Edited version of private ruling

Authorisation Number: 1011642355485

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Ruling

Subject: GST and supplies to non-resident

Questions

1. Is the supply of your services to a non-resident GST-free pursuant to section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

2. Are you required to register for GST?

Answers

1. Yes. The supply of your services to the non-resident is GST-free.

2. You are required to register for GST if your GST turnover meets the registration turnover threshold of $75,000.

Relevant facts

You have an Australian business number (ABN) and are not registered for goods and services tax (GST).

Entity A is an overseas based company and its main business activities is in manufacturing intangible goods.

You have a verbal agreement with A to provide a professional service to A.

You receive your remuneration in the form of contract payment from A.

Your services to A and owned entities in other foreign countries. You communicate with its distributors in Australia and other regions and you do not provide any service directly to them.

You report directly to A at overseas.

All billing transactions were sent to A at overseas.

You do not enter into any agreement with A requiring you to provide your service to another entity in Australia.

A is not a resident of Australia for income tax purposes and is not registered for GST.

A does not have any branch, office or representative in Australia or registered with ASIC.

You do not act as an agent for A in Australia.

Your GST turnover does not exceed $75,000 for last financial year and it may exceed $75,000 for this financial year.

Reasons for decisions

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

Taxable supply

Section 9-5 of the GST Act states:

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 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)

From the information provided, the supply of your services to A meets the requirements of paragraphs 9-5(a) to 9-5(c) of the GST Act, as:

(a) you receive consideration from A for the supply of your services

(b) the supply of your services to A is in the course or furtherance of an enterprise that you carry on, and

(c) the supply is connected with Australia as the services are performed in Australia.

Furthermore, the supply of your services is not input taxed under the GST Act or the provision of another Act. Therefore, what is left to determine is whether the supply of your services to A is GST-free and whether you are required to be registered for GST under paragraph 9-5(d) of the GST Act.

GST-free

Section 38-190 of the GST Act provides that certain supplies of things other than goods or real property, for consumption outside of Australia are GST-free. As the supply of the services to A is neither a supply of goods nor a supply of real property, section 38-190 is relevant for consideration.

Under item 2 in the table in subsection 38-190(1) of the GST Act (Item 2), a supply is GST-free where it is:

a supply that is made to a non-resident who is not in Australia when the thing supplied is done; and

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

Under item 3 in the table in subsection 38-190(1) of the GST Act (Item 3), a supply is GST-free where it is:

a supply:

a) that 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; 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.

Item 2 is applicable to supplies made to non-resident recipients. Item 3 is applicable irrespective of the residency of the recipient.

Item 2

A supply that is made to a non-resident who is not in Australia

A non-resident for GST purposes is an entity that is not an Australian resident for the purposes of the Income Tax Assessment Act 1936.

You advised that A is a company and is not a resident of Australia for income tax purposes. Therefore, A is a non-resident for GST purposes.

A is a non resident company. In order for a supply to be GST-free under Item 2 or 3 of subsection 38-190(1) of the GST Act, A must not be in Australia when your services are performed. 

Goods and Services Tax Ruling GSTR 2004/7 discusses when an entity is not in Australia when the thing supplied is done. It provides that the pre-condition for the non-resident is not in Australia when the thing supplied is done requires that neither the non-resident, nor a representative acting on behalf of the non-resident if the non-resident is a company, is in Australia 'in relation to the supply'.

Paragraph 38 of GSTR 2004/7 provides that a non-resident company is in Australia if the company is registered with ASIC, or if the company has a permanent establishment in Australia for income tax purposes.

Pursuant to the information you have provided, A is neither registered with ASIC, nor does it have a permanent establishment in Australia for income tax purposes. Therefore it is not in Australia for the purposes of Item 2 and Item 3(a). As A is not in Australia for GST purposes, we do not need to consider whether it is in Australia in relation to the supply that you make.

Where a non-resident entity is not in Australia when the supply is done, the supply must still meet the requirements in either paragraph (a) or (b) of Item 2.

Paragraphs (a) and/or (b) of Item 2

For the purposes of paragraph (a) of Item 2, the supply must be analysed to determine whether it is properly characterised as a supply of work physically performed on goods or is directly connected with real property situated in Australia. This is examined in Goods and Services Tax Ruling GSTR 2003/7.

From the information provided, the nature of your supply is the provision of professional service. The supply is neither a supply of work physically performed on goods situated in Australia nor a supply directly connected with real property situated in Australia. Therefore, the supply of your service to A satisfies paragraph (a) of Item 2. We do not need to discuss paragraph (b) of Item 2.

However, the scope of Item 2 is limited by subsection 38-190(3) of the GST Act.

Limitations

Subsection 38-190(3) of the GST Act provides that a supply covered by Item 2 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 Australia.

Goods and Services Tax Ruling GSTR 2005/6 provides the Tax Office view on the operation of subsection 38-190(3) of the GST Act. The ruling explains that subsection 38-190(3) of the GST Act only applies if there is a supply of something, being a supply that is made to a non-resident and covered by item 2, and that same supply is provided, or is required to be provided to another entity in Australia. That is, the contractual flow of the supply is to one entity and the actual flow of the supply is to another entity in Australia.

In this case, your arrangement with A is to supply professional service to A and its owned entities at overseas. You will not provide and are not required to provide your services to other entities in Australia. Hence, the contractual and actual flow of the services is to A.

Therefore, from the information provided, subsection 38-190(3) of the GST Act does not exclude your supply of services from being GST-free under Item 2 as the supply of the services are made and provided to A and its owned entities that are outside Australia when the supply is made.

Accordingly, your supply of service to A is GST-free under Item 2.

Item 3

Paragraph (a) of Item 3 has already been addressed above.

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). We take a two step approach to work out whether effective use or enjoyment of a supply takes place outside Australia. Firstly, we determine the entity to which the supply is provided (the providee entity). We then determine whether provision of the supply to the providee entity is outside Australia. 

As paragraph (b) of Item 3 refers to the effective use or enjoyment of the supply, it is necessary to inquire as to the entity that has the actual use or enjoyment of the supply. According to paragraph 41 in GSTR 2007/2, a supply is made to a recipient and provided to another entity if in the performance of the service (or in the doing of some thing) the actual flow of that supply is to an entity that is not the recipient entity with which the supplier made the agreement for the supply. That is while the contractual flow of the supply is to the recipient entity, the actual flow of the supply is to another entity.

In this case, you have made and provided your services directly to A and its owned entities located outside Australia. We consider that in all circumstances A and its owned entities have the actual use or enjoyment of your supply. Our conclusion is that the actual flow of your supply is to A and its owned entities located outside Australia, not any other Australian resident entities.

The next step is to determine whether the effective use or enjoyment of the supply takes place outside Australia. Effective use or enjoyment of a supply only takes place outside Australia if there is provision of the supply to the providee entity outside Australia.

In relation to when the supply of your services are made to and provided to A and its owned entities, they are not in Australia in relation to your supply when you provide your services. In this circumstance the use and enjoyment of your supply is outside Australia.

Therefore, the supply of your service to A and its owned entities located outside Australia is GST-free under Items 2 and/or 3. Hence, GST is not payable on this supply.

2. Under section 23-5 of the GST Act, you are required to register for GST if:

§ you are carrying on an enterprise, and

§ your GST turnover meets or exceeds the registration turnover threshold of $75,000 (or $150,000, if you are a non-profit body).

However, you may choose to register for GST even though you are not required to do so.

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.

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

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

Subsection 188-10(1) of the GST Act provides that your GST turnover meets the registration turnover threshold if:

§ your 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

§ your projected GST turnover is at or above the turnover threshold.

Therefore, if your current or projected GST turnover meets or exceeds $75,000, you are required to be registered for GST.

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.

Your supply of services to A is a GST-free supply. However, the consideration received from the GST-free supply is not excluded from the calculation of GST turnover. You advised that your GST turnover may exceed $75,000 this financial year. Therefore, you are required to register for GST once your projected GST turnover meets or exceeds $75,000.

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