Edited version of private advice

Authorisation Number: 1052339611619

Date of advice: 18 December 2024

Ruling

Subject: GST and supply of services

Question 1

Is Entity A's supply of services to Entity B GST-free under subsection 38-190(1) of the A New Tax System (Goods and Service Tax) Act 1999 (GST Act)?

Answer 1

Yes, Entity A's supply of services to Entity B is GST-free under paragraph (a) of item 2 under subsection 38-190(1) of the GST Act.

This ruling applies for the following period:

XX XXX 20XX to XX XXX 20XX

The scheme commenced on

XX XXX 20XX

Relevant facts and circumstances

Entity A is registered for GST.

Entity B is non-resident company located outside of Australia. However, Entity B has a presence in Australia through a GST registered branch.

Entity A has an agreement with Entity B to supply services to Entity B.

These services are not provided to another entity in Australia.

Relevant legislative provisions

A New Tax System (Goods and Service Tax) Act 1999 section 9-30

A New Tax System (Goods and Service Tax) Act 1999 Subdivision 38-E

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

A New Tax System (Goods and Service Tax) Act 1999 section 195-1

Reasons for decision

A supply is GST-free if it is covered under Division 38 of the GST Act.[1]

Subsection 38-190(1) of the GST Act includes a table which comprises of five items which set out supplies of things, other than goods or real property, that are GST-free when they are consumed outside the indirect tax zone. If the requirements of one of those items are met, the supply is GST-free, provided subsections 38-190(2), (2A) or (3) do not negate that GST-free status.

Indirect tax zone means Australia but does not include external territories and certain offshore areas.[2]

Item 2 in the table under subsection 38-190(1) of the GST Act (Item 2) provides that a supply of anything, other than goods or real property, made to a non-resident who is not in Australia when the thing supplied is done is GST-free if:

(a)           the supply is neither a supply of work physically performed on goods situated in the indirect tax zone when the work is done nor a supply directly connected with real property situated in indirect tax zone; 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.

The services Entity A supplies are not goods or real property. Therefore, if the supply of the services meets the following two requirements, Entity A's supply will be GST-free under Item 2.

•                     Entity A makes the relevant supplies to a non-resident who is not in Australia when the thing supplied is done; and

•                     the supply meets the requirements of at least one of the paragraphs in Item 2.

These requirements are discussed below.

Non-resident who is not in Australia when the thing supplied is done

To meet this requirement, firstly, the recipient must be a non-resident.

Non-resident

A non-resident means an entity that is not an Australian resident for the purposes of the Income Tax Administration Act 1936 (ITAA).[3]

Entity B is a non-resident within the meaning of the ITAA.

Whether Entity B is 'not in Australia' when the thing supplied is done?

Entity B has a presence in Australia as an entity registered with the Australian Securities and Investment Commission (ASIC) as a foreign company and its Australian branch is registered for GST. However, for the purposes of Item 2, what must be established is whether Entity B is in Australia 'in relation to the supply' when Entity A supplies the relevant services.

Company in Australia in relation to the supply

In this regard Goods and Services Tax Ruling GSTR 2004/7 provides,[4] among other things, the Commissioner's views on when a non-resident company is in Australia in relation a supply for the purposes of Item 2.

Paragraph 31 of GSTR 2004/7 states:

31. The requirement that the non-resident in item 2, or the recipient in item 3, is not in Australia when the thing supplied is done is a requirement, in our view, that the non-resident or recipient is not in Australia in relation to the supply when the thing supplied is done. (emphasis in original)

Accordingly, even if a company is in Australia, it may not be in Australia in relation to the supply and so can still satisfy the 'not in Australia' requirement in Item 2.[5]

To determine whether a company is in Australia in relation to a supply, it is necessary to examine the role the presence of the company in Australia plays in relation to the supply.[6]

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.[7]

If the involvement of the Australian presence is limited to the carrying out of simple administrative tasks on behalf of the company, as a matter of administrative convenience, that involvement is minor. The connection between the supply and the presence is so minor in nature that it is reasonable to conclude that the presence of the company in Australia is not in relation to the supply.[8]

Tasks of a simple administrative nature include:[9]

•                     payment of, or arranging for payment of, the supplier's invoice on behalf of the company;

•                     passing on an e-mail to the company;

•                     being a point of telephone contact to pass on messages to the company;

•                     being a mailing address or delivery contact on behalf of the company;

•                     being a point of contact for a visiting representative of the company; and

•                     on-forwarding information to the company.

Based on the information provided, Entity B is not in Australia when the thing supplied is done.

Paragraph (a) of Item 2

We have considered whether Entity A satisfy the requirements of paragraph (a) of Item 2. If Entity A satisfies these requirements, it is not relevant to consider paragraph (b) of Item 2.

Paragraph (a)

Under paragraph (a) of Item 2, a supply of a thing that is made to a non-resident who is not in Australia when the thing supplied is done, is not GST-free if the supply is directly connected with real property situated in Australia or is a supply of work physically performed on goods situated in Australia when the work is done.

A supply of work physically performed on goods

GSTR 2003/7examines the meaning of the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods', as used in subsection 38-190(1).[10]

Paragraphs 57 to 59 of GSTR 2003/7 explain what 'a supply of work physically performed on goods' means:

(57)        The range of supplies that are directly connected with goods includes supplies of work physically performed on goods. That is, a supply of work physically performed on goods is always directly connected with goods. However, not all supplies directly connected with goods are also supplies of work physically performed on goods. A supply of work physically performed on goods requires a much closer connection with the goods: it requires a 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.

(58)        A supply is a supply of work physically performed on goods where something is done deliberately to the goods to change them or to otherwise affect them in some physical way. The repair of goods is an example of work that is physically performed on goods.

(59)        In contrast, where activities do not change or affect goods in a physical way, there is no supply of work physically performed on goods. For example, a supply of transporting goods is not work physically performed on goods because the supply only changes the location of the goods, not the goods themselves.

Paragraph 68 of GSTR 2003/7 states:

(68)        In many cases it is self-evident that a supply is a supply of work physically performed on goods. However, sometimes a supply must be analysed to determine whether it is properly characterised as 'a supply of work physically performed on goods'. If the supply includes work physically performed on goods but that work is ancillary to some other dominant part of the supply that is not work physically performed on goods, then that supply is not characterised as a supply of work physically performed on goods. This depends on the particular facts of each supply.

GSTR 2001/8 provides guidance on how we identify whether a supply includes a taxable and non-taxable part under the GST Act.[11]

Where a transaction comprises a bundle of features and acts, it may be necessary to characterise what is supplied to determine whether a particular provision applies in whole or in part. It is necessary to consider all the circumstances of the transaction to ascertain its essential character. If a provision specifically requires different treatment of the components of the transaction, this will mean that the components must be separately recognised.[12]

Paragraph 16 of GSTR 2001/8 explains that 'a mixed supply is a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised'. GST is only payable on the taxable part of a mixed supply.

Whereas paragraph 17 of GSTR 2001/8 explains that 'a composite supply is a supply that contains a dominant part and includes something that is integral, ancillary or incidental to that part'. It is treated as a supply of a single thing. Where the dominant part of a composite supply is taxable, the whole supply is taxable.

Paragraph 59 of GSTR 2001/8 lists some indicators to determine whether a part of a supply may be integral, ancillary or incidental to the dominant part of the supply, which include where:

•                     you would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

•                     it represents a marginal proportion of the total value of the package compared to the dominant part; or

•                     it is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

•                     it contributes to the proper performance of the contract to supply the dominant part.

These factors are not exhaustive and must be applied by having regard to all the circumstances and by taking a common sense and practical approach. By having regard to the essential character or features of the transaction, it can be ascertained whether a supply is a mixed supply or a composite supply.

Based on the information provided, Entity A's supply is not a supply of work performed on goods.

Directly connected with real property in Australia

Paragraphs 32 to 34 of GSTR 2003/7 state:

(32)        As explained above, we consider that the expression 'directly connected with' contemplates a very close link or association between the supply and particular goods or real property.

(33)        We consider that such a close link or association between the supply and particular goods or real property exists where, for example, the direct object of the supply is the goods or real property in the sense that:

•                     the supply changes or affects the goods or real property in a physical way; or

•                     there is a physical interaction with the goods or real property but without changing the goods or real property; or

•                     the supply establishes the quantity, size, other physical attributes or the value of the goods or real property; or

•                     the supply affects (or its purpose is to affect) or protects the nature or value (including indemnity against loss) of the goods or real property; or

•                     the supply affects, or is proposed to affect, the ownership of the goods or real property including any interest in, or right in or over goods or real property.

(34)        This is not an exhaustive list of the situations where, in our view, a direct connection exists. There may be some supplies that are directly connected with goods or real property that do not readily fit into one of these categories.

Paragraph 38 of GSTR 2003/7 provides that an example of supplies that are directly connected with goods or real property include, 'the installation, alteration, repair, cleaning, restoration, modification of goods'. However, paragraph 39 provides 'transport services - the removal of goods from one place to another; and security services in relation to goods or real property' are examples of 'where there is a physical interaction with the goods or real property but without changing the goods or real property'.

Notwithstanding the examples provided in paragraph 38, paragraphs 50 to 52 of GSTR 2003/7 states:

(50)        If a supply involves the use of real property and that supply is not a supply of real property as defined (supplies of real property are discussed at paragraphs 82 to 97 of the Explanations section of the Ruling), then it needs to be determined whether that supply is directly connected with real property.

(51)        If a supply involves the use of real property in circumstances where that use is ancillary to the dominant part of the supply, the real property merely providing the setting for the dominant part of the supply, that supply is not directly connected with real property.

(52)        For example, supplies such as membership subscriptions of a golf club, admission to a cinema and provision of a service of storing goods involve the use of real property, but that use is ancillary to the dominant part of the supply. The supply is characterised by its dominant part which falls short of being a supply of real property. In cases of this kind the real property is merely the setting for the dominant part of the supply and the supply is not directly connected with that real property. (The characterisation of supplies is explained further in the Explanations section of the Ruling at paragraphs 98 to 109.)

Based on the information provided, Entity's A supply is not directly connected with real property in Australia.

Entity A's supply of their services is GST-free under paragraph (a) of Item 2 as:

•                     Entity B is a non-resident company and is not in Australia in relation to the supply at the time your supply is done; and

•                     Entity A's supply is neither a supply of work performed on goods located in Australia nor a supply that is directly connected with real property in Australia.

Since paragraph (a) of Item 2 has been satisfied, it is not relevant to consider paragraph (b) of Item 2.

Therefore, your supply of the services will be GST-free under Item 2 unless a provision applies to negate its GST-free status.

Limitations of Item 2

Subsection 38-190(2) of the GST Act

Subsection 38-190(2) of the GST Act provides:

(2)   However, a supply covered by any of items 1 to 5 in the table in subsection (1) is not GST-free if it is the supply of a right or option to acquire something the supply of which would be connected with the indirect tax zone and would not be GST-free.

Entity A's supply to Entity B is neither a supply of a right nor an option to acquire something, the supply of which would be connected with Australia and would not be GST-free. Subsection 38-190(2) does not apply to negate the GST-free status of your supply.

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

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

(2A)        supply covered by any of items 2 to 4 in the table in subsection (1) 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 real property situated in the indirect tax zone that would be, wholly or partly, input taxed under Subdivision 40-B or 40-C.

Entity A's supply to Entity B does not relate to the making of a supply of real property situated in Australia. Subsection 38-190(2A) does not apply to negate the GST-free status of your supply.

Subsection 38-190(3) of the GST Act

Subsection 38-190(3) of the GST Act provides:

(3)           Without limiting subsection (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 the indirect tax zone; 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.

Based on the information provided, subsection 38-190(3) does not apply to negate the GST-free status of Entity A's supply as they are not required to provide the supply to another entity in Australia.

Summary

Therefore, Entity A's supply is GST-free under paragraph (a) of Item 2. Entity A is not required to remit GST on the supply of their services to Entity B.

[1] GST Act paragraph 9-30(1)(a).

[2] GST Act subsection 195-1 (definition of 'indirect tax zone').

[3] GST Act sections 195-1 (definition of 'non-resident' and 'Australian resident').

[4] Goods and Services Tax Ruling GSTR 2004/7 Goods and services tax: in the application of items 2 and 3 and paragraph (b) of item 4 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999: when is a 'non-resident' or other 'recipient' of a supply 'not in Australia when the thing supplied is done'? when is 'an entity that is not an Australian resident' 'outside Australia when the thing supplied is done'? (GSTR 2004/7).

[5] See paragraphs 229 and 347 of GSTR 2004/7.

[6] See paragraphs 348 of GSTR 2004/7.

[7] See paragraphs 41 and 349 to 350 of GSTR 2004/7.

[8] See paragraph 351 of GSTR 2004/7.

[9] See paragraph 352 of GSTR 2004/7.

[10] Goods and Services Tax Ruling GSTR 2003/7 Goods and Services Tax: what do the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods' mean for the purposes of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999?

[11] Goods and Services Tax Ruling 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8).

[12] See paragraph 19 of GSTR 2001/8.

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