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Ruling

Subject: GST and supply of services by overseas based supplier

Question 1:

Is your supply of services to Australian based entities a GST-free supply?

Answer:

Your supply of services to Australian based entities is not a GST-free supply. However, the supply is not drawn into the GST system as it is not connected with Australia.

Relevant facts and circumstances

You are a company incorporated in Australia. Your permanent establishment (management and control) is based outside of Australia. You enter into a service agreement with entities that are located in Australia. All of the personnel you use are based outside of Australia. You source work predominantly from your website.

You advise that the physical address in Australia quoted on the website is a representative office only. You also advise that the advertised Australian telephone numbers for client contacts have call-forward set up and all telephone calls to these numbers are answered by your personnel overseas.

You state that no tasks are carried out of your advertised Australian address. You are a service based company and you don't have any employees in Australia to perform these tasks/services as they are all performed overseas. There are no powers held at or delegated to the Australian presence.

The following tasks are carried out at your offshore establishment:

· Online advertising management;

· Client relationship management (you provide phone and email support to your Australian clients);

· Quality assurance;

· Billing, accounting and finance;

· Sales and marketing;

· Research and development.

You advise that the following tasks are carried out at your registered office is Australia:

· Collation of mail and forwarding to overseas via email and post.

· Preparation and lodgement of year end accounts and tax returns.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 section 9-25.

Reasons for decision

Summary

A supply is required to be connected to Australia to be drawn into the GST system.

Detailed reasoning

For your supply of website consultancy services to be taxable, the supply must meet the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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 in the GST Act.

Of particular relevance to the supplies in question is paragraph 9-5(d) of the GST Act, the requirement for a supply to be connected with Australia. Subsections 9-25(5) and 9-25(6) of the GST Act outline the circumstances under which a supply of services can be connected to Australia:

(5) 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.

Example: A holiday package for Australia that is supplied overseas might be connected with Australia under paragraph (5)(c).

When enterprises are carried on in Australia

(6) An *enterprise is carried on in Australia if the enterprise is carried on through:

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

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

The supply of a 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. This is the case even if the recipient of the supply is outside Australia. In the circumstances you set out, it is considered that your supply of services is done overseas as this is where your staff performing the necessary day to day business are situated.

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) of the GST Act, the supplier makes the supply through an enterprise that the supplier carries on in Australia. The concept of carrying on an enterprise in Australia is defined in terms of the definition of 'permanent establishment' in subsection 6(1) of the Income Tax Assessment Act 1936.

Specifically, under subsection 9-25(6) of the GST Act the supplier carries on an enterprise 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.

The practical effect of this is to expand the usual definition of permanent establishment to a number of other situations and installations. One of the inclusions is a place where the person is carrying on business through an agent. However, for a supply to be connected with Australia under paragraph 9-25(5)(b) of the GST Act, a connection must be established between the Australian permanent establishment and the supply.

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.

You have advised that no tasks in respect of your service agreements are carried out in Australia and that there are no powers held by or delegated to the Australian presence. As such, your supply is not considered to be made through a permanent establishment in Australia. As your supplies do not meet the connected with Australia requirements of paragraphs 9-25(5)(a) and (b) of the GST Act, the supplies cannot be taxable supplies pursuant to section 9-5 of the GST Act.

The effect of this status is that your supplies are not drawn into the GST system. This is a different proposition to being a GST-free supply where a supply is drawn into the GST system i.e. satisfies section 9-5 of the GST Act and therefore is a taxable supply, but can be supplied GST-free under a statutory provision.

In both cases however, GST is not imposed on the supply.

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