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Ruling

Subject: GST and supply of international brokerage services

Question 1

Is the supply of brokerage services by an Australian entity (you) to clients in Australia that facilitate the sale or purchase of shares in companies incorporated overseas, that are listed on an overseas exchange, GST-free under section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

Yes, your supply of brokerage services to clients in Australia that facilitate the sale or purchase shares in companies incorporated overseas, that are listed on an overseas exchange, is GST-free under paragraph (a) of item 4 in the table in subsection 38-190(1) of the GST Act, as the services are in relation to rights and the rights are for use outside of Australia.

Question 2

Are the international transfer fees (such as courier charges and certificate lodgement fees) directly associated with your supply of the international brokerage services subject to goods and services Tax (GST)?

Answer 2

No, the international transfer fees directly associated with your supply of the international brokerage services is GST-free.

Relevant facts and circumstances

You are an Australian entity which is registered for GST. You supply brokerage services to clients in Australian who are buying and selling shares.

You also supply overseas trading services to your clients in Australia. Overseas trading services also referred to as 'International Trades', allow your clients to trade foreign shares through you. The shares are listed on international stock exchanges and are bought or sold as on-market transactions. The shares are in companies incorporated overseas.

The overseas trading services are conducted by you in association with overseas agents.

The supply of international brokerage to the clients is by execution only. You receive specific instructions from the client/s to trade overseas shares. However, as there are a number of inherent risks associated with these investments, you do not guarantee the maintenance of capital or a specific rate of return.

You charge brokerage fees to your clients when the clients buy or sell securities such as shares, warrants and options on an authorised market. The amount of brokerage the client pays will be determined in consultation with the client's advisor. You may also charge the client administration or miscellaneous fees covering (not fully inclusive) off market transfers, cancel & rebook nominee fees, international custody, SRN queries, fail fees, late settlement or early settlement, bond custody and settlement etc.

The clients are required to enter into a written agreement with you by completing a new account application form. Every client receives a Financial Services Guide (FSG) and the terms and conditions booklet. The clients are required to declare that they have received a FSG and terms and conditions booklet and agree to be bound by the terms and conditions by ticking the accept box on the application form.

Under the terms and conditions, the clients authorise you to deal in foreign exchange in order to facilitate settlement of international transactions and to provide custodial or depository services. The clients agree to pay all the fees and charges in connection with the services provided by you under the terms and conditions.

When you complete an international trade, a contract note is received from the overseas agent detailing information of the trade and any associated international fees in the local currency. These fees include brokerage charged by your overseas agent and any other country taxes or exchange fees that are relevant to the country you trade in. The international contract note total is converted into Australian dollars and you on-charge the client for the trade and add your advisors brokerage charges.

You incur international transfer fees such as courier charges and lodgement fees as an agent on behalf of your clients. Your clients are liable to pay the international transfer fees. The international transfer fees are directly debited from the clients' nominated bank account once you receive an invoice from the international custody agent.

The international transfer fees are not part of the consideration payable for your supply of brokerage services. You do not issue a tax invoice for the international transfer fees.

You have provided a copy of a FSG, the terms and conditions booklet, a new application form and copies of tax invoices issued by you.

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 9-15

A New Tax System (Goods and Services Tax) Act 1999 section 38-190

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190(1)

Reasons for decisions

Issue 1

Taxable supply

GST is payable on a taxable supply.

Under 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;

(b) the supply is made in the course or furtherance of an enterprise that you carry on;

(c) the supply is connected with Australia; and

(d) you are registered or required to be registered.

However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

From the facts provided, you satisfy the requirements of the taxable supply under paragraphs
9-5(a) to 9-5(d) of the GST Act as follows:

(e) you supply the brokerage services in return for consideration by way of payments;

(f) the supply is made in the course of an enterprise (business) that you carry on;

(g) the supply is connected with Australia as you are carrying on your enterprise (business) in Australia; and

(h) you are registered for GST.

The supply of brokerage services by you to clients in Australia is not input taxed under any provisions of the GST Act or any other legislation.

The next step is to determine whether the supply is GST-free.

GST-free

Section 38-190 of the GST Act specifies when supplies of things, other than goods or real property, for consumption outside Australia are GST-free. As your supply of brokerage services to the clients is not considered to be a supply of goods or real property, their GST status is appropriately considered under this section.

Of relevance to the facts provided is item 4 in the table in subsection 38-190(1) of the GST Act (Item 4).

The supply of brokerage services to buy or sell shares in companies incorporated overseas that are listed on an overseas exchange will be GST-free under paragraph (a) of item 4 if:

· the supply of brokerage services is a supply made in relation to rights; and

· the rights are for use outside of Australia.

Is the supply of brokerage services a supply made in relation to rights?

We consider that a supply of a service is made in relation to rights if the service is directly connected with rights. Services will be directly connected with rights if, for example, they affect the ownership of a thing and the essential character or substance of that thing is of rights.

The value of the share is in the rights that are attached to it. The rights of each shareholder in relation to each class of share are usually contained in the relevant law applicable to the share or the company's constitution (or the equivalent documents in overseas jurisdictions). A share is comprised of a bundle of rights; those rights are not separate pieces of property capable of being divided out and held separately. The nature of shares and the rights attached to shares are described in paragraphs 18 to 26 of TR 94/30 Income tax: capital gains tax implications of varying rights attaching to shares, and the view is supported by a large body of case law.

Whilst it is recognised that the detail of the rights that attach to shares (or stock) in companies incorporated overseas may vary, at a broad level the rights attached to a share generally consist of:

· a right to participate in dividends and equity distributions whilst the company is a going concern;

·  a right to participate in distribution of assets on winding up;

· a right to vote.

The brokerage services supplied by you are services that facilitate the change in ownership of the shares. The brokerage services have a direct connection with rights because through the acquisition or sale of the share, the recipient of the brokerage services acquires or sells the rights that are attached to the share.

Therefore, the supply of brokerage services by you to the clients in Australia is a supply made in relation to rights.

Are the rights for use outside of Australia?

Under paragraph (a) of Item 4 the rights must be for use outside of Australia. It is the intended use of the rights attached to the shares that is relevant in assessing the application of paragraph (a) of Item 4 to the supply of the brokerage services to buy or sell shares.

In Travelex Ltd v. Commissioner of Taxation [2010] HCA 33 at 35 ( Travelex ) the High Court considered whether the supply of Fijian currency by the appellant, Travelex, on the departure of the Customs barrier at Sydney International Airport to an individual travelling to Fiji was a 'supply made in relation to rights' for the purpose of Item 4. French CJ and Hayne J noted that 'where it is evident that the currency is to be used overseas, the rights that attach to the currency are for use outside Australia.

The analysis by the High Court is also relevant to shares, in that, if it is evident that the shares are to be used overseas, the rights that are attached to the shares will also be for use outside of Australia.

There could be a variety of intended uses of a share and these uses will also be considered a use of the rights attached to the share. Any or all of the following could be examples of the intended use of a share:

· to generate an income flow or return of equity through the right to dividend or equity distributions;

· to influence the direction of the company through the right to vote;

· to generate a capital gain or profit (if a trader) through the on-supply of the share, and therefore the disposal of the rights attached to the share.

We consider that, if the company in which particular shares are held was incorporated in an overseas location and those shares are listed on an exchange in that overseas location, the rights attached to those shares will be for use in that overseas location. This is the case even if the holder of the shares is in Australia at the time any dividend is declared or received, or is in Australia at the time any on-sale of the shares it may make takes place.

In summary, the supply of brokerage services by you to the clients in Australia to buy and sell shares in companies incorporated overseas that are listed on an overseas exchange is a supply that is made in relation to rights that are for use outside Australia. Accordingly, the supply is
GST-free under paragraph (a) of item 4 in the table in subsection 38-190(1) of the GST Act.

Issue 2

Under section 9-15 of the GST Act, consideration includes any payment, act or forbearance, in connection with, in response to or for the inducement of a supply of anything.

Goods and Services Tax Ruling GSTR 2000/37 titled 'Goods and services tax: agency relationship and the application of the law' explains the GST implications arising from situations involving agency relationships.

The GST consequences of disbursements made by agents and their subsequent reimbursements by customers are discussed at paragraphs 48 and 49 of GSTR 2000/37.

Paragraphs 48 and 49 of GSTR 2000/37 state:

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.

The GST implication on the reimbursements you received from the client depends on whether you are acting as an agent for the client or it is part of the consideration for the supply of your brokerage services.

To make the distinctions clearer paragraphs 50 to 53 of GSTR 2000/37 describe the sort of fees that a solicitor may pay on behalf of a client and describes when those fees would be paid as an agent and as a principal. These paragraphs are reproduced below:

50. The following are examples of common fees and charges, for which a client is liable, that may be paid for by a solicitor as a paying agent of the client. If the solicitor makes the payment, GST is not payable on the subsequent reimbursement by the client to the solicitor for:

· application fees;

· registration fees;

· court fees;

· barrister's fees when the barrister is engaged by the client;

· incorporation fees;

· most fees in connection with registering and maintaining the status of particular legal relationships such as companies, partnerships, societies or associations;

· fines, penalties, stamp duty and taxes; and

· probate fees.

51. The following are examples of common disbursements that, depending upon the contractual arrangements between the client and the solicitor, can be incurred by a solicitor and then reimbursed by a client as part of the consideration payable for legal services provided to the client by the solicitor. If the following disbursements are incurred by a solicitor, GST is payable on the subsequent reimbursement by the client to the solicitor:

· search fees;

· municipal search fee (eg rates; zoning; permits);

· birth/death/marriage certificate fees;

· barrister's fees when the barrister is engaged by the solicitor;

· witness fees;

· fees for recording court proceedings;

· service of document fees;

· fees for expert report or attendance in court; and

· fees to obtain court transcript.

Based on the information provided, the client has authorised you to make payments to the international custody agent which is incurred by the clients. Hence you are considered to be acting as a paying agent for the clients. In your capacity as the paying agent for the clients, you pay the relevant entity for the expenses incurred by your clients. It is your clients who are personally responsible to pay for the lodgement and document fee. The acquisitions to which the reimbursement relates are supplied to your clients by the international custody agent, not to you.

Therefore, the money paid by your clients to you is a reimbursement of transfer fees incurred by your client, which forms no part of the consideration payable by your clients in making a taxable supply. Consequently, GST is not payable on the transfer fees which you receive from your clients.

Other Information

All public rulings and/or publications referred to in this ruling are available at the Tax Office website at www.ato.gov.au

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