Edited version of private advice

Authorisation Number: 1051577762665

Date of advice: 9 September 2019

Ruling

Subject: GST and supply of legal services to an individual residing outside Australia

Question

Is the supply of legal services you make to the individual a GST-free supply under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The supply of legal services you make to the individual is a GST-free- supply under item 2 in the table in subsection 38-190(1) of the GST Act to the extent the supply is not negated by subsection 38-190(2A) of the GST Act.

Subsection 38-190(2A) of the GST Act negates the GST-free status of the supply of legal services under item 2 where the legal service that is supplied relates directly or indirectly to the rental of the Australian residential property or the legal service is part of a service that relates directly or indirectly to the rental of the Australian residential property. In this instance the supply of legal service is a taxable supply under section 9-5 of the GST Act.

From the information given, subsection 38-190(2A) negates the following supply of legal services that is GST-free under item 2:

·        You liaise with the real estate agents for the collection of rent for the residential investment and in respect of repairs to the client's investment property.

·        You liaise with the client's bank in order to deposit funds which include rent received from the rental property held on behalf of the client in your Trust Account into the client's Australian bank account and transferring the money to Indonesia.

·        You prepare and collate information for the preparation of the client's tax return which would include income from the residential property and liaising with the accountant for the lodgement of the client's tax return.

Relevant facts

You are the principal of an Australian law firm that is registered for the goods and services tax (GST).

Under an Enduring Power of Attorney, you have been appointed to act on behalf of an individual (client) regarding the financial matters of your client.

The Enduring Power of Attorney is to apply to:

·        the client's property and assets currently owned by the client and property; and

·        assets acquired or to be acquired by the client now and in the future both in Australian States and Territories and internationally.

The client is an Australian resident and for the last one and half year resides outside Australia after they were issued with a Stay Permit by the Immigration Department of the country they currently reside.

The legal services are in relation to the management of the Client's Estate. The client's assets are as follows:

·        Residential apartment in Australia;

·        Cash in an Australian bank account;

·        Shares in Australian companies;

·        Superannuation Savings Account with an Australian bank.

Under the Power of Attorney, you liaise with real estate agents for the collection of rents and in respect of repairs to the client's investment property. You also liaise with the client's bank and shareholding companies and accountants in order to manage the client's affairs.

Under the client's instructions, you attend the client's bank on a monthly basis to:

·        deposit funds held on behalf of the client in your Trust Account, which includes rent received from the client's Australian residential into the client's Australian bank account; and

·        send funds from the Australian bank account by international money transfer to the client's overseas bank account.

To date you have corresponded with the shareholding companies to record the change in the client's postal address, to cancel Dividend Reinvestment Plans, to record the client's bank account details for receipt of dividends, to receive and check Dividend Statements and to receive and check Annual Tax Statements.

You prepare and collate the information and documents required for the preparation of the client's tax returns and forward it to the client's Accountant.

The income declared in the client's tax return is as follows:

·        Rent received for the residential property in Australia

·        Expenses relating to the property are claimed as a deduction

·    Dividends received from the shareholding companies.

You have also requested from the Accountant advice in relation to the client's tax position as an Australian non-resident.

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 38-190

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.

Detailed reasoning

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

1. the supplier makes the supply for consideration; and
2. the supply is made in the course or furtherance of an enterprise that the supplier carries on; and
3. the supply is connected with Australia; and
4. 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 your supply of legal services to be a taxable supply.

From the information given, the supply of legal services made to the client satisfies paragraphs (a) to (d) of section 9-5 of the GST Act as:

a)     the supply of legal services is made for consideration; and

b)     the supply is made in the course of a business that you carry on; and

c)     your supply is connected with Australia as it is made through a business that you carry on in Australia; and

d)     you are registered for GST.

However, your supply of legal services to the client 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 your supply of legal services input taxed.

GST-free supply

Relevant to your supply of legal services to the client is item 3 in the table in subsection 38-190(1) of GST Act (item 3).

Item 3 applies irrespective of whether the recipient is a resident or non-resident of Australia

Under item 3, a supply of a thing other than a supply of work physically performed on goods situated in Australia when the thing supplied is done or a supply directly connected with real property situated in Australia is GST-free if:

a)     the supply is made to a recipient who is not in Australia when the thing supplied is done; and

b)     the effective use or enjoyment of which takes place outside Australia.

All the requirements in item 3 must be satisfied for the supply of legal services to be treated as GST-free under that item and provided that the supply is not negated by subsection 38-190(2A) of the GST Act.

Paragraph (a) of item 3

The requirement that the recipient in item 3 is 'not in Australia' when the thing supplied is done is a requirement, in our view, that the recipient is 'not in Australia in relation to the supply' when the thing supplied is done. If the recipient is in Australia in relation to the supply the recipient does not satisfy the 'not in Australia' requirement.

An individual is in Australia if that individual is physically in Australia. If an individual carries on business in Australia through employees or other representatives (including an agent), but is not physically in Australia the individual is 'not in Australia'

A resident individual who is physically in Australia when the thing supplied is done is in Australia in relation to the supply.

A non-resident individual who is physically in Australia when the thing supplied is done is in Australia in relation to the supply to the extent that the non-resident is in contact (other than contact which is only of a minor nature) with the supplier while in Australia. If that individual is in Australia on matters unrelated to the supply we consider that the individual recipient is in Australia but not 'in relation to the supply'.

Contact is minor if it is limited to contact of a simple administrative nature, such as checking on the progress of the supply or a courtesy call on the supplier. If this is the only contact between the non-resident individual and the supplier we consider that the individual is not in Australia in relation to the supply.

For more information on paragraph (a) of item 3 refer to Goods and Services Tax Ruling GSTR 2004/7 which is available at ato.gov.au

From the information given the client is an Australian resident and has moved to Indonesia upon receipt of an overseas stay permit. From that date the client is not in Australia in relation to your supply of legal services.

In this instance, paragraph (a) is satisfied as the client is not in Australia in relation to the legal services which you have supplied to him when he resides overseas.

Paragraph (b) of item 3

Paragraph (b) of item 3 requires the place of effective use or enjoyment of a supply to be determined (that is, whether the place is outside Australia).

Your supply of legal services is provided as when the service is done. When the client is located outside Australia, the use and enjoyment of your legal services to the client is outside Australia since the presence of the client outside Australia is integral with the provision of the supply of legal services you make to the client.

In this instance paragraph (b) of item 3 is satisfied.

Since the paragraphs in item 3 are satisfied the next step is to consider subsection 38-190(2A) of the GST Act.

Subsection 38-190(2A) of the GST Act

Subsection 38-190(2A) of the GST Act provides that a supply covered by any of items 2 to 4 in the table in subsection 38-190(1) of the GST Act is not GST-free if the acquisition of the supply relates (whether directly or indirectly, or wholly or partly) to the making of a supply of a real property situated in the indirect tax zone that would be input taxed under Subdivision 40-B or 40-C of the GST Act.

For example, a non-resident individual, who owns residential rental property situated in Australia and who is not registered or required to be registered, acquires gardening services for the property and also acquires the services of a local real estate agent to advertise the property for rent. The acquisition of each service relates to the making of an input taxed supply of real property. The supplies of those services are therefore not GST-free.

Subsection 38-190(2A) of the GST Act will apply regardless of whether an acquisition of the supply may either relate directly or indirectly to the making of those input taxed supplies of real property. In addition, where only part of the supply relates to the real property activities, the entire supply will be caught under subsection 38-190(2A) of the GST Act. Equally, where only part of the real property is used to make supplies that would be input taxed under subdivisions 40-B or 40-C of the GST Act, the entire acquisition will not be GST-free under subsection 38-190(1) of the GST Act.

Based on the information given, subsection 38-190(2A) of the GST Act applies to the following as the acquisition of the supply of legal services by the client are either directly or indirectly related to the residential property that is being rented into Australia or part of the supply of the legal service relates to the rental of the real property:

·        You liaise with the real estate agents for the collection of rent for the residential investment and in respect of repairs to the client's investment property.

·        You liaise with the client's bank in order to deposit funds which include rent received from the rental property held on behalf of the client in your firm's Trust Account into the client's Australian bank account and transfer the deposited money to the client's overseas bank account.

·        You prepare and collate information for the preparation of the client's return which would include income from the residential property and liaise with the accountant for the lodgement of the tax return.

In this instance the supply of legal services is no longer GST-free under item 2. The supply is a taxable supply.

Summary

The supply of legal services you make to the client is a GST-free- supply under item 2 to the extent that the supply is not negated by subsection 38-190(2A) of the GST Act.

Subsection 38-190(2A) of the GST Act negates the GST-free status of the supply of legal services under item 2 where the legal service that is supplied relates directly or indirectly to the rental of the Australian residential property or the legal service is part of a service that relates directly or indirectly to the rental of the Australian residential property. In this instance the supply of legal service is a taxable supply under section 9-5 of the GST Act.

From the information given, subsection 38-190(2A) negates the following supply of legal services that is GST-free under item 2:

·        You liaise with the real estate agents for the collection of rent for the residential investment and in respect of repairs to the client's investment property.

·        You liaise with the client's bank in order to deposit funds which include rent received from the rental property held on behalf of the client in your firm's Trust Account into the client's Australian bank account and transfer the deposited money to the overseas bank's account.

·        You prepare and collate information for the preparation of the client's return which would include income from the residential property and liaise with the accountant for the lodgement of the tax return.

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