Edited version of private ruling

Authorisation Number: 1011609522317

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Ruling

Subject: GST and permanent establishment

Questions

1. Is GST payable on services performed in Australia as part of a contract between a non-resident entity (entity A) and its Australian client?

Answer: Yes.

GST is payable on services performed in Australia as part of a contract between entity A and its Australian client.

2. Does entity A have a permanent establishment in Australia for the purposes of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer: Yes.

Entity A has a permanent establishment in Australia under subsection 9-25(6) of the GST Act.

3. Can entity A apply reverse charge provisions to the services it supplies to the Australian client?

Answer: No.

Entity A cannot apply reverse charge provisions to the recruitment services it supplies to the Australian client.

Relevant facts

Entity A is an overseas listed company.

Entity B is an Australian company and is a wholly owned subsidiary of entity A.

Entities A and B are both in the same service industry and entity B is registered for GST.

Entity A is not an Australian resident for income tax purposes. It is not registered for GST nor does it have a tax file number in Australia.

Entity A has signed a contract with an Australian client to supply a professional service.

Part of the services will be performed by the staff of entity B in Australia.

The full contract has been generated and signed overseas and is between the Australian client and entity A. Entity B is not a party to the contract.

Entity B does not enter into any agreement with entity A for the supply of service. Entity B does not receive any commission or any other form of consideration from entity A for the supply of this service.

Entity B does not have the authority to sign the contract with third party on behalf of entity A.

Entity A's GST turnover from supplies that are connected with Australia exceeds $75,000.

Reasons for decisions

1. Is GST payable on services performed in Australia by entity B as part of a contract between entity A and an Australian client?

Section 9-40 of the GST Act provides that you must pay GST on any taxable supply you make.

Section 9-5 of the GST Act states:

You make a taxable supply if:

(a) you make a 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 Australia; 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.

(*denotes a defined term in section 195-1 of the GST Act.)

The supply of the services will be taxable if it meets the requirements of section 9-5 of the GST Act.

Services performed by entity B

Entity B provides the service on behalf of entity A and it is necessary to determine whether its supply of the service to entity A is taxable under section 9-5 of the GST Act.

Paragraph 9-5(a) of the GST Act provides that you make a taxable supply if you make the supply for consideration.

Subsection 9-15(1) of the GST Act defines consideration and includes:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

Based on the information provided, entity A requested entity B to provide the services to its Australian client. Entity B merely performs the services on behalf of entity A and it does not provide an invoice or receive any consideration for performing these services. As such, the service entity B provides form part of entity A's supply to its Australian client and entity B does not make a separate supply of service in its own right.

As entity B does not meet the requirement in section 9-5 of the GST Act and therefore it is not liable for GST for the supply of service to entity A.

Services supplied by entity A to its Australian client

Based on the information provided, entity A satisfies the requirements of paragraphs (a) and (b) of section 9-5 of the GST Act as it receives consideration for the supply and it makes the supply of services in the course or furtherance of an enterprise that it carries on.

We need to consider whether the supply of services by entity A through entity B is connected with Australia under paragraph 9-5(c) of the GST Act and whether entity A is required to be registered for GST under paragraph 9-5(d) of the GST Act.

Supplies connected with Australia (Paragraph 9-5(c) of the GST Act)

Subsection 9-25(5) of the GST Act provides that a supply of anything other than goods or real property is connected with Australia if:

(a) the thing is done in Australia: or

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

(c) all 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. (iii) the supply of the other thing would be connected with Australia.

Goods and Services Tax Ruling GSTR 2000/31 explains when a supply is connected with Australia under section 9-25 of the GST Act.

Paragraph 9-25(5)(a) of the GST Act

Thing' is defined in section 195-1 of the GST Act to mean anything that can be supplied or imported. Things other than goods or real property that can be supplied include services, advice, information, rights, obligations to do anything, or any combination of these things. Under paragraph 9-25(5) of the GST Act the connection with Australia requires that the 'thing' being supplied is 'done' in Australia.

The meaning of 'done' depends on the nature of the 'thing' being supplied. 'Done' can mean, for example, performed, executed, completed, finished etc depending on what is supplied.

Paragraph 65 of GSTR 200/31 states:

If the 'thing' being supplied is a service, the supply of that service is typically done where the service is performed. If the service is performed in Australia, the service is done in Australia and the supply of that service is connected with Australia under paragraph 9-25(5)(a). This is the case even if the recipient of the supply is outside Australia.

As the services will be performed by the staff of entity B in Australia, it is considered the supply of the service is connected with Australia under paragraph 9-25(5)(a) of the GST Act.

Paragraph 9-25(5)(b) of the GST Act

Paragraph 84 of GSTR 2000/31 states:

84. For a supply to be connected with Australia under paragraph 9-25(5)(b), a connection must be established between the Australian permanent establishment and the supply.

Subsection 9-25(6) of the GST Act further clarifies 9-25(5)(b) of the GST Act by stating that an enterprise is carried on in Australia if the enterprise is carried on through:

(a) a permanent establishment (as defined in subsection 6(1) of the Income Tax Assessment Act 1936); or

(b) a place that would be such a permanent establishment if paragraph (e), (f) or (g) of that definition and did not apply.

The definition of permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA) is stated in its entirety:

'Permanent establishment', in relation to a person (including the Commonwealth, a State or an authority of the Commonwealth or a State), means a place at or through which the person carries on any business and, without limiting the generality of the foregoing, includes -

(a) a place where the person is carrying on business through an agent;

(b) a place where the person has, is using or is installing substantial equipment or substantial machinery;

(c) a place where the person is engaged in a construction project; and

(d) where the person is engaged in selling goods manufactured, assembled, processed, packed or distributed by another person for, or at or to the order of, the first-mentioned person and either of those persons participates in the management, control or capital of the other person or another person participates in the management, control or capital of both of those persons - the place where the goods are manufactured, assembled, processed, packed or distributed,

but does not include -

(e) a place where the person is engaged in business dealings through a bona fide commission agent or broker who, in relation to those dealings, acts in the ordinary course of his business as a commission agent or broker and does not receive remuneration otherwise than at a rate customary in relation to dealings of that kind, not being a place where the person otherwise carries on business;

(f) a place where the person is carrying on business through an agent -

(i) who does not have, or does not habitually exercise, a general authority to negotiate and conclude contracts on behalf of the person; or

(ii) whose authority extends to filling orders on behalf of the person from a stock of goods or merchandise situated in the country where the place is located, but who does not regularly exercise that authority,

not being a place where the person otherwise carries on business; or

(g) a place of business maintained by the person solely for the purpose of purchasing goods or merchandise;

Please note that for the purposes of the GST Act, the definition of permanent establishment has a broader meaning than in subsection 6(1) of the ITAA. This is because the exclusions from the permanent establishment definition in paragraphs (e), (f) and (g) of the ITAA are not excluded from the definition for GST purposes.

Paragraph 86 of GSTR 2000/31 provides some factors that indicate whether a supply is made through a permanent establishment in Australia which is reproduced below:

86. There is no specific set of circumstances which must be satisfied before a supply is connected with a permanent establishment. Rather, each case will be determined on the basis of the individual facts and circumstances. However, some factors that will usually indicate that the supply is made through a permanent establishment include:

· the permanent establishment has the authority to sign contracts or accept purchase orders for the supply;

· the permanent establishment has the authority to make important decisions in respect of the supply;

· the permanent establishment physically makes for example, manufactures or produces, the supply;

· if the supply is a service, the service is provided by the permanent establishment;

· if the supply is the provision of advice or information such as a legal opinion, the permanent establishment provides that advice or information;

· if the supply is the grant, creation, assignment, transfer or surrender of a right, the permanent establishment grants, creates, assigns, transfers or surrenders that right.

Entity B is the subsidiary and representative of entity A in Australia. It supplies the services on behalf of entity A in Australia and provides the services to entity A's Australian client. Entity B has the authority to make decision even though the actual contract will be entered between entity A and the third party.

Based on the role and activities carried on by entity B, entity A is carrying on an enterprise through B, a permanent establishment in Australia under subsection 9-25(6) of the GST Act. Thus entity A meets the requirements in paragraph 9-25(5)(b) of the GST Act and its supply of the service to the Australian client is connected with Australia for the purpose of paragraph 9-5(c) of the GST Act.

Required to be registered (paragraph 9-5(d) of the GST Act)

Entity A is not registered for GST. Therefore, it is necessary to consider whether it is required to be registered for GST.

Under section 23-5 of the GST Act, an entity (including non-resident) must register for GST in Australia if:

· it is carrying on an enterprise, and

· its GST turnover from supplies, that are connected with Australia and made in the course of its enterprise, meets or exceeds the registration turnover threshold of $75,000 (or $150,000, if you are a non-profit body).

GST Turnover

Division 188 of the GST Act defines GST turnover. GST turnover is defined by reference to current GST turnover and projected GST turnover.

The current GST turnover is the GST exclusive value of all the supplies the entity makes or likely to make in the current month plus all the supplies the entity made in the previous 11 months.

The projected GST turnover is the GST exclusive value of all the supplies made in the current month plus all the supplies the entity is likely to make in the next 11 months.

Subsection 188-10(1) of the GST Act provides that an entity's GST turnover meets the registration turnover threshold if:

· its current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that its projected GST turnover is below the turnover threshold; or

· its projected GST turnover is at or above the turnover threshold.

Therefore, if an entity's current or projected GST turnover meets or exceeds $75,000, it is required to be registered for GST in Australia.

It must be noted that in calculating current and projected GST turnover, the following supplies are disregarded:

· supplies that are input taxed, such as sale or lease of residential premises; or

· supplies for no consideration (unless to an associate); or

· supplies not made in connection with the business that you carry on (for example, supplies made in a private capacity); or

· supplies not connected to Australia.

As advised, the annual turnover of entity A's supplies that are connected with Australia exceeds $75,000. Therefore, its GST turnover meets the registration turnover threshold and therefore it is required to be registered for GST under section 9-5(d) of the GST Act.

As discussed, entity A is carrying on an enterprise and its supplies to its Australian client are connected with Australia. There is no other provision in the GST Act for its supply of service to be input taxed or GST-free. Accordingly, the supply of the service by entity A to its Australian client through B is a taxable supply and GST is payable on the supply.

2. Does entity A have a permanent establishment in Australia for the purposes of GST Act?

As discussed in question 1, entity A has a permanent establishment in Australia under subsection 9-25(6) of the GST Act and it carries on its enterprise through entity B, a permanent establishment in Australia.

3. Can entity A apply reverse charge provisions to the services it supplies to the Australian client?

Division 83 of the GST Act provides that in certain circumstances a non-resident supplier and an Australian recipient can agree for the GST payable on a taxable supply made by the non-resident is payable by the Australian recipient. As these supplies are then disregarded in working out annual turnover, this may alleviate the need for the non-resident supplier to register. This is referred to as a 'reverse charge' on the supply.

Subsection 83-5(1) of the GST Act provides that the GST on a taxable supply is payable by the recipient of the supply, and is not payable by the supplier; 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 Australia; and

(c) the recipient is registered or required to be registered; and

(d) the supplier and the recipient agree that the GST on the supply be payable by the recipient.

In this case, entity A makes the supply of service through its permanent establishment, entity B in Australia. Therefore, entity A does not meet the requirement in paragraph 83-5(1)(b) of the GST Act and it cannot apply Division 83 of the GST Act to the supply of services to its Australian client.