Edited version of your written advice

Authorisation Number: 1051397926836

Date of advice: 11 July 2018

Ruling

Subject: GST and entitlement to GST credits

Question 1

Will it be possible for the overseas company to claim GST back when it’s locally registered entity deregisters itself from ASIC as a foreign company and cancel its ABN and TFN registration?

Advice

If after the deregistration of the Australian company and cancellation of its ABN and TFN registration, the overseas company satisfies all the requirements for a creditable acquisition in section 11-5 of the GST Act and Division 69 of the GST Act does not override this creditable acquisition, the overseas company will be entitled to claim GST credit for the creditable acquisitions it has made under section 11-20 of the GST Act provided it is registered for GST.

Question 2

If the answer for question 1 is yes, how would the overseas company claim back the GST with no local registration or ABN?

Advice

The overseas company can register for the’ standard claim only’ GST registration (GST only registration) to claim back the GST paid on acquisitions that are for business purposes.

Information on how to register for the ‘standard Claim only’ registration is in the fact sheet ‘Australian GST registration for non-residents’ available on our website at https://www.ato.gov.au/business/international-tax-for-business/in-detail/doing-business-in-australia/australian-gst-registration-for-non-residents/#Typesofregistration.

Question 3

When the Australian company is deregistered, will the supply made by the Australian company to the overseas company be a taxable supply for the purposes of paragraph 11-5(b) of the GST Act?

Advice

When the Australian company is deregistered in Australia, the supply made by the Australian company to the overseas company will not be a taxable supply for the purposes of paragraph 11-5 of the GST Act. The supply will be GST-free under item 2 in the table in subsection 38-190(1) of the GST Act.

Relevant facts

You are the subsidiary of an overseas company and a non-resident company registered with ASIC and registered for GST.

You previously had a sales office in Australia and this office was handed over to an Australian company under an agreement between the Australian company and the overseas company. The Australian company as General Sales Agent is the contact between the overseas company and the sales Agents in Australia.

By the end of this year your finance office will close while your sales part will continue to stay with the General Sales Agent. You will not have any employees left in Australia after the closure of the finance office.

The Australian company is registered for GST and is responsible for representing the overseas company in Australia by promoting the overseas company to sales agents in Australia. Sales Reps of the Australian company Group also visit agents to train them to avoid mistakes when agents perform their work. The Australian company also assists the overseas company with local market advice.

In return for their services to the overseas company, the Australian company receives a commission.

There are many thousands of sales agents in Australia and you cannot say who is registered and who is not. You would assume they are registered for GST.

The Australian company is already interacting/reporting to the overseas company and will do so when you are deregistered from ASIC.

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 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

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

A New Tax System (Goods and Services Tax) Act 1999 Division 69

Reasons for decision

Note: Where the term ‘Australia’ is used in this document, it is referring to the ‘indirect tax zone’ as defined in section 195-1 of the GST Act.

Question 1

Under section 11-20 of the GST Act an entity is entitled to the input tax credit for any creditable acquisitions that it makes.

Under section 11-5 of the GST Act an entity makes a creditable acquisition if:

a) the entity acquires anything solely or partly for a creditable purpose; and

b) the supply of the thing to you is a taxable supply; and

c) the entity provides or is liable to provide consideration for the supply; and

d) The entity is registered for GST.

Under subsection 11-5(1) of the GST Act you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

However, under subsection 11-5(2) of the GST Act you do not acquire a thing for a creditable purpose to the extent that:

a) The acquisition relates to making supplies that would be input taxed; or

b) the acquisition is of a private or domestic nature.

Further Division 69 of the GST Act provides that some acquisitions that are not deductible for income tax purposes under the Income Tax Assessment Act 1997 (ITAA 1997) are not creditable acquisitions.

It should be noted that Division 69 of the GST Act applies to an entity irrespective of the income tax status of that entity. In other words, an acquisition will still be a non-deductible expense notwithstanding that the entity making the acquisition may be exempt from Australian income tax.

Subsection 69-5(1) of the GST Act provides that an acquisition is not a creditable acquisition to the extent that it is a ‘non-deductible expense’. Of relevance to this case is paragraph 69-5(3)(f) of the GST Act which provides that entertainment expenses that are not deductible under Division 8 of ITAA 1997 because of Division 32 of the ITAA 1997 (which deals with entertainment expenses), are non-deductible expenses.

Entertainment Expenses

Section 32-5 of the ITAA 1997 denies an income tax deduction to the extent that an entity incurs expenditure on entertainment unless that expenditure is related to any of the exceptions outlined in Subdivision 32-B of the ITAA 1997.

The term ‘entertainment’ is defined in subsection 32-10(1) of the ITAA 1997 to mean:

● entertainment by way of food, drink or recreation, or

● accommodation or travel to do with providing entertainment by way of food, drink or recreation.

Following on from this, subsection 32-10(2) of the ITAA 1997 provides that you are taken to provide entertainment even if business discussions or transactions occur. This means that entertainment expenses are not deductible no matter who the recipients of the entertainment are and irrespective of whether there is a genuine connection with business activities.

The types of things caught as entertainment expenses are:

● business lunches, dinners, cocktail parties and social functions.

● tickets to sporting or theatrical events, sightseeing tours and holidays

● accommodation and travel in connection with entertaining employees and non-employees (for example clients) over a weekend at a tourist resort or providing them with a holiday.

Recreation includes amusement, sport and similar leisure time activities or pursuits, for example a game of golf, theatre or movie tickets, a joy flight or a harbour cruise.

Taxation Ruling 97/17 provides guidance in determining when an expense for drink and food is an entertainment expense.

Accordingly, if after the deregistration of the Australian company and cancellation of its ABN and TFN the overseas company satisfies all the requirements for a creditable acquisition in section 11-5 of the GST Act and Division 69 of the GST Act does not override this creditable acquisition, the overseas company is entitled to claim GST credit for the creditable acquisitions it has made under section 11-20 of the GST Act provided it is registered for GST.

When you cancel your ABN you must also cancel your GST registration. One of the requirements for the overseas company’s acquisition to be a creditable acquisition is that the overseas company must be registered for GST. If the entity is not carrying an enterprise in Australia and not making any supplies that are connected with Australia it can register for the for the ‘standard claim only registration’ (refer to question 2 for information on how to register).

Question 2

Non-resident companies that have made acquisitions that include GST can register for the Australian GST to claim back the GST paid on acquisition that are for business purposes. They will need to hold valid tax invoices at the time you claim the GST refund in the activity statement we will send to you after you have registered for GST.

They can register for the Standard claim only GST registration (GST only registration). Information on how to register for the Standard Claim only registration is in the fact sheet ‘Australian GST registration for non-residents’ available at https://www.ato.gov.au/business/international-tax-for-business/in-detail/doing-business-in-australia/australian-gst-registration-for-non-residents/#Typesofregistration.

Further non-resident company can register for the standard GST registration with an ABN if they make supplies that are connected with Australia and would also like to claim GST refund for GST paid on acquisitions related to the business.

Information on how to register is in the fact sheet ‘Australian GST registration for non-residents’ available at https://www.ato.gov.au/business/international-tax-for-business/in-detail/doing-business-in-australia/australian-gst-registration-for-non-residents/#Typesofregistration

You should be aware that you are not required to register with the Australian Securities & Investment Commission (ASIC) and get an ABN unless you have a business in Australia. In addition, being registered for GST purposes does not mean you have a permanent establishment for income tax purposes.

Accordingly, if after the closure of its Australian office and cancellation of its ABN and TFN the overseas company makes creditable acquisitions it can register for the Standard claim only GST registration.

Question 3

Section 11-5 of the GST Act provides when an acquisition is a creditable acquisition. One of the requirements for a creditable acquisition is that the supply made by the supplier to you is a taxable supply (paragraph 11-5(b) of the GST Act)

Will the supply made by the Australian supplier to the overseas company be a taxable supply after the closure of its Australian office?

GST is payable on a taxable supply. A supply is a taxable supply under section 9-5 of the GST Act if:

a. the supplier makes the supply for consideration; and

b. the supply is made in the course or furtherance of an enterprise that the supplier carries on; and

c. the supply is connected with Australia; and

d. the supplier is registered or required to be registered for GST.

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

All of the above must be satisfied for the supplier’s supply of services to be a taxable supply.

From the information given, the supplier’s supply of services satisfies paragraphs (a) to (d) of section 9-5 of the GST Act as:

a) it makes its supply for consideration; and

b) the supply is made in the course of a business that it carries on; and

c) its supply is connected with Australia as it is made through a business that it carries on in Australia; and

d) it is registered for GST.

However, the supplier’s supply of services is not a taxable supply to the extent that it is GST-free or input taxed.

There is no provision under the GST Act that makes the supplier’s supply of services input taxed.

GST-free supply

Relevant to the supplier’s supply of services is item 2 in the table in subsection 38-190(1) of GST Act (item 2).

Item 2 provides that a supply of a thing (other than goods or real property) made to a non-resident is GST-free if it is a supply that is made to a non-resident that is not in Australia when the thing supplied is done, and:

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 for GST.

Only one of the paragraphs in item 2 needs to be satisfied.

Precondition of item 2 – non-resident is 'not in Australia'

Goods and Services Tax Ruling GSTR 2004/7 (available at ato.gov.au) provides guidance on when a non-resident is 'not in Australia' for the purposes of item 2.

The Agreement is between the supplier and the overseas company. You advised that the supplier currently interacts with the overseas company and will continue to do so after the office is closed. In this instance the requirement of ‘not in Australia in relation to your supply’ for the purposes of item 2 will be satisfied as the overseas company will not be in Australia in relation to the supplier’s supply since it is located outside Australia.

The next step is to consider the paragraphs in item 2.

Paragraph (a) of item 2

From the fact given, the supplier’s supply of services satisfies paragraph (a) of item 2 as the supply of services 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

The supply of services is GST-free under paragraph (a) of item 2 to the extent that it is not negated by subsection 38-190(3) of the GST Act.

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

Subsection 38-190(3) of the GST Act

Subsection 38-190(3) of the GST Act provides that without limiting subsection 38-190(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; and

c) for a supply other than an input taxed supply – none of the following applies:

i. the other entity would be an Australian-based business recipient of the supply, if the supply had been made to it;

ii. the other entity is an individual who is provided with the supply as an employee or officer of an entity that would be an Australian-based business recipient of the supply, if the supply had been made to it; or

iii. the other entity is an individual who is provided with the supply as an employee or officer of the recipient, and the recipient’s acquisition of the thing is solely for a creditable purpose and is not a non-deductible expense.

From the facts given, the supplier satisfies paragraphs (a) and (b) in subsection 38-190(3) of the GST Act as the supplier has an agreement with a non-resident company and under the agreement the supplier is required to provide their services at times to sales agents who are located in Australia (for example training them to avoid mistakes when performing their work and supervising the sales agent where applicable)

We will now consider paragraph (c) in subsection 38-190(3) of the GST Act for the supply to be provided to the Australian distributor.

Paragraph 38-190(3)(c) of the GST Act

Requirement (i)

The term ‘Australian based business recipient’ describes the relationship that a recipient has with a particular supply. An entity is an ‘Australian-based business recipient’ of a supply that is made to it if:

a) the entity is registered for GST;

b) an enterprise of an entity is carried on in Australia; and

c) the acquisition of the thing supplied is not solely of a private or domestic nature.

Where the sales agents are registered for GST, requirement (i) will apply to the supplier’s supply of services made to the overseas company and provided to the sales agents since the acquisition by these GST registered sales agents are for their business purposes.

In this instance subsection 38-190(3) of the GST Act will not negate the supplier’s GST-free supply of services made to the overseas company under paragraph (a) in item 2 and provided to the GST registered sales agents.

The supplier will need to obtain the ABN of the sales agents and a statement that they are registered for GST before considering that their supply is GST-free under item 2. Failure to obtain the information the supply of services provided to the sales agents will be a taxable supply under section 9-5 of the GST Act by virtue of subsection 38-190(3) of the GST Act.

Requirement (ii)

Where the supplier will be providing the services to the employee of the GST registered sales agents requirement (ii) will apply as the acquisition of the supplier’s services will be for the business purposes of the Australian sales agents.

In this instance subsection 38-190(3) of the GST Act will not negate your GST-free supply of services to the overseas company under paragraph (a) in item 2 when provided to the employee of the GST registered sales agents.

The supplier will need to obtain the ABN of the sales agents and a statement that they are registered for GST before considering that their supply is GST-free under item 2. Failure to obtain the information the supply of services provided to the sales agents will be a taxable supply under section 9-5 of the GST Act by virtue of subsection 38-190(3) of the GST Act.

Requirement (iii)

Requirement (iii) is not relevant as from the facts given the supplier is not required to provide the services to an employee of the overseas company who is located in Australia after the Australian office is closed.

Summary

When the supplier will provide their services to the sales agents located in Australia, their supply of services to the overseas company will be GST-free under paragraph (a) of item 2.

The supplier will need to obtain the ABN of the sales agents and a statement that they are registered for GST before considering that their supply is GST-free under item 2. Failure to obtain the information the supply of services provided to the sales agents will be a taxable supply under section 9-5 of the GST Act by virtue of subsection 38-190(3) of the GST Act.

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