A for any queries rose by Australian service providers that are contracted by the non-resident company or from other entities.

· Replying to queries from overseas agencies, preparing English language monitoring reports and writing annual monitoring reports. You advise it is the Regulatory authorities on behalf of Company A or the non-resident company who are in receipt of this activity at the time it is performed.

Other activities you perform in Australia are:

· Prepare and maintain production and propagation manuals. You revise the technical manuals including review of past production problems for use by the non-resident company's staff and the overseas sales manager. You also review production forecast data, write and circulate reports to the non-resident company, overseas sales manager and production manager. On request you prepare sales reports historical data for the non-resident company and the overseas sales manager.

· Provide administration support by cross checking monthly product invoice calculations that were made overseas, draft letters to be sent by the non-resident company's staff and deputise for invoice preparation.

· Collate data from procedures in Australia and overseas for the non-resident company. Maintain written communication with overseas regulators, overseas translators and consultants in regard to the release of new products outside Australia.

· Assist the non-resident company with regulatory submissions by providing technical advice to the overseas company.

· Manage the overseas consultant by negotiating agreements on behalf of the non-resident company, set work assignments for the consultant, reporting back to the non-resident, co-ordinate payments with the non-resident company and providing guidance to the consultant.

Reasons for decisions

Question 1

Section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are required to be registered for GST if:

· you are carrying on an enterprise; and

· your GST turnover meets the GST registration turnover threshold of $75,000.

Under subsection 188-10(2) of the GST Act you have a GST turnover that does not exceed a particular turnover threshold if: 

(a) your current GST turnover is at or below the turnover threshold, and the Commissioner is not satisfied that your projected GST turnover is above the turnover threshold; or

(b) your projected GST turnover is at or below the turnover threshold.

Current GST turnover

Under subsection 188-15(1) of the GST Act, your current GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during the 12 months ending at the end of that month, other than: 

(a) supplies that are input taxed; or

(b) supplies that are not for consideration (and are not taxable supplies under section 72-5 of the GST Act); or

(c) supplies that are not made in connection with an enterprise that you carry on.

Projected GST turnover

Under subsection 188-20(1) of the GST Act, your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months, other than: 

(a) supplies that are input taxed; or

(b) supplies that are not for consideration (and are not taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an enterprise that you carry on.

Under subsection 188-15(3) and subsection 188-20(3) of the GST Act, the following supplies are disregarded when working out your current and projected GST turnover:

(a) any supply that is not connected with Australia; and

(b) any supply that is connected with Australia because of paragraph 9-25(5)(c) of the GST Act; and

(c) any supply (other than a supply covered in (a) or (b) above);

(i) of a right or option to use commercial accommodation in Australia; and

(ii) that is not made in Australia; and

(iii) that is made through an enterprise that the supplier does not carry on in Australia.

For more information on GST turnover please refer to Goods and Services Tax Ruling GSTR 2001/7 which is available at www.ato.gov.au

Connected with Australia

Goods and Services Tax Ruling GSTR 2000/31 (available at www.ato.gov.au) provides guidance on when supplies are connected with Australia.

Under subsection 9-25(5) of the GST Act, 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) all of the following apply:

(i) neither paragraph (a) nor (b) applies in respect of the thing;

(ii) the thing is a right or option to acquire another thing;

(iii) the supply of the other thing would be connected with Australia.

Where any of the paragraphs in subsection 9-25(5) of the GST Act is satisfied, the supply is connected with Australia.

From the facts given, you carry on a consulting business in Australia and the consulting services are made through this consulting business and performed in and outside Australia. Accordingly, the whole supply of services under the service agreement with the non-resident company will be connected with Australia under paragraph 9-25(5)(b) of the GST Act and will be included when you work our your GST turnover.

The next step is to determine whether you are required to be registered for GST.

GST registration

From the information received, your projected turnover from the date you start your business will be above the GST registration turnover threshold of $75,000. Hence you are required to be registered for the GST.

Question 2

You are liable to pay GST for taxable supplies that you make. Under section 9-5 of the 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 supplies of services that you make to the non-resident company 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) as discussed in question 1 you are required to be 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 of services input taxed.

The next step is to examine whether these supplies of services 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 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.

If the involvement of the Australian presence is limited to the carrying out of simple administrative tasks on behalf of the company, as a matter of administrative convenience, that involvement is minor. The connection between the supply and the presence is so minor in nature that it is reasonable to conclude that the presence of the company in Australia is not in relation to the supply. Paragraph 352 of GSTR 2004/7 provides a list of tasks of a simple administrative nature and includes being a mailing address or delivery contact on behalf of the company.

From the facts given, the non-resident company is located outside Australia and has a subsidiary company, Company B in Australia. The only contact you have with this Australian subsidiary is to forward any mail that is still being inadvertently delivered to Company A's old mailbox. In this instance, we consider the involvement of the Australian company in relation to your supply is minor and therefore the non-resident company is not considered to be in Australia in relation to your supply.

The precondition that the non-resident must not be in Australia in relation to the supply when the thing supplied is done is therefore met. The next step is to determine whether paragraph (a) or (b) of Item 2 is satisfied.

Paragraph (a) of Item 2

The requirements in paragraph (a) of Item 2 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 supplier may use goods or real property as inputs in making a supply. However, that use does not make that supply directly connected with the goods or real property used.

A supply of work physically performed on goods is always directly connected with goods. However, not all supplies directly connected with goods are also supplies of work physically performed on goods. A supply of work physically performed on goods requires a much closer connection with the goods.

In many cases it is self-evident that a supply is a supply of work physically performed on goods. However, sometimes a supply must be analysed to determine whether it is properly characterised as a supply of work physically performed on goods.

For example, a supply of a report on the results of testing and analysing samples of goods is characterised as a supply of information or advice as the dominant part of the supply is the analysis of data to enable a professional option to be provided. The supply is not characterised as a supply of work physically performed on goods because the testing and analysis of samples of goods enables the information to be compiled and is ancillary to the supply of that information.

From the facts given, you satisfy paragraph (a) of Item 2 as:

· the services that you performed under the service agreement with the non-resident company are not a supply of work physically performed on goods though they may be connected to goods; and

· the services are not directly connected with real property in Australia.

Your supply of services is therefore GST-free under paragraph (a) of Item 2 to the extent that this GST-free status is not negated by subsection 38-190(3) of the GST Act.

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.

You have advised that the non-resident company is not registered for GST. Accordingly, if the non-resident company is not required to be registered for GST paragraph (b) of Item 2 will be satisfied as the non-resident company will be acquiring the services while carrying on their business.

However, the supply will be GST-free under paragraph (b) of Item 2 to the extent that subsection 38-190(3) of the GST Act does not negate this GST-free status.

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.

Are the supplies of services GST-free?

From the facts given, you performed your services in and outside Australia.

Services performed outside Australia

Where you perform your services outside Australia and the recipients of these services are located outside Australia, the supply of these services will be GST-free under Item 2.

Services performed in Australia

From the facts given, when you perform your services in Australia the recipients of these services may be located in Australia or outside Australia at the time these services are performed.

Where the recipients of your services are located outside Australia, your supply of these services will be GST-free under Item 2.

However, where the recipients of your services are located in Australia (for example local staff member managing the certain procedures, services that are for the purposes of company A for example exporting the products on their behalf), the supply of these services are not GST-free under Item 2 by virtue of subsection 38-190(3) of the GST Act.

Summary

Your supply of services under the service agreement with the non-resident company is a combination of taxable and GST-free supplies. You will be liable to pay GST on the taxable supplies.

You therefore need to apportion the consideration you received for the taxable and GST-free supplies to find the consideration for the taxable part. You can use any reasonable method to apportion the consideration and the method you use must be supportable in the particular circumstances.

The following publications which are available at www.ato.gov.au may be of assistance to you:

· Goods and Services Tax Ruling GSTR 2001/8 - it provides guidance on apportioning consideration received for taxable and non-taxable parts for GST purposes.

· Goods and Services Tax Ruling GSTR 2000/17 - it provides guidance on tax invoices.

· Fact sheet 'how to set out tax invoices and invoices' (NAT 11675).

Additional information

From the facts given, you receive reimbursements from the non-resident company in addition to the monthly payment of your services. You therefore need to consider whether the reimbursements you receive are consideration that is part of your fees for the supply of your services under the service agreement.

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.

48. 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.

Reimbursements are consideration

Where the reimbursements you receive are for expenses which enable you to supply your services to the non-resident company, then these reimbursements are part of the consideration payable by the non-resident company for your mixed supply of services (GST-free and taxable) and you need to include these amounts when you work out your GST turnover.

You will be liable to pay GST on the reimbursements received where the reimbursement are connected to the taxable supplies you make. Hence, you need to examine the purpose of each reimbursement in order to determine whether you are liable to pay GST on the reimbursement.

For example, the reimbursement of overseas air fare will be in connection to the supplies that you make overseas. Since your supply of services performed overseas is GST-free, this reimbursement will also be consideration for a GST-free supply. In this instance you will not be liable to pay GST on this reimbursement.

Reimbursement not consideration

Where the reimbursements do not relate to your business, for example reimbursement of fees paid on behalf of Company A, these reimbursements are not considered to be consideration for the supplies you make to the non-resident company. In this instance GST is not applicable to these reimbursements and you do not include them when you work out your GST turnover.

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