Edited version of private advice

Authorisation Number: 1052025676533

Date of advice: 24 July 2023

Ruling

Subject: GST - digital services made by a non-resident

Issue 1 - Connection to the indirect tax zone

Are the supplies made by a non-resident company to businesses in Australia connected with the indirect tax zone under subsection 9-25(5) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Decision 1

No. The supplies made by the non-resident company to Australian-based business recipients are not connected with the indirect tax zone under subsection 9-25(5) of the GST Act (unless the recipient of the supply is an Australian consumer).

Issue 2 - Applicability of section 9-5 of the GST Act

Are the 'supplies made by the non-resident company to businesses based in Australia taxable supplies under section 9-5 of the GST Act?

Decision 2

No. The supplies made by the non-resident to businesses based in Australia are not taxable supplies under section 9-5 of the GST Act (unless the recipient of the supply is an Australian consumer).

Relevant facts and circumstances

A non-resident enters into agreements with Australian businesses to supply a service.

The non-resident has an Australian presence that undertakes marketing activities for the non-resident company.

The non-resident is registered for GST.

The recipients of the supply are Australian businesses that are registered for GST (except one recipient who is not registered for GST).

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 subsection 9-25(5)

A New Tax System (Goods and Services Tax) Act 1999 section 9-26

Reasons for decision

Unless otherwise stated, all legislative references in this Ruling are to the A New Tax System (Goods and Services) Act 1999

Section 7-1 states that GST is payable on any taxable supply.

Section 9-5 defines a taxable supply as follows:

You make a taxable supply if:

(a)          you make the supply for consideration; and

(b)          the supply is made in the course or furtherance of an enterprise that you carry on; and

(c)          the supply is connected with the indirect tax zone; and

(d)          you are registered, or required to be registered.

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

(Terms defined in section 195-1)

Paragraph 9-5(a) - supply for consideration

The supply made by the non-resident is a service.

The recipients pay a fee for the services supplied by the non-resident.

Paragraph 9-5(b) - supply made in the course of an enterprise

The non-resident carries on an enterprise and makes the supply to the recipients in the course of carrying on their enterprise.

Paragraph 9-5(d) - registration

The non-resident is registered for GST.

What needs to be determined in this case is whether paragraph 9-5(c) is satisfied. This provision requires that the supplies are connected with the indirect tax zone (ITZ), which includes Australia, but excludes certain external territories and offshore areas.[1]

Connected with the ITZ

Section 9-25 outlines when a supply is connected with the ITZ.

In respect of supplies other than goods or real property, subsection 9-25(5) states:

(5) A supply of anything other than goods or real property is connected with the indirect tax zone if:

(a) the thing is done in the indirect tax zone; or

(b) the supplier makes the supply through an enterprise that the supplier carries on in the indirect tax zone; or

(c) all of the following apply:

(i) neither paragraph (a) nor (b) applies in respect of the thing;

(ii) the thing is a right or option to acquire another thing;

(iii) the supply of the other thing would be connected with the indirect tax zone; or

(d) the recipient of the supply is an Australian consumer.

Example:

A holiday package for a trip to Queensland that is supplied by a travel operator in Japan will be connected with the indirect tax zone under paragraph (5)(c).

Note:

A supply that is connected with the indirect tax zone under this subsection might be GST-free if it is consumed outside the indirect tax zone: see section 38-190. For more rules about supplies that are GST-free, see Division 38.

Paragraph 9-25(5)(a) - is the 'thing' done in the ITZ?

Paragraph 9-25(5)(a) provides that a supply of anything other than goods or real property is connected with the ITZ if the thing is 'done' in the ITZ.

Goods and Services Tax Ruling GSTR 2019/1 Goods and services tax: supply of anything other than goods or real property connected with the indirect tax zone (Australia) (GSTR 2019/1) provides guidance in characterising the 'thing' being supplied. The ruling explains when a supply of services, advice, information, and rights is done in the ITZ. It states:

The 'thing' being supplied

32.         'Thing' is defined to mean anything that can be supplied or imported. 'Thing' includes but is not limited to a service, advice, information, a right or a digital product. It does not matter if the supply is provided electronically.

33.         It is the 'thing' supplied which is the subject of the supply and which must be characterised for GST purposes. When determining what is supplied, it is the subject of the supply or its component parts which must be characterised, rather than the activities, actions, means, processes or systems involved.

Where the thing is being 'done'

34.         Once the relevant supply is identified, the next step is to determine where the thing that is supplied is 'done'.

35.         The term 'done' is not defined in the GST Act and takes its ordinary meaning. Where a thing is 'done' depends on the nature of the thing being supplied. Depending on what is supplied, 'done' can mean various things including performed, executed, completed or finished.

36.         This Ruling [GSTR 2019/1] explains when the thing is 'done' in Australia for supplies of services, advice, information and rights. For supplies of other intangibles, whether the thing is 'done' in Australia depends on the individual nature of the thing being supplied.

The supply made by the non-resident is a service.

A supply of a service is a 'thing' done in the ITZ if the supply is performed in the ITZ. GSTR 2019/1 explains that for supplies of other intangibles, whether the thing is 'done' in Australia depends on the individual nature of the thing being supplied.

Given the nature of the supply made by the non-resident, the Commissioner considers that it is done in the ITZ.

Paragraph 9-25(5)(b) - supply made through an enterprise carried on in the ITZ

Paragraph 9-25(5)(b) provides that a supply is done in connection to the ITZ if 'the supplier makes the supply through an enterprise that the supplier caries on in the indirect tax zone'.

Section 9-27 provides when an enterprise is carried on in the ITZ as follows.

(1)  An enterprise of an entity is carried on in the indirect tax zone if:

(a)          The enterprise is carried on by one or more individuals covered by subsection (3) who are in the indirect tax zone; and

(b)          Any of the following applies:

(i)            the enterprise is carried on through a fixed place in the indirect tax zone;

(ii)           the enterprise has been carried on through one or more places in the indirect tax zone for more than 183 days in a 12 month period;

(iii)         the entity intends to carry on the enterprise through one or more places in the indirect tax zone for more than 183 days in a 12 month period.

(2)  It does not matter whether:

(a)          the entity has exclusive use of a place; or

(b)          the entity owns, leases or has any other claim or interest in relation to a place.

(3)  This subsection covers the following individuals:

(a)          if the entity is an individual - that individual;

(b)          an employee or officer of the entity;

(c)          an individual who is, or is employed by, an agent of the entity that:

(i)            has, and habitually exercises, authority to conclude contracts on behalf of the entity; and

(ii)           is not a broker, general commission agent or other agent of independent status that is acting in the ordinary course of the agent's business as such an agent.

Given the nature of the non-resident's Australian presence this allows for inference to be drawn that the non-resident is carrying on an enterprise in Australia through this presence within the meaning contained in section 9-27 of the GST Act.

However, for the purpose of paragraph 9-25(5)(b) it needs to be determined whether the non-resident makes the supply to the merchants, 'through' their Australian GST presence.

To this point, GSTR 2019/1 explains:

14. For a supply to satisfy paragraph 9-25(5)(b), the supply must also be made 'through' an Australian GST presence. There needs to be a connection between the Australian GST presence and the supply. A supply may be connected with an entity's enterprise carried on in more than one jurisdiction. This means that a supply that is connected with an entity's Australian GST presence can still satisfy paragraph 9-25(5)(b), even if the supply can also be said to be connected with the entity's place of business in another country.

Paragraph 18 of GSTR 2019/1 provides a list of factors that form the ATO's understanding of what paragraph (b) means:

18.          There are no specific criteria which must be satisfied to determine whether a particular supply is connected with an Australian GST presence. Each case is to be determined on an overall assessment of the individual facts and circumstances of the supply. If one or more of the following factors are established in any particular case it would be a strong indicator that the supply is connected with an Australian GST presence:

•                     where the relevant individuals of the Australian GST presence

-        exercise an authority to sign, negotiate, conclude or accept contracts and purchase orders for the supply

-        make important decisions leading to the making of the supply or performance of the supply

-        perform the activities that facilitate the making of the supply

-        use equipment and/or infrastructure in performing or making the supply

•                     if the supply is a service, the service is performed or delivered by the Australian GST presence

•                     if the supply is the grant, creation, assignment, transfer, surrender or licence of a right, that supply is facilitated by the relevant individuals of the Australian GST presence

•                     in relation to the supply, the Australian GST presence has its own accounts[2], and revenue for the supply is booked or recorded in those accounts.

GSTR 2019/1 explains that there are no specific criteria which must be satisfied to determine whether a particular supply is connected with an Australian GST presence.

The most relevant of the criteria in paragraph 18 of GSTR 2019/1 to the Australian GST presence is:

•         where the relevant individuals of the Australian GST presence

-        exercise an authority to sign, negotiate, conclude or accept contracts and purchase orders for the supply

-        make important decisions leading to the making of the supply or performance of the supply

-        perform the activities that facilitate the making of the supply

-        use equipment and/or infrastructure in performing or making the supply

The Australian GST presence assists in identifying potential customers and introducing them to the non-resident. However, it does not assist the making of supplies under the contract.

The Australian GST presence is a step removed from the facilitation of the service envisaged in paragraph 18 of GSTR 2019/1 and the activities it performs have none of the character of the other three factors. Those being, the exercise of authority, either legal or decisional, or in relation to equipment or infrastructure involved in performing or making the supply.

The word 'facilitate' is not defined in the GST Act. The Macquarie Dictionary (at 629) gives the contemporary senses as follows:

... to make easier or less difficult; help forward (an action, a process etc).

Considering the nature of the supply made by the non-resident • the Australian business, by reference to paragraph 18 of GSTR 2019/1 our view is that the facilitation/marketing activities undertaken by the non-resident's Australian presence alone are not enough to conclude that they have a connection with the supply made by the non-resident.

As such our view is that the supplies made by the non-resident are not made 'through an enterprise' that the non-resident carries on in the ITZ.

Paragraph 9-25(5)(d) - whether the recipient is an Australian consumer

Paragraph 9-25(5)(d) provides that supplies of anything other than goods or real property is connected with the ITZ if the recipient of the supply is an Australian consumer. Subsection 9-25(7) defines an Australian consumer to mean:

(7) An entity is an Australian consumer of a supply made to the entity if:

(a) the entity is an Australian resident (other than an entity that is an Australian resident solely because the definition of Australia in the ITAA 1997 includes the external Territories); and

(b) the entity:

(i) is not registered; or

(ii) if the entity is registered - the entity does not acquire the thing supplied solely or partly of an enterprise that the entity carries on.

Paragraph 9-25(5)(d) provides an 'and test'. Therefore, any supplies made by Australian residents that are not registered for GST meets the definition of an Australian consumers.

Accordingly, Australian recipient of the supply made by the non-resident that is not registered for GST is an Australian consumer.

Further any supplies made to Australian residents that fall within paragraph 9-25(7)(b)(ii) also meet the definition of an Australian consumer.

Conclusion regarding connected with the ITZ rules

Supplies made by the non-resident are connected with the ITZ under subsection 9-25(5) as they fall within paragraph 9-25(5)(a) and some supplies also fall within paragraph 9-25(5)(d).

Disconnection rules under subsection 9-26(1)

Given the supplier is a non-resident, it is necessary to consider whether the supplies made by the non-resident come within section 9-26(1) and therefore are 'disconnected'.

Subsection 9-26(1) states:

A supply is not connected with the indirect tax zone if:

(a) the supplier is a non-resident; and

(b) the supplier does not make the supply through an enterprise that the supplier carries on in the indirect tax zone; and

(c) the supply is covered by an item in this table:

.......

Supplies made by the non-resident to recipients who are Australian-based business recipients meet the requirements of subsection 9-26(1). This is because:

•                     they are a non-resident,

•                     the non-resident does not make the supply through an enterprise they carry on in the ITZ,

•                     the supply is covered by item 1 in the table in subsection 9-26(1), because

-        the supply is done in the ITZ (as explained above), and

-        the recipients are Australian based business recipients.

Supplies made by the non-resident to recipients who are not Australian based business recipients do not come within any of the items in the table in subsection 9-26(1) and as such are not 'disconnected' under this provision.

Conclusion

Supplies made by the non-resident to Australian based business recipients

Given one of the requirements of section 9-5 of the GST Act is not satisfied (namely paragraph 9-5(c)), these supplies are not taxable supplies.

Supplies made by the non-resident to Australian consumers

These supplies meet the requirements of section 9-5 of the GST Act and as such are taxable supplies. These supplies are not GST-free or input taxed supplies.

[1] See section 195-1 of the GST Act.

[2] This reference to 'accounts' is not limited to statutory accounts, and could also include, for example, management accounts.

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