Edited version of your private ruling

Authorisation Number: 1012557692010

Ruling

Subject: GST and turnover

Question 1

Pursuant to section 188-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), can the supply of employee services made by A to B be disregarded for the purposes of determining whether A exceeds the registration turnover threshold?

Answer

No.

Relevant facts and circumstances

A and B are part of the global C Group. B is an Australian resident entity, it holds an Australian Business Number (ABN) and is registered for GST. B is a wholly owned subsidiary of D and is the representative member of the B GST Group.

D is a wholly owned subsidiary of E, it is registered for GST and is a member of the B GST Group. D is an Australian resident entity. A, a US resident entity, is also a wholly owned subsidiary of E and is not registered for GST.

A and B have entered into an arrangement whereby employees of A will work in Australia in connection with, and for the benefit of, B's business activities in Australia for various periods of time. Pursuant to the Secondment Agreement between A and B made and entered into (Agreement) B notes that it requires additional employees in connection with the operation of its business. A desires to provide assistance and support to B and has agreed to second the services of certain of its employees.

The Agreement states that for its term, or such shorter time period that the parties may agree to, the employees shall be seconded to B where they will serve as employees of the B. As a consequence, the day to day duties and responsibilities of the employees will be determined by B provided, that B complies with all labour and employment conditions and obligations granted or applicable to the employees by A.

The employees are required to be based in Australia during the term of the secondment and will not lose the rights and benefits regarding their employment status with A as a result of their secondment. B is required to pay the employees salaries and all other benefits, however A may pay the salaries and other considerations to the employees without implying a waiver from the employees to receive their salaries directly from B.

In case the payment of salaries and other benefits to the employees is made by A, B shall reimburse these amounts to A upon receipt of a written request for reimbursement. B will also reimburse A for any other expenses related to the employees.

A employees in Australia will undertake activities such as marketing, business development, investigation of subcontractors and suppliers, engineering work, business and financial support, oversight roles by executives of A and orientation visits prior to permanent relocation. The precise time which a particular A employee will spend in Australia will vary. Some employees will spend somewhere between two to four weeks working in Australia, other A employees will be working in Australia for several years.

No margin over and above the A employee's salaries and wages component will be included in the amount periodically invoiced by A. The amounts to be paid by B to A on an annual basis to reflect the services supplied by A to B in Australia will exceed the GST registration turnover threshold. A will not perform any other services in Australia, i.e. all turnover that A will derive in Australia will be generated through the services that its employees perform in Australia in connection with, and for the benefit of, B's business activities and not for any other purpose.

While A may incur some minor costs while in Australia performing services, a majority of the costs attributable to A being in Australia (through its employees) will be incurred and ultimately borne by B.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 188-40

Income Tax Assessment Act 1997 section 975-505

Income Tax Assessment Act 1936 section 6

Reasons for decision

Summary

Pursuant to section 188-40 of the GST Act the supply of employee services made by A to B cannot be disregarded for the purposes of determining whether A exceeds the registration turnover threshold

Detailed reasoning

Division 188 of the GST Act deals with GST turnover. There are several turnover thresholds for GST, calculation of which is done by adding together the values of supplies made by an entity over a defined period. Division 188 of the GST Act also stipulates that some supplies are excluded in this calculation. Section 188-40 of the GST Act is one such exclusion.

Section 188-40 of the GST Act allows for some supplies of employee services by overseas entities to be disregarded for the registration turnover threshold. The section states:

(1) In working out a *non-resident's *current GST turnover or *projected GST turnover in order to determine whether it meets the *registration turnover threshold, if:

(a) the non-resident makes a supply of the services of an employee of the non-resident; and

(b) the *recipient of the supply is the non-resident's *100% subsidiary; and

(c) the services that the employee performs for the recipient are performed in Australia;

disregard the supply to the extent that the payments that the non-resident makes to the employee for performing those services would, if they were made by the recipient, be *withholding payments.

(2) This section does not affect how to work out any *turnover threshold other than the *registration turnover threshold.

It follows that A must be a non-resident and supply its employees' services to B, further the employee services must be performed in Australia. Finally, B must be A's 100% subsidiary.

Non-resident

A non-resident for GST is a person who is not a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA). Subsection 6(1) of the ITAA notes that a resident company is:

a company which 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.

A is an overseas entity and for the purposes of the Agreement states its address in a foreign jurisdiction. We accept that A is a non-resident for GST purposes.

Employee services

There may be a number of different ways by which B could achieve a desired end result. Examining the Agreement or other reciprocal legal relationships is the starting point in analysing an arrangement to determine who is making a supply to whom and what that supply is.

The Agreement provides for the secondment of employees rather than any specified milestones or delivery of services that the employees might be expected to achieve.

B does not specify what ends are meant to be achieved through the Agreement other than the secondment of A's employees. Further, the seconded employees are envisaged as being remunerated in a manner consistent with them remaining employees under the Agreement, i.e. they will be paid salaries.

Therefore we agree that A's supply to B can be characterised as a supply of employment services.

Performed in Australia

The Agreement stipulates that that during the term of the secondment, the employees will be based in Australia.

We accept that A's supply of employment services to B are performed in Australia.

100% subsidiary

From the C Group Structure provided at Appendix A to your submission we can ascertain that B is 100% owned by D which in turn is 100% owned by E. E is 100% owned by F which is 100% owned by the ultimate holding company.

D holds 100% ownership of A.

The term '100% subsidiary' in section 188-40 of the GST Act has the meaning given by section 975-505 of the Income Tax Assessment Act 1997 (ITAA 1997) which states

975-505 What is a 100% subsidiary?

(1) A company (the subsidiary company) is a 100% subsidiary of another company (the holding company) if all the *shares in the subsidiary company are beneficially owned by:

(a) the holding company; or

(b) one or more 100% subsidiaries of the holding company; or

(c) the holding company and one or more 100% subsidiaries of the holding company.

(2) However, the subsidiary company is not a 100% subsidiary of the holding company if a person is *in a position to affect rights, in relation to the subsidiary company, of:

(a) the holding company; or

(b) a 100% subsidiary of the holding company.

(3) The subsidiary company is also not a 100% subsidiary of the holding company if at some future time a person will be *in a position to affect rights as described in subsection (2).

(4) A company (other than the subsidiary company) is a 100% subsidiary of the holding company if, and only if:

(a) it is a 100% subsidiary of the holding company; or

(b) it is a 100% subsidiary of a 100% subsidiary of the holding company;

because of any other application or applications of this section.

It is clear from the C Corporate Group Structure that A and B are subsidiaries of a common holding company rather than A being a holding company in the chain of ownership above B.

The Australian Taxation Office believes that the current drafting of section 188-40 only applies to circumstances where the recipient is a 100% subsidiary of the non-resident as per the section 975-505 of the ITAA 1997 definition. This definition does not extend to circumstances where a non-resident sister company of the recipient provides the employee services.

We note that submissions have been made to the Board of Taxation to extend the coverage of section 188-40 of the GST Act to a broader range of companies within a corporate group. To date no change has been enacted or recommended.

Therefore A's supply of employee services to B does not meet the requirements for exclusion as provided for in section 188-40 of the GST Act when determining GST turnover threshold.

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