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Ruling

Subject: GST and international services

Questions:

1. Are the services supplied by ABC to XYZ pursuant to a Master Services Agreement (MSA) and Statement of Work (SoW) GST-free pursuant to item 2 in subsection 38-190(1) of the A New Tax System (Goods and Services) Tax Act 1999 (GST Act)?

2. If those services are GST-free pursuant to item 2 in subsection 38-190(1) of the GST Act, does subsection 38-190(3) apply to negate that GST-free status?

Answers:

1. Yes, the services supplied by ABC to XYZ pursuant to the MSA and SoW are GST-free pursuant to item 2 in subsection 38-190(1) of the GST Act.

2. No, subsection 38-190(3) of the GST Act does not negate the GST-free status of the supply of those services.

Relevant facts:

The parties

ABC Pty Ltd (ABC) is a company incorporated in Australia which carries on business as a call centre operator and specialises in providing travel-related call centre services. ABC is registered for GST.

XYZ is incorporated overseas. The ruling request states that XYZ:

· is a non-resident of Australia for Australian tax purposes;

· registered with ASIC as a foreign company;

· obtained an Australian Business Number (ABN) solely for the purpose of registering with the Travel Compensation Fund; and

· applied for an Australian Travel Agents Licence.

That ruling request also states (p. 3):

As a result of this Travel Agents Licence, XYZ considered that it had a Permanent Establishment Australia for income tax purposes. This Permanent Establishment is not relevant for the purposes of this analysis (see below).

and that XYZ is neither GST registered in Australia nor required to be so registered.

XYZ facilitates the booking and payment by computer or telephone for travel products and services provided by airlines, hotels, car rental companies, destination service providers, cruise lines and other travel product and service providers to travellers located around the world, including travellers located in Australia and New Zealand.

XYZ has an Australian subsidiary, SUB. The ruling requests did not describe SUB's activities. We understand, however, that SUB owns www.XYZ.com.au on behalf of XYZ, that SUB employs an advertising sales manager to promote advertising on www.XYZ.com.au (although any contract for the sale of advertising is between the advertiser and XYZ), that SUB employs a production and merchandising team which, after receiving approval from XYZ, maintains and localises the home page on www.XYZ.com.au, and that SUB's interacts with potential customers of XYZ (e.g. visits a hotel (referred to as a 'Property') and discusses the type and number of rooms to be displayed on www.XYZ.com.au, although the SUB's is not authorised to conclude the Agreement (see below) between XYZ and the Property on XYZ's behalf and must send the Agreement to XYZ for approval and execution.

The services supplied by ABC

The ruling request states that XYZ has engaged ABC to supply call centre services in relation to travellers located in Australia and New Zealand. A Master Services Agreement (MSA) and a Statement of Works (SoW) between ABC and XYZ were attached to the ruling request.

The ruling request states that ABC's call centre services include sales services and handling inbound and outbound telephone, fax and e-mail and online communications and that the services supplied by ABC to XYZ include responding to general inquiries and travel-related questions from travellers, assisting travellers with existing itineraries, providing travellers with procedural information, and responding to sales enquiries from travellers in accordance with XYZ's guidelines and policies.

The ruling request also states that the majority of calls and e-mails made and received by ABC in relation to the services supplied by ABC to XYZ involve private individual travellers located in Australia and New Zealand, that ABC does not contract with travellers in XYZ's name, and that the services supplied ABC to XYZ generates less than EE% of ABC's total revenue

Reasons for decision

Question 1 - is the supply made by ABC GST-free under item 2 in subsection 38-190(1)?

Summary of decision:

The supply made by ABC to XYZ is GST-free pursuant to item 2 in subsection 38-190(1) of the GST Act.

Detailed reasoning:

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' and 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, carries on business in Australia and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

The ruling request states that XYZ is incorporated overseas. We understand that XYZ's headquarters are overseas. We are satisfied that, even if XYZ carries on business in Australia, XYZ is a 'non-resident' because XYZ does not have its central management or control in Australia or its voting power controlled by shareholders who are residents of Australia.

Is XYZ 'in Australia'?

The third column in item 2 in subsection 38-190(1) refers to a supply made to a non-resident 'who is not in Australia when the thing supplied is done'.

Goods and Services Tax Ruling GSTR 2004/7 states (Para 37):

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.

and that it would be reasonable for a supplier to conclude that a non-resident company is in Australia if that company is registered with ASIC or has an Australian permanent establishment for income tax purposes (Para 38).

In relation to whether XYZ has a fixed and definite place of XYZ's own in Australia, the ruling request acknowledges that XYZ registered with ASIC) and acquired an Australian permanent establishment for income tax purposes as a result of acquiring an Australian Travel Agents Licence. We have confirmed that XYZ holds an Australian Travel Agents Licence and, for the purposes of that licence and XYZ's participation in the Travel Compensation Fund, has a place of business in Australia.

Is XYZ in Australia in relation to the supply?

The 'ruling' section of GSTR 2004/7 states (Para 41):

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, for example, its Australian branch. If the supply is not for the purposes of the Australian presence but that Australian presence is involved in the supply, the company is in Australia in relation to the supply, except where the only involvement is minor.

The 'Explanation' section of GSTR 2004/7 states that in order to work out whether a company is in Australia in relation to the supply it is necessary to examine the role the Australian presence of the company plays in relation to the supply (Para 348) and if the supply is not for the purposes of the Australian presence, but that presence is involved in the supply, the company is in Australia 'in relation to the supply', unless the involvement of the Australian presence is minor (i.e. limited to carrying out simple administrative tasks on behalf of the company as a matter of administrative convenience) (Paras 350 - 351).

There are three means by which XYZ may be in Australia in relation to the supply made by ABC - the ruling request acknowledged that XYZ acquired a permanent establishment in Australia for income tax purposes as a result of acquiring an Australian Travel Agents Licence and it is necessary to consider whether XYZ is in Australia in relation to the supply made by ABC as a result of the activities of either ABC or SUB.

In the ruling request it was submitted that the Australian permanent establishment acquired by XYZ through acquiring an Australian Travel Agent's Licence is not involved in any way with the supply of call centre services made by ABC to XYZ and that those call centre services are supplied to and consumed by XYZ oversea's. We agree with that submission. The MSA is between XYZ and ABC and recites that ABC wishes to provide and XYZ wishes to obtain from ABC certain customer service and administration support services. XYZ's Travel Agents Licence does not appear to play a role in relation to the supply made by ABC to XYZ. The only role, if any, that the Travel Agents Licence plays is that the www.XYZ.co.au website and any booking confirmation issued to an Australian traveller state that XYZ 'participates in the Travel Compensation Fund" and provides XYZ's Travel Agents Licence number.

As noted above, GSTR 2004/7 states that a non-resident company is in Australia if that company carries on business in Australia through an agent at a fixed and definite place for a sufficiently substantial period of time (Para 37(b)). Even if application of the factors listed in paragraph 281 of GSTR 2004/7 to ABC's activities resulted in XYZ being in Australia as a result of carrying on business through ABC as XYZ's agent that would not result in XYZ being in Australia in relation to the supply made to XYZ by ABC. The reasons for this are explained in GSTR 2004/7 (Para's 374 - 379):

Supply of agency services by an agent to a non-resident

If an agent carries on the business of a non-resident company in Australia at a fixed and definite place for a sufficiently substantial period of time, that company is in Australia. However, the supply of services by the agent to the non-resident company in the course of its own business ('agency services') may still be GST-free.

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.

This treatment of agency services also applies if the entity receiving the services is an entity other than a company, for example a partnership.

Example 21 - supply of agency services

Ausage acts as agent in Australia for NZ Co and is carrying on the business of NZ Co in Australia. NZ Co is therefore in Australia. In carrying on the business of NZ Co in Australia, Ausage enters into a contract with Aus Store, an Australian storage company, to secure storage services for stock held in Australia by Ausage on behalf of NZ Co. The supply of storage services to NZ Co is not GST-free as NZ Co is in Australia in relation to the supply .

Ausage also charges NZ Co a monthly fee for the agency services it provides to NZ Co in carrying on the business of NZ Co in Australia. Even though NZ Co is in Australia in relation to the supply from Aus Store, it is not in Australia in relation to the supply of the agency services supplied by Ausage. Therefore, the supply of agency services from Ausage to NZ Co is GST-free, provided the other requirements of item 2 are met.

Nor would SUB's activities result in XYZ being in Australia in relation to the supplies made by ABC. GSTR 2004/7 requires a connection that is not a minor connection between the supplies made by ABC and SUB (Para 349). In our view the supply made by ABC to XYZ supports XYZ's business of facilitating the booking of and payment for travel products by travellers using a computer or telephone and there is not the required connection between that supply and the activities undertaken by SUB on behalf of XYZ (e.g. promoting advertising, maintaining www.XYZ.com.au and negotiating Agreements).

For the reasons set out above we consider that XYZ is not 'in Australia' for the purposes of item 2 in subsection 38-190(1) in relation to the supply made by ABC.

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

Paragraph (a) in item 2 requires that the supply made by ABC 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 ABC pursuant to the MSA and SoW 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 ABC is not a supply directly connected with real property situated in Australia. 'Real property' is defined in section 195-1 of the GST Act to include, inter alia, a licence to occupy land or any other contractual right exercisable over or in relation to land. GSTR 2003/7 states that a supply of a hotel room is a supply of real property (Para's 94-95):

Hotel accommodation

The essence of a supply of hotel accommodation is the right to occupy a specified room for a particular period. This is not a tenancy (and the grant of an interest in land) but a personal right given under the arrangements. A person who takes a room at a hotel is conferred with a licence to enter the land of another and occupy it for a particular purpose.

A hotel guest may also be entitled to receive other services as part of the supply of the hotel accommodation. These may include access to a gym, pool, lounge areas, business facilities (Internet, facsimile, telephone) and car parking or room services such as cleaning. We consider these services to be only qualitative aspects of the accommodation and ancillary to the dominant part of the supply, a licence to occupy land, which is a supply of real property

In Saga Holidays Limited v. Commissioner of Taxation [2006] FCAFC Stone J was 'satisfied that, at the very least, the contract between Saga and the tourist [for hotel accommodation] can be accurately described as including 'a contractual right exercisable... in relation to land'.

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 following cases (Para 44):

· provision of advice or information about real property prices or property markets in general;

· marketing, advertising or auctioneering services (where the auctioneer is not the common law agent of the vendor) or similar intermediary service;

· services of merely arranging supplies between two other parties, for example, an insurance broker arranging for a supply of building insurance;

The examples set out in the Explanation section of GSTR 2003/7 explain why a direct connection does not exist. Example 22 deals with a supply of marketing services (Para 181):

Example 22 indicates that a supply of services which facilitates but does not effect a transaction that is directly connected with the real property is not directly connected with that real property for the purposes of item 2(a).

There is not a supply of a right to a hotel room by the Property to XYZ followed by a supply of that right by XYZ to a traveller. Instead XYZ supplies to the Property the service of facilitating the booking and payment for the room by the traveller and ABC supplies to XYZ the service of supporting the supply of that facilitation service. We therefore consider that the service supplied by ABC to XYZ does not have a direct connection with any underlying real property.

For the reasons set out above, we consider that the requirements in paragraph (a) in item 2 in subsection 38-190(1) are satisfied and that the supply made by ABC to XYZ is GST-free pursuant to item 2(a) in subsection 38-190(1) of the GST Act.

Item 2(b) in Subsection 38-190(1)

Paragraph (b) in item 2 requires that XYZ acquires the thing done by ABC in carrying on XYZ's enterprise but that XYZ is not GST registered or required to be GST registered.

'Enterprise' is defined in section 9-20 of the GST Act as, inter alia, an activity or series of activities done in the form of a business. We are satisfied that XYZ carries on an enterprise.

We are also satisfied that XYZ acquires the services in carrying on XYZ's enterprise.

We have searched the ABN Register and confirmed that XYZ has an ABN but is not registered for GST.

In relation to whether XYZ is required to register for GST, section 23-5 of the GST Act states that an entity is required to be registered for GST if the entity is carrying on an enterprise and the entity's GST turnover meets the registration turnover threshold (currently $75,000). Subsection 188-10(1) states that an entity has a GST turnover that meets a particular turnover threshold if either that entity's 'current GST turnover' (defined in relation to a particular month as the sum of the values of all supplies made during the 12 months ending at the end of that month) is at or above that threshold and the ATO is not satisfied that the entity's 'projected GST turnover' (defined in relation to a particular month as the sum of the values of all supplies made during that month and the next eleven months) is below that threshold or that entity's projected GST turnover is at or above the turnover threshold.

Supplies that are input taxed, not for consideration, or not made in connection with an enterprise that the entity carries on are not included in the calculation of current GST turnover and projected GST turnover. In addition, subsections 188-15(3) and 188-20(3) state that certain supplies are disregarded when working out current GST turnover and projected annual turnover respectively. Paragraph 188-15(3) states:

(3) In working out your current GST turnover, disregard:

(a) any supply that is not connected with Australia; and

(b) any supply that is connected with Australia because of paragraph 9-25(5)(c); and

(c) any supply (other than a supply covered by paragraph (a) or (b)):

(i) of a right or option to use commercial accommodation in Australia; and

(ii) that is not made in Australia; and

(iii) that is made through an enterprise that the supplier does not carry on in Australia.

and paragraph 188-20(3)(c) contains a corresponding provision in relation to the calculation of projected annual turnover.

The supply made by XYZ was a right to a hotel room and that the recipient of that supply is the traveller located in Australia or New Zealand who occupied that hotel room. The ruling request states that the supply made by XYZ is the supply to a traveller of a right to a room

We consider that XYZ or XYZ's Affiliates ('Company' or 'Companies') makes a supply to the hotel ('Property') of the service of facilitating the booking of a room in the Property by a traveller (referred to as a 'Guest' ) through XYZ's System. We do not consider that the Property supplies the right to a room to XYZ which XYZ then supplies that right to the Guest

We consider it likely that XYZ makes a supply of agency services to a hotel. Given that XYZ makes a supply of services to the relevant hotel, we consider that that supply is excluded from the GST registration turnover threshold pursuant to paragraphs 188-15(3)(a) and 188-20(3)(a) of the GST Act as not being connected with Australia. GSTR 2000/31 states (Para 65):

If the 'thing' being supplied is a service, the supply of that 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 under paragraph 9-25(5)(a). This is the case even if the recipient of the supply is outside Australia.

Based on the advice in the ruling request that the server that hosts XYZ's services and products is located outside Australia, that XYZ has no equipment or employees located in Australia and that XYZ's business is conducted outside Australia, we consider that the supply made by XYZ to the operator of a hotel (whether located in Australia or offshore) of facilitating the booking of and payment for a room in that hotel is not connected with Australia and is therefore excluded from calculation of XYZ's GST registration turnover threshold by paragraphs 188-15(3)(a) and 188-20(3)(a) of the GST Act and that XYZ is not required to be registered for GST. Although we have not seen the relevant agreements, we consider it likely that the same reasoning applies to supplies made by XYZ to suppliers of other travel products and services.

Question 2 - does subsection 38-190(3) of the GST Act negate the GST-free status of the supply made by ABC?

Summary of decision:

The GST-free status of the supply made by ABC to XYZ pursuant to the MSA and SoW is not negated by subsection 38-190(3) of the GST Act.

Detailed reasoning:

Item 2 in subsection 38-190(1) of the GST Act is qualified by subsection 38-190(3) which states that a supply covered by item 2 is not GST-free if:

a) It is a supply under an agreement entered into, whether directly or indirectly, with an Australian resident; and

b) The supply is provided, or the agreement requires it to be provided, to another entity outside Australia.

In the ruling request it was submitted that the supply of call centre services made by ABC is provided solely to XYZ, a non-resident entity and that although travellers in Australia benefit from that supply, those travellers are not provided with call centre services. The ruling request referred to Example 34 in Goods and Services Tax Ruling GSTR 2005/6.

GSTR 2005/6 explains the meaning of 'provided to another entity' in subsection 38-190(3) of the GST Act:

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.

60. The example in the Explanatory Memorandum accompanying the Bill that introduced subsection 38-190(3) illustrates this. In that example, non-resident parents contract for the supply of education services to be provided to their children in Australia. The contractual flow of the services is to the parents, while the actual flow of the services is to the children. The supply is made to the parents (non-residents) and provided to another entity, each child, in Australia.

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.

GSTR 2005/6 also sets out the process for determining whether a supply is provided to another entity (Paras 66 - 82). The first step is to characterise the supply. The second step is to determine the exact nature of the supply (by examining the relevant agreement) in order to determine the entity to which the supply is provided (Para 73).

In the ruling request it was submitted that the supply made by ABC is the service of operating a call centre which is provided to XYZ and:

While the Australian based customers of XYZ receive the relevant information to assist with their airline bookings and accommodation from the call centre operated ABC, the Australian based customers are not provided with a call centre service.

In our view the supply made by ABC to XYZ may be characterised as a service. We consider that the exact nature of the supply made by ABC to XYZ is the supply of support for the facilitation service which XYZ supplies to hotels, airlines etc. (i.e. enabling a traveller to book and pay for a room or flight through a computer or telephone). We consider that that XYZ supplies a facilitation service and the SoW obliges ABC to provide 'Customer Support Contacts' and 'Sales Contacts'.

We consider that the exact nature of the supply made by ABC is such that, although an Australian traveller who telephones ABC for assistance in relation to booking and paying for a travel product may benefit from the supply made by ABC, ABC does not provide the service of supporting XYZ's supply of facilitation services to that traveller. Thus although ABC's case does not fall squarely within the facts in Example 34 in GSTR 2005/6, the reasoning set out in paragraph 593 of GSTR 2005/6 applies.

For the reasons set out above we consider that the supply made by ABC to XYZ is neither provided, nor required to be provided, to another entity in Australia in terms of paragraph 38-190(3)(b) of the GST Act.

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 23-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 188-10

A New Tax System (Goods and Services Tax) Act 1999 Section 188-15

A New Tax System (Goods and Services Tax) Act 1999 Section 188-20.

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).

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