Edited version of private ruling

Authorisation Number: 1011617967151

Subject: supply of mail house and print services

Question:

Is the supply of mail house and print services made by B to D pursuant to an Agreement a GST-free supply for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 ('GST Act)?

Answer:

Yes, the supply of mail house and print services made by B to D pursuant to the Agreement is a GST-free supply for the purposes of the GST Act.

We note that the ATO previously provided oral advice that the supply of mail house and print services made by B was taxable. After reviewing the Agreement and applying the applicable Goods and Services Tax Rulings we now consider that the supply of mail house and print services is GST-free and that B has incorrectly classified a non-taxable supply as a taxable supply. Applying the principles in Law Administration Practice Statement PSLA 2002/12 (withdrawn), provided B first reimburses D for the GST, B can obtain a refund of the GST from the ATO pursuant to section 8AAZLF of the Taxation Administration Act 1953 ('TAA').

Relevant facts and circumstances:

The Parties:

B is a company incorporated in Australia.

D is a company incorporated in the United States, although D's website states that D has a 'Correspondence Receipt Centre' in Australia and that D is registered with the Australian Securities & Investments Commission to do business as a finance broker.

The Agreement:

B provided a copy of the Agreement which is stated to be between B and D, but is signed on behalf of B and C.

Clause 1 of the Agreement provides that B will provide 'mail house and print services' in accordance with D's instructions, including supply and overprinting of envelopes and stationery/flyers, laser and copier services, mail handling and bulk lodgement of mail with Australia Post for delivery in Australia and overseas. Clause 1 also states that B will arrange for collection of return mail and processing of return mail (if required) in a format suitable to D.

B agrees to keep confidential all data supplied by D and to remove all D's data from B's system after one week has elapsed following completion of a job (clause 3). Data is supplied by D to B in the form of password protected zip files (clause 4). B advised that the file downloads plus all emails and instructions in relation to the mail house and print services came from D in the United States and that the role of D's Correspondence Receipt Centre is limited to dealing with return mail.

Clause 5 sets out prices for printing envelopes and letterhead, laser processing and data, mail processing, lodgement with Australia Post, and job management. There is also a charge for 'estimated postage' (and for B to increase that charge if Australia Post increases its postage charges). Actual postage costs are determined upon lodgement at Australia Post, and B agrees to send the lodgement docket to C along with the invoice.

Clause 1 of the Agreement provides for B to arrange for collection and processing of return mail in a format suitable to D if required and clause 5 provides for B to scan return mail, create a data file on a weekly basis, send the scanned documentation to D, and send the originals to D in Chicago within 5 business days of receipt. B advised that B never provided these services as they were performed by D's Correspondence Receipt Centre in Australia.

Clause 5 also provides that 'all costs supplied are exclusive of GST'.

We understand that D has recently terminated the Agreement.

Ruling request:

B advised that B had previously obtained oral advice from the ATO that B should charge GST on mail house and print services supplied to D because those services were performed in Australia and the recipients of all the mail-outs prepared by B were located in Australia.

B advised that B performed the mail house and print services under the Agreement in Australia and that invoices issued by B for those services were addressed to D at the address of D's Correspondence Receipt Centre but were e-mailed to an e-mail address which is linked to a website which belongs to C, a company listed in the United States.

B confirmed that all the services provided by B pursuant to the Agreement were performed in Australia and the mail-outs were all sent to addressees located in Australia. B receives computer files which contain the names and addresses of addressees and prepares and processes bulk mail-outs to those addressees. B advised that the bi-monthly mail-outs were to new clients of D and to existing clients without current loans from D and that the weekly mail-outs offered 'upgrades' to 'gold', 'silver' or 'platinum' status (with correspondingly reduced fees on future loans) to clients who currently had loans with D or advised that existing loans were currently past due for payment. B provided sample templates of the types of letters prepared.

B advised that D is now requesting a refund of all the GST charged on services provided by B.

Legal advice:

B provided a copy of legal advice given to D and which D subsequently provided to B.

On the basis that D offered finance broking services to customers in Australia through the internet, that D's employees, premises, and hardware were located in the United States, that any entities in Australia which source business for D are independent contractors and neither agents or employees of D, and that D enters into the broking contracts in the United States, the advice was that supplies made by D were not connected with Australia for Australian GST purposes as they were neither a thing done in Australia nor made through an enterprise carried on in Australia by D.

The legal advice also included the following:

Services supplied to [D] by an Australian entity should be GST-free since [D] are not in Australia and not a resident of Australia.

Reasons for decision:

Summary:

The supply of mail house and print services made by B to D is GST-free as it satisfies the requirements of Item 2 in subsection 38-190(1) of the GST Act.

Although subsection 38-190(3) of the GST Act states that a supply which is GST-free under Item 2 nevertheless is taxable if it is a supply made under an agreement with a non-resident and is provided to another entity in Australia, we do not consider that B provides the mail house and print services to another entity in Australia.

Detailed reasoning:

Section 9-5 of the GST Act provides that an entity makes a taxable supply if the supply is made for consideration, is made in the course or furtherance of the entity's enterprise, is connected with Australia, and the entity is GST registered. The supply made by B to D pursuant to the Agreement appears to satisfy all these requirements, but section 9-5 further provides:

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

Part 3-1 of the GST Act sets out the GST-free supplies, including subdivision 38-E which deals with exports and other supplies that are for consumption outside Australia. Within subdivision 38-E section 38-190(1) deals with supplies of things, other than goods or real property, for consumption outside Australia. Pursuant to the Agreement B supplies 'mail house and print services' to D (which are things other than goods or real property). We therefore consider that section 38-190 is the applicable provision for determining whether the supply made by B to D is GST-free.

Subsection 38-190(1) sets out five types of GST-free supplies, three of which are clearly inapplicable to the supply made by B - Item 1 (a supply that is directly connected with goods or real property situated outside Australia); Item 4 (a supply made in relation to rights); and Item 5 (a supply constituted by the repair, renovation, modification or treatment of goods from outside Australia whose destination is outside Australia).

Item 2 in subsection 38-190(1):

Item 2 in subsection 38-190(1) applies to a supply that is made to a non resident who is not in Australia when the thing supplied is done. 'Non-resident' is defined in section 195-1 of the GST Act as an entity that is not 'Australian resident'. 'Australian resident' is defined as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 ('ITAA'). Goods and Services Tax Ruling GSTR 2004/7 explains whether a company is 'non-resident' for the purposes of Item 1 (Paras 121 -123):

A company that is a non-resident

121. A supply that is made to a company is a supply to a non-resident if the company is not a resident of Australia, as defined in subsection 6(1) of the ITAA 1936, for Australian income tax purposes.

122. As defined in that subsection a company is a resident if the company is incorporated in Australia or, if not incorporated in Australia, it carries on business in Australia and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

123. Thus if, for example, a company is incorporated in Australia under the Corporations Act 2001, it is a resident of Australia.

We understand from the ASIC website that D is incorporated in the United States. Although D's website refers to D having a 'Correspondence Receipt Centre' in Sydney, it is unlikely that D has its central management and control in Australia or its voting power controlled by Australian-resident shareholders. We therefore consider that D is a 'non-resident' for the purposes of Item 2 in subsection 38-190(1).

Item 2 in subsection 38-190(1) further requires that D is 'not in Australia' when the thing supplied by B&C is done. GSTR 2004/7 explains (Paras 181 and 184) that this requirement:

…is in effect a proxy test for determining where the supply to that entity is consumed. The presumption is that if the non-resident or other recipient of the supply is 'not in Australia' when the thing supplied is done, the supply of that thing is for consumption outside Australia and is GST-free, provided the other requirements of the item are met.

As the Australian location of the entity to which the supply is made at the relevant time is a proxy test for identifying when consumption occurs in Australia, we consider that the expression 'not in Australia' should be interpreted in the context of the supply in question. The expression 'not in Australia' requires, in our view, that the non-resident or other recipient is not in Australia in relation to the supply. This means that a non-resident or other recipient of a supply may satisfy the 'not in Australia' requirement if that entity is in Australia but not in relation to the supply.

GSTR 2004/7 sets out the test for whether a company is 'in Australia when the thing supplied is done' as follows (Para 241):

We consider, therefore, that a non-resident company is in Australia for the purposes of item 2 and paragraph (b) of item 4 if that company carries on business (or in the case of a company that does not carry on business, carries on its activities) in Australia:

(a)   at or through a fixed and definite place of its own for a sufficiently substantial period of time; or

(b)   through an agent at a fixed and definite place for a sufficiently substantial period of time.

GSTR 2004/7 also states (Para 247) that it would be reasonable for a supplier to conclude that a non-resident company is 'in Australia' if the company is registered with ASIC. D is registered with ASIC as a Foreign Company (Overseas) and as it is incorporated outside Australia, D has an Australian Registered Body Number and a registered office in Sydney. However GSTR 2004/7 also states (Para 248) a company that is registered with ASIC nevertheless may be able to demonstrate that it is not 'in Australia' under the tests set out in Para 241 of GSTR 2004/7 already referred to above.

It also appears that, in terms of the test in paragraph (a) of Para 241 of GSTR 2004/7, D carries on business at or through a fixed and definite place in Australia. D's website states that D has a 'Correspondence Receipt Centre' in Sydney and B advises that the activities described in clause 5 of the Agreement (i.e. scanning incoming correspondence on a weekly basis and sending the scanned correspondence to D at a specified electronic address) are not carried out by B but instead carried out by D at the Correspondence Receipt Centre. Given that D's Correspondence Receipt Centre is a fixed and definite place which is occupied by D, the issue is whether the activities undertaken there by D are substantial enough to conclude that D carries on business at or through the Correspondence Receipt Centre. GSTR 2004/7 refers (Para 271) to South India Shipping Corporation v Bank of Korea [1985] 1 WLR 585 which held that a place is a place of business even if the activities carried on there are not a substantial part of, or no more than incidental to, the main objects of the business. Applying that test, even if the activities carried on at the Correspondence Receipt Centre are limited to scanning incoming correspondence on a weekly basis and sending the scanned correspondence to at a specified electronic address, the Correspondence Receipt Centre is a place of business.

As noted above, GSTR 2004/7 states (Para 184):

The expression 'not in Australia' requires, in our view, that the non-resident or other recipient is not in Australia in relation to the supply. This means that a non-resident or other recipient of a supply may satisfy the 'not in Australia' requirement if that entity is in Australia but not in relation to the supply.

GSTR 2004/7 states (Para 347) that this makes it necessary to examine the role the presence of D in Australia plays in relation to the supply of mail house and print services made by B. GSTR 2004/7 further states (Para 350) that if the supply by B is not for the purposes of D's Australian presence but D's Australian presence is involved in that supply, D is 'in Australia in relation to the supply' unless the involvement of D's Australian presence in that supply is minor (e.g. carrying out simple administrative tasks).

B advised that the file downloads plus all emails and instructions in relation to the mail house and print services come to B from D in the United States and that the Correspondence Receipt Centre's role is limited to dealing with return mail. On that basis we consider that although D is 'in Australia', D is not 'in Australia' in relation to the supply of mail house and printing services made by B.

Paragraph 2(b) in Item 2 in subsection 38-190(1):

Paragraph 2(b) requires that the non-resident (i.e. D) acquires the mail house and printing services in carrying on D's enterprise and that D is neither GST registered nor required to be GST registered.

'Enterprise' is defined in section 9-20 of the GST Act to include an activity or series of activities done in the form of a business. In our view D carries on an enterprise and acquires the mail house and printing services from B in carrying on that enterprise. We have confirmed that D is not GST registered. It is unlikely that D is required to be GST registered as D does not exceed the GST registration turnover threshold because the relevant tests exclude supplies that are input taxed and disregard supplies that are not connected with Australia.

We therefore consider that the requirements of paragraph (b) in Item 2 in subsection 38-190(1) are satisfied.

As all of the requirements of Item 2 in subsection 38-190(1) are satisfied, the supply of mail house and printing services made by B to D pursuant to the Agreement is GST-free unless subsection 38-190(3) applies.

Subsection 38-190(3):

Subsection 38-190(3) provides that a supply which is covered by Item 2 is not GST-free if it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident and the supply is provided, or the agreement requires it to be provided, to another entity in Australia.

In our view the first requirement in subsection 38-190(3) is satisfied as B makes the supply of mail house and print services pursuant to an agreement (i.e. the Agreement) entered into with a non-resident (i.e. D). We have already set out above the reasons why we consider D to be a 'non-resident', i.e. D is incorporated in the United States and does not have its central management and control in Australia or its voting power controlled by Australian-resident shareholders.

In relation to the requirement in subsection 38-190(3) that the supply is provided, or the agreement requires the supply to be provided, to another entity in Australia, Goods and Services Tax Ruling GSTR 2005/6 explains the meaning of 'provided' as follows (Paras 59-61):

59. The word 'provided' is used in subsection 38-190(3) to contrast with the term 'made' in item 2. In the context of section 38-190, the contrasting words indicate that if a non-resident contracts for a supply to be provided to another entity, the place of consumption should be determined with regard to the entity to which the supply is provided, not the entity to which the supply is made.

60. The example in the Explanatory Memorandum accompanying the Bill that introduced subsection 38-190(3) illustrates this. In that example, non-resident parents contract for the supply of education services to be provided to their children in Australia. The contractual flow of the services is to the parents, while the actual flow of the services is to the children. The supply is made to the parents (non-residents) and provided to another entity, each child, in Australia.

61. Thus the expression 'provided to another entity' means, in our view, that in the performance of a service (or in the doing of some thing), the actual flow of that supply is, in whole or part, to an entity that is not the non-resident entity with which the supplier made the agreement for the supply. The contractual flow is to one entity (the non-resident recipient) and the actual flow of the supply is to another entity.

Thus, although the 'contractual flow' of the services supplied by B&C pursuant to the Agreement is to D, it is necessary to determine whether the 'actual flow' of those services is to another entity (i.e. the persons to whom the mail-outs are addressed).

To determine the 'actual flow' of a supply, GSTR 2005/6 first requires (Para 261) the nature of that supply to be established, i.e. whether it is a supply of a service, a right, or some other thing. GSTR 2005/6 states (Para 277):

By determining what is in substance and reality being supplied, it is possible to identify to which entity the supply is provided.

In the present case the Agreement describes the supplies as 'mail house and printing services' and clause 5 of the Agreement refers to a process which involves printing of envelopes and letterhead, laser processing and data, mail processing, lodgement with Australia Post and job management. Clause 5 of the Agreement refers to a charge for 'estimated postage' (and for B to increase that charge if Australia Post increases its postage charges) which suggests that B also supplies the service of arranging delivery of the mail. GSTR 2005/6 states (Para 282) that, for the purposes of subsection 38-190(3), delivery services are provided to the addressee (except where items are generically addressed, e.g. 'To the Householder').

On the other hand, GSTR 2005/6 also states (Para 285):

In situations where the contractual flow of the supply is to an entity (other than an individual), and it is necessary to determine whether the actual flow of the supply is to another entity (other than an individual), we consider that a strong indicator that the supply is provided to another entity is that the contracting entity has no further interaction with, or participation in, the provision of the supply beyond contracting and paying for the supply.

In the present case clause 4.2 of the Agreement provides for D to review and approve a draft of any mailing materials prepared by B before they are printed, which suggests that D does do more than merely contract and pay for the mail house and print services. That indicates that B both makes and provides the supply of mail house and print services to D.

However GSTR 2005/6 also states (Para 282) that, for the purposes of subsection 38-190(3), delivery services are provided to the addressee. GSTR 2005/6 also states (Para 434) that the unsolicited delivery of goods to the public at large is not the provision of delivery services to another entity. B advised that the bi-monthly mail-outs were to new clients of D and to existing clients without current loans from D and that the weekly mail-outs offered 'upgrades' to 'gold', 'silver' or 'platinum' status (with reduced fees) to clients who currently had loans with D or advised that existing loans were currently past due for payment. As such, we consider that these mail-outs involved unsolicited delivery and therefore did not involve B providing the supply of mail house and print services to the addressees.

For the reasons set out above we consider that the requirements of subsection 38-190(3) of the GST Act are not satisfied as the supply of mail house and print services which B made to D was not provided, or required by the Agreement to be provided, to another entity in Australia. Consequently that supply remains GST-free under Item 2 of subsection 38-190(1).

Refund of GST:

As B has paid GST on a supply that should not have been treated as a taxable supply, the issue of whether B can obtain a refund of that GST arises. Such refunds are governed by section 105-65 of the TAA which implements the policy that GST on a taxable supply should be borne by the unregistered end consumer and overpaid GST should not be refunded to a supplier where it may result in a windfall gain to the supplier.

Law Administration Practice Statement PSLA 2002/12 (withdrawn) deals with refunds of GST incorrectly included in the price of non-taxable supplies. Although PSLA 2002/12 was withdrawn with effect from 15 September 2008 because a public ruling on the same topic is currently being developed (Draft Miscellaneous Taxation Ruling MT2009/D1 was issued for comment in December 2009), PSLA 2002/12 states:

Until this ruling issues, the Commissioner will continue to abide by the approach described in PSLA 20022/12…

PSLA 2002/12 states (Para 4) that the ATO will exercise the discretion to refund GST where the scenarios in Appendix 2 apply. Appendix 2 to PSLA 2002/12 states that in cases where:

paragraphs (a) and (b) of subsection 105-65(1) are satisfied (i.e. a supplier has overpaid GST because a supply was treated as a taxable supply and the supply is not taxable (e.g. because it is GST-free)); and

sub-paragraph 105-65(c)(i) is satisfied (i.e. the supplier has reimbursed the recipient); and

the recipient is not registered for GST

the ATO must refund the GST under section 8AAZLF of the TAA. Subsection 8AAZLF(1) provides that the ATO must refund any Running Balance Account surplus of that entity.

Thus provided B first refunds the GST to D, B can either revise B's Activity Statements for the tax periods in which the GST was incorrectly paid or, subject to meeting the guidelines in the Correcting GST Mistakes Fact Sheet (NAT 4700), claim a refund of all the GST incorrectly paid in B's next Activity Statement.

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