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Ruling

Subject: GST and international services

Question

Is the supply of services to the non-resident company GST-free?

Answer

Yes.

Relevant facts

You provide advice and information to a foreign company in relation to customer prospects or inquiries.

Previously, an Agency Agreement was signed between your related entity as Agent, Entity A and Entity X as Principal, where Entity A was granted exclusive agency for Entity X's Products in Australia. The Agency Agreement provides the following:

· The Products are specialty goods.

· The tasks and powers of the Agent:

o The Agent shall keep the Principal informed of the needs of the Customers and of the state of the market of the Products in Australia.

o The Agent shall in particular notify the Principal without delay of the observations made by the Customers as well as their claims with respect to the delivered Products.

o The Agent shall assist the Principal in the initiation and the successful conduct of the negotiations as well as in the conclusion of the Sales Contracts with the Customers.

o The information communicated by the Agent to the Customers shall correspond to the technical data as well as to the terms and conditions of the sale (including delivery periods, price and payment) presented by the Principal.

o The Agent shall immediately transmit to the Principal the offers or orders received by him. Unless previously authorised in writing by the Principal, the Agent has not authority to sign contracts on behalf of the Principal.

· The Agent shall perform their task in an independent way. Consequently, it rests with him to organise himself the allotment of his time and to canvass for customers.

· In consideration of the services performed under the Agency Agreement Entity X shall pay a commission on the sale contracts concluded by the Customer with Entity X during the term of the contract.

· The amount of the commission is a percentage of the Products sales. The commission granted covers all expenses incurred within the framework of the Agency Agreement.

· The Agency Agreement is effective from date of signing and remains in force for an indefinite period.

Amendments were made to the Agency Agreement on a number of occasions varying the clause which deals with the commission rate.

Entity A assigned all its rights and obligations under the Agency Agreement to you effective 1 January 20XX. Effective from this date, you took over and assumed all such rights and obligations in accordance with the terms and conditions of the Agency Agreement.

In 20YY, Entity A entered into a Consultancy Agreement with Entity X where it commits to support and assist Entity X in the organisation of its commercial agency set-up in Australia. The Consultancy Agreement replaces the Agency Agreement.

Entity X is a manufacturer of specialty goods that sells and exports these products to various countries. It is a company incorporated according to the laws of a foreign country and whose principal office is in that country. It is not a resident of Australia for income tax purposes and is not registered with the Australian Securities and Investments Commission (ASIC). It does not have a permanent establishment, in Australia and does not carry on its business in Australia at or through a fixed and definite place of its own or through an agent. It is not registered for GST in Australia.

You do not have the authority to enter into legal relations with other entities in Australia on behalf of Entity X. You are not its general mercantile agent and do not negotiate any contracts for it.

Any advice and information is provided to Entity X in its country of residence and on occasion to its offices in other countries.

You have virtually no interaction with Entity X in Australia, apart from an occasional short visit to Australia by Entity X's representatives.

You are registered for GST.

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 Subsection 38-190(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-190(3).

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Income Tax Assessment Act 1936 Section 6-1.

Reasons for decision

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST on any taxable supply that you make.

Section 9-5 of the GST Act states:

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 term defined in section 195-1 of the GST Act.)

Your supply of consultancy services to Entity X satisfies the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. This is because:

(a) the supply is made for consideration

(b) the supply is made in the course or furtherance of your enterprise

(c) the supply is connected with Australia as the services are done in Australia and

(d) you registered for GST.

The supply as outlined in the Agency Agreement is not input taxed under any provision of the GST Act or any other Act. It remains to be determined if the supply is GST-free.

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 supply is item 2 in the table in subsection 38-190(1) of the GST Act (item 2).

Item 2 provides that a supply of a thing (other than goods or real property) made to a non-resident is GST-free if the non-resident is not in Australia when the thing supplied is done and:

(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 for GST.

A non-resident for GST purposes is an entity that is not an Australian resident for the purposes of the Income Tax Assessment Act 1936.

You advised that Entity X is a company existing under the laws of a foreign country and whose principal office is in that country, and that Entity X is not a resident of Australia for income tax purposes.

The meaning of 'not in Australia'

Goods and Services Tax Ruling GSTR 2004/7 provides guidance on when a non-resident is 'not in Australia' for the purposes of item 2.

The requirement that the non-resident in item 2 is not in Australia when the thing supplied is done is a requirement that the non-resident is not in Australia in relation to the supply when the thing supplied is done.

At paragraph 37 of GSTR 2004/7, we established a test where we consider that a non-resident company is in Australia 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.

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.

You advised that Entity X does not have any business of its own in Australia nor carry on business through an agent in Australia. Although Entity X representatives have visited Australia for short periods, Entity X, either through its employees, representatives or agents, is not in Australia when you provide your services. Further, all communications in relation to your supply are made directly to Entity X in its country of residence and on occasion to its offices in other countries..

Based on the information provided, we consider that Entity X is not in Australia in relation to your supply when such supplies are made.

The supply under the Agency Agreement must also satisfy the requirements of either paragraph (a) or paragraph (b) of item 2 for the supply to be GST-free.

Paragraph (a) and/or (b) of item 2

The requirement in paragraph (a) of item 2 is 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 examines the meaning of the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods' as used in subsection 38-190(1) of the GST Act.

Paragraphs 68 and 69 of GSTR 2003/7state:

68 … If the supply includes work physically performed on goods but that work is ancillary to some other dominant part of the supply that is not work physically performed on goods, then that supply is not characterised as a supply of work physically performed on goods. This depends on the particular facts of each supply.

69. 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 if the dominant part of the supply is the analysis of data to enable a professional opinion to be provided. The supply is not characterised as a supply of work physically performed on goods. 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 information provided, we consider that the requirements in paragraph (a) of item 2 are satisfied because the dominant part of your supply to Entity X is a supply of information or advice. This supply is neither a supply of work physically performed on goods nor a supply directly connected with real property in Australia.

Accordingly, the supply satisfies the requirements of paragraph (a) of item 2.

As the requirements of paragraph (a) of item 2 are satisfied, there is no need to consider if the requirements of paragraph (b) of item 2 are met.

Exclusion

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 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.

Goods and Services Tax Ruling GSTR 2005/6 provides the ATO view on the operation of subsection 38-190(3) of the GST Act. The ruling explains that subsection 38-190(3) only applies if there is a supply of something, being a supply that is made to a non-resident and covered by item 2, and that same supply is provided, or is required to be provided to another entity in Australia. That is, the contractual flow is to one entity (the non-resident entity) and the actual flow of the supply is to another entity.

From the information provided, subsection 38-190(3) of the GST Act is not applicable to your supply to Entity X as you are not required under the Agency Agreement to provide the supply to another entity in Australia. Hence, the contractual and actual flow of the supply is to Entity X.

Therefore, subsection 38-190(3) of the GST Act does not exclude your supply from being GST-free under item 2.

Accordingly, your supply to Entity X as outlined in the Agency Agreement is GST-free. Hence, GST is not payable on this supply.

Correcting GST mistakes

Where you have incorrectly calculated your GST payable, you have to correct this mistake in your activity statement. Refer to the fact sheet Correcting GST Mistakes for further information.

All GST rulings and publications referred to above are available at the ATO website www.ato.gov.au

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