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Ruling

Subject: GST and supply of services

Question

What is the goods and services tax (GST) status of the supplies made by AusCo in the three Scenarios set out by AusCo in the private ruling application form?

Advice

Based on the information provided by AusCo we consider that AusCo has made two distinct supplies under the three Scenarios:

· a supply of services to Company A; and

· a supply of services to Company Y.

Supply of services to Company A

The supply of services made to Company A by AusCo under the three Scenarios is GST-free under item 2 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Supply of services to Company Y

The supplies of services made by AusCo to Company Y in Scenarios 1 and 2 are not GST-free by virtue of subsection 38-190(3) of the GST Act. Those supplies are taxable supplies under section 9-5 of the GST Act and AusCo is liable for GST on these supplies.

The supply of advertising services made by AusCo to Company S (a branch of Company Y) in Scenario 3 is GST-free under Item 2 in the table in subsection 38-190(1) of the GST Act.

Relevant facts

The Parties

AusCo is a company incorporated in Australia and registered for GST. AusCo is owned by a non-resident parent company NRCo.

Company A is a non-resident company and is also under the control of NRCo.

Companies X, Y and Z are incorporated overseas (collectively XYZ).

Company Y has a branch located overseas Company S and does not have a branch in Australia.

Company B is a company incorporated in Australia.

Ruling request

AusCo outlined the following Scenarios in the ruling request and requested rulings on the GST status of the supplies made by AusCo in these Scenarios:

Scenario 1

In this Scenario the supply made by AusCo is the adaptation of generic advertising material (which is owned and made available by XYZ) for the product in order that it may appear in Australian media. AusCo retrieves XYZ's generic advertising material from XYZ's online portal to which AusCo has access.

When providing the supply to XYZ, AusCo liaises with an employee of Company B. All communication with the employee is by email or phone. AusCo's supply under this Scenario is made subject to the direction, review and approval of that employee.

AusCo estimates the costs of various services required for the adaptation of the global advertising materials and obtains approval of those costs from the employee via email.

The local adaptation of the global advertising material is handled in AusCo's office.

AusCo manages and despatches print and TV materials to local Australian magazines and TV networks. The advertising materials are despatched digitally through an Australian company. Australian suppliers are used for any adaptation or despatch of advertising material.

AusCo issues an invoice to Company Y's accounts section for the costs of the various services acquired by AusCo, per requirement in the XYZ's global contract.

Scenario 2

The supply in this Scenario relates to the adaptation of XYZ's generic advertising material for a product in order to update XYZ's websites for Australian and other overseas markets.

AusCo retrieves XYZ's generic advertising material from XYZ's online portal to which AusCo has access. AusCo puts together a brief and charges digital production time for this work.

The website updates for these markets are briefed, directed and approved by the employee of Company B.

Once final approval is obtained from the employee, AusCo briefs an overseas company in regard to updating the websites as that overseas company is commissioned by XYZ to update/maintain XYZ's websites and already has access to XYZ advertising material.

Australian suppliers are used for any adaptation or courier/despatch costs.

AusCo issues an invoice to Company Y for 'all third party costs and non account service time and internal costs'.

Scenario 3

Company S briefs AusCo on a new campaign for a product.

AusCo then submits the revised creative to Company S for approval. At the same time AusCo requests global files for both magazine and television from the originating office.

Once Company S has approved the revised creative and AusCo has received the global files, local versions of print and television are produced.

Revised artwork and TV edits are submitted to Company S for approval.

Once artwork and TV edits are approved by Company S AusCo advises media agencies of material instructions.

AusCo then despatches the magazine and TV material to media digitally through an Australian company. Australian suppliers are used for any adaptation or courier/despatch costs.

AusCo issues an invoice to Company S for 'all third party costs and non Account Service time and internal costs'.

Additional information received from AusCo

· NRCo entered into a Global Agreement (GA) with XYZ. The recitals to the GA state that XYZ and its affiliates and subsidiaries wish to engage agencies within the NRCo network which sign the Supplemental Agreement attached to the GA to perform advertising, media, marketing, promotional, branding, design and other services(copy of the GA received).

· XYZ is a global client of Company A as Company A has entered into a Supplemental Agreement with XYZ in which Company A agreed to provide the services stated in the Supplemental Agreement (copy of the Supplemental Agreement received).

· AusCo provides the services referred in the Supplemental Agreement signed by Company A.

· The main service supplied by AusCo to XYZ is adapting overseas commercial activity based on the media plan devised in relation to each project and despatching the adapted version to the relevant media for advertising.

· For the three scenarios AusCo received payment for some of the services they supplied from Company A and in addition AusCo invoiced Company Y for 'all third party costs and non Account Service time and internal costs', i.e. services either supplied by AusCo to Company Y or acquired by AusCo (as principal) from third parties and then included in the supply made by AusCo to Company Y.

· In each Scenario Company A contacts AusCo to notify them of the relevant project, the available budget, and the XYZ contact who will be involved in the project. AusCo then starts working on the project.

· Company A does not get involved when AusCo provides the supplies to XYZ in the three Scenarios and XYZ's staff give all instructions and approve all expenses.

· AusCo does not have a written agreement with either Company A or XYZ.

· Pursuant to the GA, Company A prepares a detailed Global Master Plan for the provision of advertising, media, marketing and promotional services to XYZ. Pursuant to a verbal agreement between AusCo and Company A AusCo provides some of those services and receives from Company A an allocation of the annual fee (ANR). AusCo issues an invoice to Company A each month for their share of the ANR for that month. The services for which AusCo is paid a share of the ANR by Company A are as follows:

· Account Management;

· Creative; and

· Production Supervision.

· Company A does not issue any instructions to AusCo in relation to projects which are covered by the Global Master Plan - Company A simply allocates a portion of the ANR based on the projects that are covered by the Global Master Plan. Any instructions given to AusCo for these projects come from XYZ for each product covered.

· AusCo also supplies services in relation to XYZ products which are not covered by AusCo's share of the ANR. Instead AusCo issues invoices to Company Y or Company S for these services.

· In relation to the three Scenarios AusCo does not need authorisation from Company A before invoicing Company Y or Company S for services which are not covered by the ANR. The authorisation for those services comes from XYZ.

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 38-190.

Reasons for decisions

Taxable supplies and GST-free supplies

An entity is liable to pay GST for taxable supplies that that entity makes. Under section 9-5 of the GST Act, a supply is a taxable supply if an entity ('you'):

(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.

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 AusCo's circumstances is item 2 in the table in subsection 38-190(1) of the GST Act (Item 2). Item 2 states that a supply that is made to a non-resident who is not in Australia when the thing supplied is done is 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 is GST-free if the non-resident is not in Australia when the thing supplied is done.

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 where a supply that is made to a non-resident and covered by Item 2 is also 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 in contrast to the word 'made' in Item 2 in subsection 38-190(1) with the intention that if a supply which is made (i.e. contractual flow) to a non-resident is nevertheless provided (i.e. actual flow) to another entity in Australia, the place of consumption is in Australia.

Characterisation of the supplies made by AusCo

GSTR 2005/6 states (Para 66):

66. Before it can be determined whether a supply is provided (or is required to be provided) to another entity, it is essential that the supply be properly characterised as the supply of a service, right or some other thing. It is only when the supply is properly characterised that it is possible to determine whether that supply is provided to another entity.

and (Paras 70-72):

70. A clear understanding of the exact nature of the supply is essential to 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.

71. The exact nature of a supply in any given situation depends on the facts and circumstances of the supply and the agreement made between the parties. In this regard, it is necessary to look at the whole arrangement for the supply (including the contractual arrangements) and the way in which the supply is carried out.

72. If there is no written contract, other documents such as correspondence between the parties may be useful in establishing the nature of the supply.

Based on the information provided by AusCo we consider that there is a verbal contract between AusCo and Company A pursuant to which AusCo makes (in the contractual sense) supplies of account management, creative and production supervision services to Company A. Company A pays AusCo a share of the ANR in return for those services.

Based on the information provided by AusCo and the conditions in the GA we also consider that, in the case of the three scenarios referred to in the ruling request, AusCo enters into a contract with either Company Y or Company S pursuant to which AusCo makes (in the contractual sense) supplies of the various services which are set out in the Estimates prepared by AusCo for approval by Company Y or Company S.

The next step is to determine the GST status of the supplies of services made by AusCo to Company Y under the three Scenarios.

GST status of supplies of services to Company Y

The supplies made by AusCo under the three Scenarios satisfy paragraphs 9-5(a) to 9-5(d) of the GST Act as:

(a) AusCo makes the supplies for consideration; and

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

(c) the supplies are connected with Australia as they are made through an enterprise that AusCo carries on in Australia; and

(d) AusCo is registered for GST.

As noted above, however, a supply is not a taxable supply to the extent that it is GST-free, and we have referred above to Item 2 in subsection 38-190(1) of the GST Act.

Item 2 requires that the relevant supply is made to a non-resident who is not in Australia when the thing supplied is done.

'Non-resident' is defined in section 195-1 of the GST Act as an entity that is not an 'Australian resident' and 'Australian resident' is defined as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936. A company is Australian resident if it is incorporated in Australia or, is not incorporated in Australia but carries on business in Australia and has either its central management and control in Australia or its voting power controlled by Australian residents. We understand that Company Y is incorporated overseas and does not carry on business in Australia and therefore is not 'Australian resident' under these tests.

The requirement that Company Y is also not 'in Australia' is explained in paragraphs 181 and 184 of Goods and Services Tax Ruling GSTR 2004/7:

181. The requirement that a supply is made to a non-resident (item 2), or recipient (item 3), who is 'not in Australia' 'when the thing supplied is done' is in effect a proxy test for determining where the supply to that entity is consumed. The presumption is that if the non-resident or other recipient of the supply is 'not in Australia' when the thing supplied is done, the supply of that thing is for consumption outside Australia and is GST-free, provided the other requirements of the item are met.

184. As the Australian location of the entity to which the supply is made at the relevant time is a proxy test for identifying when consumption occurs in Australia, we consider that the expression 'not in Australia' should be interpreted in the context of the supply in question. The expression 'not in Australia' requires, in our view, that the non-resident or other recipient is not in Australia in relation to the supply . This means that a non-resident or other recipient of a supply may satisfy the 'not in Australia' requirement if that entity is in Australia but not in relation to the supply. We examine this more fully when considering the application of items 2 and 3 and paragraph (b) of item 4 to specific entity types in Part III.

and, in relation to a non-resident company, at paragraph 241:

241. We consider, therefore, that a non-resident company is in Australia for the purposes of item 2 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:

· 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.

We understand that Company Y neither has a branch in Australia nor carries on business in Australia through an agent. Even if Company Y was 'in Australia', item 2 further requires that Company Y is 'in Australia' in relation to the relevant supply, as stated in paragraph 347 of GSTR 2004/7:

347. Even if a company is in Australia, it may not be in Australia in relation to the supply and so can still satisfy the 'not in Australia' requirement in item 2 or item 3 or paragraph (b) of item 4.

We therefore consider that the requirement in Item 2 that the supply is made to a non-resident who is not in Australia when the thing supplied is done is satisfied.

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, AusCo's supply of services under the three Scenarios satisfies paragraph (a) of Item 2 as:

· those services are not a supply of work physically performed on goods, although AusCo may use goods as inputs to make the changes to the generic advertising materials; and

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

AusCo's 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.

Since paragraph (a) of item 2 is satisfied there is no need to consider paragraph (b) of Item 2.

Subsection 38-190(3) of the GST Act

GSTR 2005/6 contains Examples 23, 32 and 33 which demonstrate the application of subsection 38-190(3) to supplies of advertising services made to a non-resident who is not in Australia:

Example 23 - a supply of advertising services made and provided to a non-resident in respect of goods sold in Australia

504. A non-resident US company that is a distributor of soft drinks contracts for the supply of advertising air time on a national television network in Australia. The soft drinks are available from supermarket chains throughout Australia. The non-resident US company does not carry on business in Australia either through a place of business of its own or through an agent acting on its behalf.

Item 2

505. The supply of air time by the Australian television network is made to the non-resident company that is not in Australia when the services are performed. The supply satisfies the requirements of item 2 and is, therefore, a supply covered by item 2.

Subsection 38-190(3)

506. The supply of air time by the Australian television network to the non-resident US company is a supply under an agreement entered into with a non-resident. Paragraph 38-190(3)(a) is therefore satisfied.

Provided to another entity

507. What is being supplied is air time on an Australian television network advertising the US distributor's products in Australia generally. The nature of the supply of air time is such that the supply is provided to the US company. While Australian retailers potentially benefit from the supply of advertising air time through increased sales, this does not alter the nature of the supply and the fact that the supply, as properly described, is not provided to another entity.

508. Subsection 38-190(3) does not negate the GST-free status of the supply of advertising services covered by item 2.

509. The advertising example illustrates that, for the purposes of applying subsection 38-190(3), the focus is on the nature of the supply and the actual flow of that supply. It is not about tracing benefits. The next example also illustrates this.

Example 32 - supply of advertising services made and provided to a non-resident parent company

573. An Australian advertising agency, Aus Ad Co, wins a contract to supply advertising services to an Egyptian company, Nile Co. The services are to develop and prepare advertising material for the products sold by the Nile Co group world-wide including products sold by the Australian subsidiary of Nile Co, Aust Co. Nile Co does not carry on business in Australia either through a place of business of its own or its subsidiary or any other agent acting on behalf of the company.

574. The advertising service supplied by Aus Ad Co is the development of an advertising campaign and the preparation of print, television and radio advertisements including those for the Australian market. Aus Ad Co only deals with Nile Co in relation to the development and preparation of the advertising campaign for the Australian brand of products. Nile Co exercises full control over the conduct of the advertising services and Aus Ad Co only talks to and works with the marketing staff of Nile Co in developing the campaign and the advertising material. The Australian subsidiary is not involved with the supply. Aus Ad Co delivers the advertising 'copy' (that is, the product) directly to the media in Australia.

Item 2

575. The supply of advertising services is made by Aus Ad Co to Nile Co, a non-resident company that is not in Australia when the services are performed. The supply satisfies the requirements of item 2 and is, therefore, a supply covered by item 2.

Subsection 38-190(3)

576. The supply of advertising services by Aus Ad Co to Nile Co is a supply under an agreement entered into with a non-resident. Paragraph 38-190(3)(a) is therefore satisfied.

Provided to another entity

577. What is being supplied is an advertising campaign for the world-wide products of the Nile group. Having regard to the facts and circumstances of the supply including the way the supply is carried out - see paragraph 574, it follows that the supply of advertising services is made and provided to Nile Co. The nature of the supply is such that the supply is not provided to another entity, even though other entities in the Nile group, in particular, Aust Co, benefit from the advertising campaign run by Nile Co. The actual flow of the advertising service is to Nile Co, not Aust Co.

578. Subsection 38-190(3) does not negate the GST-free status of the supply of the advertising services covered by item 2.

579. The above example is contrasted with the following example.

Example 33 - supply of advertising services made to a non-resident parent company and provided to its Australian subsidiary

580. An Australian advertising agency, Aus Ad Co wins a contract to supply advertising services to a Singapore company, Sing Co. The contract for the supply is between Aus Ad Co and Sing Co. Sing Co does not carry on business in Australia either through a place of business of its own or through an agent acting on behalf of the company. Aust Co, a subsidiary of Sing Co in Australia, is not the agent of Sing Co in Australia. The contract is for the development and preparation of advertising material for products sold by Aust Co.

581. Aus Ad Co deals with Aust Co in relation to the advertising campaign for the Australian brand of products including, for example, obtaining sign-off on the advertising copy. Aus Ad Co does not deal with Sing Co in relation to the development and approval for the advertising copy. Aust Co exercises full control over the conduct of the advertising services. Aus Ad Co talks to the marketing staff of Aust Co and works with them to develop the campaign and the advertising material. Sing Co has no further participation in the supply beyond contracting and paying for the supply.

Item 2

582. The supply of advertising services by Aus Ad Co is made to Sing Co, a non-resident company that is not in Australia when the advertising services are performed. The supply satisfies the requirements of item 2 and is, therefore, a supply covered by item 2.

Subsection 38-190(3)

583. The supply of advertising services by Aus Ad Co to Sing Co is a supply under an agreement entered into with a non-resident. Paragraph 38-190(3)(a) is therefore satisfied.

(i) Provided to another entity

584. What is being supplied is an advertising campaign to advertise the goods sold by the Australian subsidiary. Aus Ad Co only deals with the Australian subsidiary throughout the course of developing the advertising campaign for those products. Aus Ad Co does not deal with Sing Co in relation to the development and approval for the advertising copy. Aust Co exercises full control over the conduct of the advertising services. Aus Ad Co talks to the marketing staff of Aust Co and works with them to develop the campaign and the advertising material.

585. The nature of the advertising service is such that the supply is provided to the Australian subsidiary. In contrast to the previous example, the offshore parent company contracts for advertising services to be provided to the Australian subsidiary. Other than contracting for the supply, Sing Co is not otherwise involved with the supply. The supply is provided to another entity, Aust Co. The actual flow of the advertising services in this example is to Aust Co, another entity.

(ii) Provided to that other entity in Australia

586. Aust Co is in Australia when the services are performed. As the services are for the purposes of Aust Co in Australia, the supply of advertising services is provided to another entity, Aust Co, in Australia.

587. Subsection 38-190(3) negates the GST-free status of the supply covered by item 2.

Below we consider whether subsection 38-190(3) of the GST Act applies to the supplies of services made by AusCo to Company Y under the three Scenarios provided by AusCo:

Scenario 1 - adaptation of global advertising material for Australian market

Given the statement in the ruling request that AusCo is briefed , directed and the relevant material is reviewed and approved by the employee of Company B for Scenario 1 situations, we consider that Scenario 1 is similar to Example 33 in GSTR 2005/6 where the supplier of advertising services interacted with an entity in Australia which signed off on the advertising copy and exercised full control over the conduct of advertising services. We therefore consider that subsection 38-190(3) of the GST Act applies to the supply made by AusCo under Scenario 1. Consequently that supply is taxable and not GST-free.

Scenario 2 - adaptation of global advertising material for overseas markets

Given the statement in the ruling request that in Scenario 2 AusCo is briefed, directed and the relevant material is reviewed and approved by the employee of Company B, for the reasons set out above in relation to Scenario 1 we consider that subsection 38-190(3) of the GST Act also applies to the supply made by AusCo under Scenario 2. Consequently that supply is taxable and not GST-free.

Scenario 3 - website updates for Australian and overseas markets

Based on the statement in the ruling request that AusCo is briefed, directed and the relevant material is reviewed and approved by employees of XYZ's overseas operation', we consider that subsection 38-190(3) of the GST Act does not apply and that AusCo's supply of services including advertising services under Scenario 3 is GST-free under Item 2 in subsection 38-190(1) of the GST Act.

Supply of services to Company A

Based on the information provided, the supply of services made by AusCo to Company A satisfies paragraph (a) of item 2 in subsection 38-190(1) as:

· Company A is not incorporated in Australia and does not carry on its business at a fixed and definite place in Australia or through an agent at a fixed and definite place in Australia for a substantial period. Accordingly, the requirement that the non-resident is not in Australia when the thing supplied is done is satisfied; and

· the services done are not a supply of work physically performed on goods and are not directly connected with real property in Australia.

AusCo's supply of services to Company A 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.

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