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Ruling

Subject: GST and supplies to non-residents

Question 1

Are the supplies made by Entity 1 to an Entity 1's non-resident clients within the scope of Item 2 of the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, subject to the assumptions on which this ruling is based, the supplies made by Entity 1 to Entity 1's non-resident clients are within the scope of Item 2(a) of the table in subsection 38-190(1) of the GST Act.

Question 2

If the answer to Question 1 is yes, does subsection 38-190(3) of the GST Act apply?

Answer

No, subsection 38-190(3) of the GST Act does not apply.

Relevant facts and circumstances

The request for a goods and services tax (GST) Private Ruling stated:

Entity 1 is an Australian based consulting firm which specialises in international business development;

Entity 1 is registered for GST in Australia;

Entity 1 has entered into arrangements with a number of non-resident clients to supply services. The services provided by Entity 1 are:

§ Promotion of clients' products to potential customers in the Australian market and public relations services, including representing clients at trade fairs and other publicity events;

§ Analysis and advice on both local and overseas market conditions;

§ Assisting Australian customers of Entity 1's clients by referring their queries to the relevant overseas call centres;

§ Providing local office services (such as local phone number and mail services, meeting room hire, photocopying etc);

§ Assistance with general business operations such as budgeting, formulating business plans and monthly reporting activities; and,

§ Co-ordinating services from third parties (for example, legal and accounting firms);

Entity 1 provides dedicated employees for each client account who work exclusively for that particular client account from Entity 1's premises. Although Entity 1's employees report directly to their non-resident client contacts, they remain employees of Entity 1. Additional staff within Entity 1 may assist the dedicated employee;

Entity 1 also makes Entity 1's premises available to Entity 1's non-resident clients. However, the use of Entity 1's premises by the non-resident clients is limited to the occasional use of a boardroom;

Entity 1's non-resident clients may separately engage additional Australian service providers to supply specific services e.g. advertising services;

Entity 1 understands that the non-resident clients are incorporated entities which do not have a Permanent Establishment (PE) in Australia for income tax purposes but may have a PE in Australia for GST purposes;

Entity 1 understands that its non-resident clients are not registered for GST in Australia;

Entity 1 has negotiated its contractual relationships with its non-resident clients directly (rather than through any intermediary or agent of the clients in Australia);

Entity 1 does not enter into negotiations or conclude contracts on behalf of its non-resident clients. Instead, Entity 1's role is to represent its clients and provide a point of contact for those clients' customers in Australia;

Entity 1 does not lease any real property to its clients;

In return for its services, Entity 1 receives various forms of consideration, which may be calculated based on one or more of the following variables:

§ Recovery of dedicated employee salaries and on-costs plus a percentage management fee;

§ Recovery of expenses plus a percentage management fee;

§ Negotiated monthly fees for local office services (i.e. a bundled fee); or

§ Additional fees where the assistance of additional Entity 1 employees is required.

We received a copy of a Consulting and Services Agreement, between Entity 1 and a non-resident entity, being Entity 2.

Assumptions

This private ruling is based on the assumptions that:

1. All Consulting and Services Agreements between Entity 1 and Entity 1's clients are not materially different to the Consulting and Services Agreement between Entity 1 and Entity 2;

2. Entity 1's understanding that each client which enters into a Consulting and Services Agreement with Entity 1 is a 'non-resident' within the meaning of that term in section 195 of the GST Act is correct; and

3. Where Entity 1 enters into a Consulting and Services Agreement with a non-resident company which has a presence in Australia, either

§ Entity 1 does not supply consulting or other services solely or partly for the purposes of that Australian presence; or

§ The involvement of that Australian presence in the supply made by Entity 1 is minor, i.e. limited to carrying out simple administrative tasks of the type listed in paragraph 352 of GSTR 2004/7.

Relevant legislative provisions

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)

Reasons for decision

Question 1

Summary

Subject to the assumptions set out above, supplies made by Entity 1 to Entity 1's non-resident clients are within the scope of Item 2(a) of the table in subsection 38-190(1) of the GST Act.

Detailed reasoning

Section 38-190 of the GST Act defines certain supplies other than goods or real property for consumption outside of Australia as GST-free.

Item 2 in the table in subsection 38-190(1) of the GST Act (Item 2) states:

(* is a defined term under section 195-1 of the GST Act.)

A supply that is made to a non-resident:

The third column in item 2 in subsection 38-190(1) of the GST Act refers to "a supply that is made to a non-resident".

"Non-resident" is defined in section 195-1 of the GST Act as an entity that is not an "Australian resident". Section 195-1 defines "Australian resident" as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA). Subsection 6(1) of the ITAA states that, in the case of a company, "resident of Australia" means a company that is incorporated in Australia, or which, not being incorporated in Australia, has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

It was stated in the ruling request (Appendix B, p.4):

"Entity 1 understands that its clients are non-resident entities with no presence in Australia. That is, it understands that the non-resident clients are incorporated entities which do not have a permanent establishment (PE) in Australia for income tax purposes. However, the non-resident clients may have a PE in Australia for GST purposes."

This ruling is based on an assumption that Entity 1's understanding is correct.

The recipient is not in Australia:

The requirement that the recipient is not in Australia when the thing supplied is done is discussed in Goods and Services Tax Ruling 2004/7 (GSTR 2004/7).

Under paragraph 37 of GSTR 2004/7, 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

Fixed and definite place of its own

In relation to paragraph 37(a) of GSTR 2004/7 it was submitted in the ruling request (Appendix C, p. 7):

"Based on Entity 1's understanding that its clients are non-residents that do not carry on business at or through a fixed and definite place of their own for a substantially sufficient period of time in Australia, we consider that paragraph (a) of the Commissioner's comments set out above will not be satisfied."

In relation to the reference in paragraph 37(a) of GSTR 2004/7 to a company having a "place of its own" paragraph 253 of GSTR 2004/7 states:

"A non-resident company clearly has a place of business of its own if it leases or owns a place at which it conducts business through its servants or agents. However, a place of its own is not limited to such a place. A non-resident company occupies a place as a place of its own if it has a right to be there. Evidence of that right is generally to be found in the fact that the company's employees or agents occupy that place for the purposes of its business."

From the facts provided, Entity 1's non-resident clients pay Entity 1 a service fee for a local address in Australia; a dedicated mail box and the transfer of mail; two phone lines; and office facilities. Entity 1 also provides a dedicated office for managing its client's account. Pursuant to the Consulting and Services Agreement with Entity 2, Entity 1 provides (and charges an additional fee for) a dedicated office which is used by a dedicated employee employed by Entity 1 and an intern for managing Entity 2's account. However Entity 2 does not "lease" or "own" that dedicated office. Nor does Entity 2 have a "right to be there" according to the test set out in the last sentence in paragraph 253 of GSTR 2004/7 because that office is occupied by Entity 1's employees for the purposes of Entity 1's business, not Entity 2's business.

We therefore consider that Entity 1's clients are not "in Australia" according to the test set out in paragraph 37(a) in GSTR 2004/7.

Through an agent

In relation to the test in paragraph 37(b) of GSTR 2004/7, i.e. whether the non-resident incorporated entities to which Entity 1 supplies services are "in Australia" by reason of carrying on business in Australia "through an agent at a fixed and definite place for a sufficiently substantial period of time", paragraph 278 of GSTR 2004/7 states:

"The key issue in this kind of situation is whether the non-resident company is itself carrying on business through a duly appointed agent, or whether the business being conducted is the agent's own business, the non resident company merely being one of its customers."

and paragraph 281 of GSTR 2004/7 lists ten factors that indicate whether a non-resident company can properly be regarded as carrying on business in Australia through an agent:

"Was the fixed place of business from which the agent operates originally acquired for the purposes of enabling the agent to carry on the business of the non-resident company?

Does the non-resident company directly reimburse the agent for the cost of accommodation or staff at the fixed place of business?

Does the non-resident company make other contributions to the financing of the business carried on by the agent?

Is the agent remunerated by reference to transactions, for example, by commission, or by fixed regular payments or in some other way? Commission can be an indicator that the agent is carrying on its own business and not that of the non-resident. However, it is not determinative.

What degree of control does the non-resident company exercise over the running of the business conducted by the agent?

Does the agent reserve part of the agent's staff or accommodation for the conducting of business related to the non-resident company?

Does the agent display the name of the non-resident company at the agent's premises or on stationery and, if so, does it indicate that the agent is an agent of the non-resident company?

What business, if any, does the agent transact as principal exclusively on the agent's own behalf?

Does the agent make contracts with customers or other third parties in the name of the non-resident company or otherwise in such a manner so as to bind it?

If the agent does not make contracts so as to bind the non-resident company, does the agent require specific authority in advance before binding that foreign company to contractual obligations?"

The ruling request did not address the factors listed in paragraph 281 of GSTR 2004/7, although in relation to the issue of whether Entity 1 was an agent for Entity 1's clients, it was submitted (Appendix C, p. 8):

"On the basis that Entity 1 does not negotiate or enter into contracts on its clients' behalf, we consider it unlikely that Entity 1 is acting 'as agent' for its clients. Where Entity 1 is not acting as agent for its clients, we consider that the non-resident clients are not 'in Australia' in accordance with the above analysis."

In Australia in relation to the supply

Instead the ruling request stated (Appendix C, p. 7):

"We note that at paragraphs 34 and 184 of GSTR 2004/7, the Commissioner considers that the phrase 'in Australia" in Item 2 should be interpreted as in Australia 'in relation to' the relevant supply. As such, it is also necessary to consider whether, if a client of Entity 1 were carrying on its business through an agent as described in paragraph (b) of the Commissioner's comments above, the supplies made by Entity 1 would be made 'in relation to' that business."

The ruling request then referred to the discussion of a supply of agency services by an agent to a non-resident in paragraphs 374 to 379 of GSTR 2004/7, especially paragraphs 375 and 376 of GSTR 2004/7:

"For supplies of agency services made by the agent to the non-resident company, the company is not in Australia in relation to the supply of those agency services. This is because the agent does not make the company in Australia in relation to supplies that it makes itself to the company. If the other requirements of item 2 are met, the supply of services and other things made by the agent in the course of its own business (agency services) to the non-resident company is a GST-free supply.

For example, a non-resident company that is in Australia because the real estate agent attends to the day to day management and operation of a commercial rental property in Australia on behalf of the company is not in Australia in relation to a supply of services that the real estate agent itself makes to that company. The company is not in Australia in relation to the supply unless those services are for the purposes of some other presence of the company in Australia, such as a branch, or there is some other connection (that is not minor in nature) between the agency services and that other Australian presence of the company. If this is the case, the company is in Australia in relation to the supply of the agency services through its other presence in Australia and the supply of the agency services is not GST-free."

It was submitted that even if the ATO considered that Entity 1 was acting as agent for Entity 1's clients, paragraphs 375 and 376 of GSTR 2004/7 indicate that the supply of agency services by Entity 1 to Entity 1's clients cannot put those clients "in Australia" in relation to the supply made by Entity 1 (ibid):

"Accordingly, in the event that Entity 1 did act as agent for its clients, we would still consider that the services supplied by Entity 1 in Australia remain supplies made to non-residents that are not 'in Australia'."

We agree with this submission.

The ruling request also addressed the situation where a client of Entity 1 carried on business in Australia through an agent (i.e. an entity other than Entity 1). It was submitted that that client would not be in Australia "in relation to" any supply made by Entity 1. The ruling request referred to paragraphs 348 to 352 of GSTR 2004/7 (Appendix C, pp. 7 - 8):

"In summary the Commissioner considers that a non-resident with a presence in Australia will be in Australia in relation to a supply where:

· The supply is solely or partly for the purpose of the Australian presence;

· The Australian presence is involved in the supply, unless the only involvement is minor; or

· The Australian presence is involved in the supply but that involvement is limited to the carrying out of simple administrative tasks on behalf of the company as a matter of administrative convenience."

and it was submitted (ibid):

"Entity 1 has entered into contracts with its non-resident clients directly and not through any agents acting on the clients' behalf. As such, even where a non-resident client has an agent and is in Australia for GST purposes, we would submit that the non-resident is not in Australia 'in relation to' the supplies made by Entity 1."

We disagree. In our view GSTR 2004/7 does not suggest that involvement of the Australian presence of a non-resident company in the formation of a contract for the supply of consulting or other services by Entity 1 determines whether the non-resident company is in Australia in relation to the supply of those services. Instead the test is whether the non-resident company's Australian presence is involved in relation to the performance of those services by Entity 1. This is demonstrated by Example 15 in GSTR 2004/7 where the contract is entered into directly with a non-resident company but the non-resident company's Australian presence is involved in the supply of services made pursuant to that contract:

"Example 15 - representative office in Australia in relation to the supply

362. A United Kingdom company ('UK Co') has a representative office in Australia at which it carries on business. UK Co engages Aus Finance, an Australian company, to give advice on the possible acquisition of shares in an Australian company. UK Co instructs its representative office in Australia to give responses to the questions posed by Aus Finance and any other information that may be of assistance to Aus Finance. Some information is supplied in writing, and at other times, the information is supplied at meetings held between Aus Finance and the Australian representative office of UK Co.

363. The role of the representative office in Australia is not limited to administrative tasks of a minor nature. UK Co is in Australia in relation to the supply. Therefore, the supply is not GST-free under item 2 or item 3."

In the ruling request it was submitted (Appendix C, p. 8):

"…if the non-resident client did have an agent or presence in Australia with which Entity 1 contracted, we note that the supply of services by Entity 1 should not be considered to be supplied to that presence in Australia but would be supplied to the non-resident client who is not in Australia, as the services are administrative in nature."

This submission was preceded by a reference to the discussion in GSTR 2004/7 (Para's 348 - 352) of the role the Australian presence of a non-resident company plays in relation to a supply made to the non-resident company.

In our view the submission set out above misunderstands the discussion in paragraphs 348 to 352 of GSTR 2004/7. The point of that discussion is that if the Australian presence of a non-resident company is involved in a supply made to the non-resident company but that involvement is limited to tasks of a simple administrative nature, the non-resident company is not in Australia in relation to the supply made to the non-resident company. The submission above, on the other hand, is that if the Australia presence of a non-resident company was involved in a supply made by Entity 1 pursuant to a Consulting and Services Agreement, the non-resident company would nevertheless not be in Australia in relation to the supply made by Entity 1 because the supply made by Entity 1 is limited to tasks of a simple administrative nature.

Apart from misunderstanding the discussion in paragraphs 348 to 352 of GSTR 2004/7, the submission that the services supplied by Entity 1 "are administrative in nature" appears to be contradicted by the Consulting and Services Agreement with Entity 2 which obliges Entity 1 to provide "advice for the best set up for Entity 2 in Australia to facilitate its access to the market" and to enter into a public liability insurance policy on Entity 2's behalf.

In our view, if Entity 1 enters into a Consulting and Services Agreement with a non-resident company which has a presence in Australia and Entity 1 supplies consulting or other services solely or partly for the purposes of that Australian presence then the non-resident company is in Australia in relation to the supply made by Entity 1 (paragraph 349 of GSTR 2004/7 refers). If the supply made by Entity 1 is not solely or partly for the purposes of the Australian presence but the Australian presence is involved in that supply, the non-resident company is in Australia in relation to the supply made by Entity 1 unless the involvement of the non-resident company's Australian presence is minor, i.e. limited to carrying out simple administrative tasks of the type listed in paragraph 352 of GSTR 2004/7 for the non-resident company. We have added an assumption to this ruling to reflect this.

Subject to the assumptions set out in this ruling being correct in relation to any supply of consulting or other services by Entity 1, we are satisfied that those services are supplied to a non-resident who is not in Australia when the thing supplied is done for the purposes of Item 2 in subsection 38-190(1) of the GST Act.

Item 2(a) in subsection 38-190(1)

Paragraph (a) in item 2 requires that the supply made by Entity 1 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 in Australia.

Goods and Services Tax Ruling GSTR 2003/7 states that "a supply of work physically performed on goods" in paragraph (a) replaced the words "a supply directly connected with goods" with the intention of allowing a wider range of services to be GST-free (Para 56), and (Para's 57-8):

"A supply of work physically performed on goods requires a much closer connection with the goods: it requires physical intervention with the goods. For example, a supply of legal services in preparing an agreement for the lease of goods is directly connected with goods but it is not a supply of work physically performed on goods as there is no physical intervention with the goods.

A supply is a supply of work physically performed on goods where something is done deliberately to the goods to change them or affect them in some physical way. The repair of goods is an example of work that is physically performed on goods."

In our view the supply made by Entity 1 does not involve a physical intervention with goods situated in Australia.

In the alternative, paragraph (a) in Item 2 requires that the supply made by Entity 1 is not a supply directly connected with real property situated in Australia. GSTR 2003/7 states that the addition of the adverb "directly" to the phrase "connected with" implies a more emphatic connection between the supply and real property and that the inference is that the supply is so closely aligned with the real property that it is appropriate to treat the location of the goods or real property as the place where consumption occurs (Para 21). GSTR 2003/7 also states that a direct connection does not exist in the case of the supply of advice or information about real property, the supply of marketing or similar intermediary service, or merely arranging supplies between two other parties (Para 44).

In the ruling request it was stated (Appendix C, p. 9):

"The majority of Entity 1's non-resident clients do not make use of the premises in Australia. For the minority of clients that do, the supply is used no more than once or twice a year. We also point out that use of the premises is limited to the use of a boardroom."

and submitted (ibid):

"We submit that the occasional use of Entity 1's premises by the non-resident clients should merely be the setting for the dominant part of the supply being made by Entity 1, i.e. the use and enjoyment of the premises is in order for Entity 1 to supply its PR services. Therefore, the use of the premises should not be considered to be a supply directly connected with real property."

In our view, the supply by Entity 1 of the use of Entity 1's premises is not a supply of real property as it is ancillary to supply of the PR services. Accordingly, the supply made by Entity 1 does not involve a supply directly connected with real property situated in Australia.

Question 2

Summary

Subsection 38-190(3) of the GST Act does not apply to negate the GST-free treatment under Item 2(a) of a supply made by Entity 1 to a non-resident client.

Detailed reasoning

Subsection 38-190(3) of the GST Act deals with supplies used or enjoyed outside Australia and appears as follows:

"Without limiting subsection (2) or (2A), a supply covered by item 2 in that table is not GST-free if:

(a) it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident; and

(b) 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 (GSTR 2005/6) provides guidance on the application of subsection 38-190(3) of the GST Act.

Paragraph 38-190(3)(a):

In our view, subject to the first assumption set out above, paragraph 38-190(3)(a) is satisfied.

Entity 1 has advised that Entity 1 understands that each client which enters into a Consulting and Services Agreement with Entity 1 is a "non-resident" within the meaning of section 195-1 of the GST Act.

Paragraph 38-190(3)(b):

Paragraph 38-190(3)(b) applies where the supply is provided, or the agreement requires it to be provided, to another entity.

"Another entity" is an entity, as defined in subsection 184-1(1) of the GST Act, other than the non-resident entity to which the supply is made. The term entity includes individual, companies, partnerships and trusts.

The term "provided" is used in subsection 38-190(3) to differentiate from the term "made" in item 2. The word provided focuses on the doing of the thing to be supplied and the flow of the actual services or thing required to be supplied under the contractual arrangements. This is explained in Goods and Services Tax Ruling GSTR 2005/6 (GSTR 2005/6):

"59. The word 'provided' is used in subsection 38-190(3) to contrast with the term 'made' in item 2. In the context of section 38-190, 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.

…

61. Thus the expression 'provided to another entity' means, in our view, that in the performance of a service (or in the doing of some thing), the actual flow of that supply is, in whole or part, to an 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 recipient) and the actual flow of the supply is to another entity."

Character of the supply

GSTR 2005/6 states:

"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."

The ruling request it was submitted that the only supplies made by Entity 1 in relation to which subsection 38-190(3) needed to be considered were marketing and promotion services and telephone support services (i.e. redirection of queries from Australian customers to call centres located in overseas countries (Appendix C, p.11). Reference was made to Examples 26 and 34 in GSTR 2005/6, which characterised speaking services and telephone booking services as supplies of services. Based on those examples we agree that the supplies made by Entity 1 pursuant to Consulting and Services Agreements are supplies of services.

Exact nature of the supply

GSTR 2005/6 also states:

"69. It is also necessary to establish the exact nature of the supply to determine to which entity that service or thing is provided. That is, it is necessary to establish what is really being supplied.

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."

In relation to marketing and promotion services supplied by Entity 1, we agree with the submission in the ruling request that the reasoning set out in Example 26 in GSTR 2005/6 in relation to promotion of new software applies:

"534…While knowledge and information…flow to audience members, this is only a by-product of the supply of speaking services and it does not alter the true nature of the service, that is, the promotion and marketing of the new software."

In relation to telephone services, we agree with the submission in the ruling request that the reasoning set out in Example 34 in GSTR 2005/6 applies:

"593….While the customers get information and other benefits, such as their travel booked, by calling Aus Bookings Co, the customers are not provided with the service of operating a bookings and enquiries service. This is provided to Trans-Europe".

We have also briefly considered the other services supplied by Entity 1 pursuant to the Consulting and Services Agreement with Entity 2 (e.g. acting as Entity 2's public relations agency, supporting the representation of Entity 2 at local conferences and sports events, assistance in establishing a business plan and budget). Based on the descriptions of those services, we consider it unlikely that those services would be provided to another entity in Australia.

Therefore, subsection 38-190(3) of the GST Act does not apply to negate the GST-treatment that is available under Item 2. The supplies of Entity 1's' services to its non-resident clients will be considered a GST-free supply.

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