Edited version of private ruling

Authorisation Number: 1011662921605

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Ruling

Subject: GST and acquisitions from a resident company

Issue

Are the supplies of professional services (excluding the supply in relation to X's home office facilities set out in the contract) made by X to Y under the contract taxable supplies for the purposes of paragraph 11-5(b) of the X New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice/Answer:

No, X's supplies of professional services (excluding the supply in relation to X's home office facilities set out in the contract) to Y under the contract are not taxable supplies for the purposes of paragraph 11-5(b) of the GST Act.

Relevant facts and circumstances

Y is a company incorporated overseas and carries on their business activities overseas. They do not have a fixed place of business in Australia and do not conduct any business activities, whether directly or indirectly through an agent authorised to do so, in Australia. Y has advised that they are not registered or required to be registered for the Australian goods and services tax (GST) and do not have a permanent establishment in Australia for income tax purposes.

Y, as operator of the joint venture resource project, has to construct certain facilities overseas. The construction of those facilities was committed by Y entering into a contract) with an Australian company X Pty Ltd (X).

The contract is between Y and X where X will provide professional services (engineering, procurement services and construction management services) for the work as described in the contract. X is not contracted to undertake the construction work but to provide services to ensure that the construction work is undertaken in accordance with the agreed scope. The payments for these services are described in the contract.

Y will operate a Project Team in parallel to X's Project Structure. It is Y's intention to work collaboratively with X on all aspects of project related work. In this process, Y's project team will support X's efforts but 'at arms length' that is the contractual obligations for delivery of the agreed scope of Work and the associated project decisions will lie with X.

You also advised that Y does not have any employee in Australia.

The representative for Y is Q. Q is an employee of another Australian company M. Representative Q will be frequently located at X's office in Australia. Y has a separate contract with company M in regard to the monitoring of X's work and this includes project management.

Q is empowered to act for Y in all matters relating to X's performance of the work and expressly to determine whether or not X is performing the work in accordance with the contract. Q has no power to relieve X from any of their obligations under the Contract. No amendment or variation in the Contract by Q will be valid or binding on Y unless it is in writing, and if it is verbal, company M must provide the amendment or variation in writing within 24 hours of the verbal amendment or variation.

The work to be performed by X is as follows:

· Project management and administration services

· Engineering

· Transportation and logistics

· Procurement

· Safety, health and security

· Regulatory, environmental and socioeconomic

The contract contains agreed reimbursable expenses in addition to other fees to be paid by Y. The list is as follows:

· General office expenses home office:

· Office facilities for company's personnel:

· Travel expenses:

· Software and related charges:

· Additional expenses:

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 subsections 38-190(1), 2) and (3).

A New Tax System (Goods and Services Tax) Act 1999 section 9-25.

A New Tax System (Goods and Services Tax) Act 1999 section 11-5.

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

Reasons for the decision

Section 11-5 of the GST Act provides when a creditable acquisition is made. One of the requirements for a creditable acquisition is that the supply of the thing to the recipient is a taxable supply (paragraph 11-5(b) of the GST Act).

A supply will be a taxable supply where the requirements of section 9-5 of the GST Act are satisfied. 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

Y makes payments to X for the following supplies of professional services by X:

i) Engineering and design services

ii) Project management and administration services (including safety, health and security and regulatory environmental and socioeconomic aspects)

iii) Contracts arrangement

iv) Procurement of material including transport and logistics

v) Construction management services

vi) Commissioning services (supplies)

From the information received, the supplies of professional services made by X to Y satisfy paragraphs 9-5(a) to 9-5(d) of the GST Act as:

a) X receives consideration from Y when they make the supply to Y;

b) the supplies are made in the course of an enterprises that X carries on;

c) the supplies are connected with Australia as the supplies are made through an enterprise that X carries on in Australia; and

d) X is registered for GST.

However, the supplies are not taxable supplies to the extent that they are GST-free or input taxed.

There is no provision in the GST Act that will make these supplies input taxed. The next step is to determine whether the supply of the services will be GST-free.

GST-free

Subsection 38-190(1) of the GST Act comprises five items which set out supplies of things, other than goods or real property that are GST-free. X's supply that is not GST-free under one item in subsection 38-190(1) of the GST Act may be GST-free under one of the other items.

Relevant to Y's acquisitions are items 1, 2 and 3 in the table in subsection 38-190 (1) of the GST Act (Items 1, 2 and 3).

Under Item 1, a supply is GST-free where it is:

a supply that is directly connected with goods or real property situated outside Australia.

Under 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, 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.

Application of Item 1 to supply (i) engineering and design services

Item 1 provides that a supply of things, other than goods or real property (such as services), for consumption outside Australia is GST-free if it is a supply that is directly connected with goods or real property situated outside Australia.

Goods and Services Tax Ruling GSTR 2003/7 provides guidance on what 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 GST Act.

The expression 'directly connected with' contemplates a very close link or association between the supply and the goods or real property. The goods or real property, must in our view, be particular goods or real property for this very close connection to exist.

The Contract states that this project involves overseas production facilities. Therefore, X's design and engineering services are for particular sites outside Australia. This is a supply directly connected with real property (paragraph 42 of GSTR 2003/7), and the property is located outside Australia. It is not a supply of a right or option to acquire something the supply of which would be connected with Australia and subsection 38-190(2) of the GST Act would not apply to deny the supply from being GST-free. Accordingly, where X's services are directly connected with specific goods or real property outside Australia, their supply to Y will be GST-free under item 1.

Application of Item 2 to supplies from (ii) to (vi) (various supplies)

· Project management and administration services

· Contracts arrangement

· Procurement of material including transport and logistics

· Construction management services

· Commissioning services (supplies)

Y is a non resident company. In order for a supply to be GST-free under item 2 or 3 of subsection38-190(1) of the GST Act, Y must not be in Australia when X's services are performed. 

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

Paragraph 31 of Goods and Services Tax Ruling 2004/7 provides 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 that the non-resident or recipient is not in Australia in relation to the supply when the thing supplied is done.

Paragraph 37 of GSTR 2004/7 provides that a non-resident company is in Australia if the company carries on its business or its activities in Australia:

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

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

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 provided, Y is not registered with ASIC. You state that it does not have a permanent establishment in Australia for income tax purposes. You have also contended that Y does not carry on a business in Australia of its own for a sufficiently substantial period of time; or through an agent at a fixed and definite place for a sufficiently substantial period of time.

Does Y carry on its business in Australia through an agent at a fixed and definite place for a sufficiently substantial period of time?

Paragraphs 277 to 281 of GSTR 2004/7 discuss this question. Even if Y does not have a fixed and definite place of its own in Australia, it may still carry on its business in Australia through an agent at a fixed and definite place for a sufficiently substantial period of time.

Paragraph 280 of GSTR 2004/7 states that the question of whether X is carrying on Y's business or doing no more than carrying on its own business necessitates an investigation of the functions which X performs and all aspects of the relationship between Y and X.

Paragraph 281 of GSTR 2004/7 states as follows:

281. In this regard it is necessary to weigh up various factors, including but not necessarily limited to the following, to determine whether a non-resident company can properly be regarded as carrying on business in Australia through an agent:

· Was the fixed place of business from which the agent operates originally acquired for the purposes of enabling the agent to carry on the business of the non-resident company?

· Does the non-resident company directly reimburse the agent for the cost of accommodation or staff at the fixed place of business?

· Does the non-resident company make other contributions to the financing of the business carried on by the agent?

· Is the agent remunerated by reference to transactions, for example, by commission, or by fixed regular payments or in some other way? Commission can be an indicator that the agent is carrying on its own business and not that of the non-resident. However, it is not determinative.

· What degree of control does the non-resident company exercise over the running of the business conducted by the agent?

· Does the agent reserve part of the agent's staff or accommodation for the conducting of business related to the non-resident company?

· Does the agent display the name of the non-resident company at the agent's premises or on stationery and, if so, does it indicate that the agent is an agent of the non-resident company?

· What business, if any, does the agent transact as principal exclusively on the agent's own behalf?

· Does the agent make contracts with customers or other third parties in the name of the non-resident company or otherwise in such a manner so as to bind it?

· If the agent does make contracts so as to bind the non-resident company, does the agent require specific authority in advance before binding that foreign company to contractual obligations?

We will now examine the factors in paragraph 281 in relation to your situation.

Y does not directly reimburse X for the cost of accommodation or staff at the fixed place of business, or make other contributions to the financing of the business carried on by X.

We agree with your contention that although there is an agency arrangement between Y and X in relation to X's procurement services, the agency of X is merely part of its engagement under the Contract to deliver an outcome for the provision of goods and services to Y by the Australian subcontractors. Although X is referred to in Y's Purchase Orders as Y's company representative, acting as agent for or on behalf of Y, it appears X does not have authority to contract on Y's behalf, because Y reviews all purchase orders and subcontracts raised by X with the Australian subcontractors and approve each under Y's Delegation of Authority. In this respect, Y is one of X's customers (paragraphs 282 and 283 of GSTR 2004/7). In summary, X is not Y's resident agent carrying on Y's business in Australia.

Even if X is Y's agent in Australia, Y will not be considered as being "in Australia" in relation to X's administrative and/or agency services (paragraphs 374 and 375 of GSTR 2004/7: Supply of agency services by an agent to a non-resident).

Therefore, we consider that Y does not carry on its business in Australia through X as an agent at a fixed and definite place for a sufficiently substantial period of time. Y is not in Australia for the purposes of Item 2 and Item 3(a) in relation to X's supply to Y.

· Further, 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; or

· the presence of the company is involved in the supply, unless the only involvement is minor.

Whether Y is in Australia in relation to the various supplies made by X because of Y's project team's interaction with X in Australia

From the information received, Y has an agreement with an Australian company M where the employees of M will provide their services by monitoring the work done by X under the Contract and this includes having one employee from M to be the project manager and representative of Y. Further Y has acquired offices and work stations from X for these contracted employees to enable them to do the services M has agreed with Y.

We consider that since Y's project team consists of M's employees, not Y's employees, this project team is not Y's presence in Australia. Paragraph 349 of GSTR 2004/7 gives examples of an Australian presence of a company as its Australian branch, representative office or agent. Although Q is the representative of Y, and has the power to monitor X's performance, he is M's employee and M is providing a supply of monitoring services to Y (paragraph 359 of GSTR 2004/7).

We accept your contention that although one or more of Y's employees might come to Australia to visit X and attend X's meetings, however, such visits will be infrequent, and X's service would not be provided to Y's employees. Their infrequent presence in Australia would not cause Y to be in Australia in the relevant sense in section 38-190 of the GST Act.

Accordingly, Y is considered not to be in Australia in relation to the various supplies made by X.

Paragraph (a) of Item 2

The requirement in paragraph (a) of Item 2 is met if the thing supplied is neither work physically performed on goods situated in Australia when the work is done, nor directly connected with real property situated in Australia.

From the information in the Contract, X's various supplies to Y are neither work physically performed on goods situated in Australia when the work is done, nor directly connected with real property situated in Australia (GSTR 2003/7).

Therefore X's various supplies to Y meet the requirement in paragraph (a) of Item 2. We do not need to discuss paragraph (b) of Item 2, although the various supplies would also meet the requirement in paragraph (b) of Item 2 because Y acquires X's various supplies in carrying on its enterprise but is not registered or required to be registered for GST.

Limitation of Item 2

The scope of item 2 is limited by subsection 38-190(3) of the GST Act which provides that a supply 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.

Pursuant to the information you have provided, paragraph 38-190(3) (a) of the GST Act is satisfied because X's various supplies are supplies under an agreement entered into with a non resident company, Y.

The next step is to consider paragraph 38-190(3) (b) of the GST Act.

Are X's various supplies provided to another entity, and if yes, are they provided to that other entity in Australia?

Paragraphs 59 and 61 of Goods and Service Tax Ruling GSTR 2005/6 provide guidance in relation to the expression "provided to another entity". Generally a supply is made to whoever you are contractually liable to perform the services for. In this instance X's supply is made to Y. However, a supply is provided to whoever obtains the actual effective use or enjoyment of the supply, that is, the actual beneficiary.

Paragraph 509 of GSTR 2005/6 provides that for the purposes of applying subsection 38-190(3) of the GST Act, the focus is on the nature of the supply and the actual flow of that supply.

X is making various supplies to Y, and these supplies are not provided to any other entity in Australia.

Therefore, subsection 38-190(3) of the GST Act does not apply and X's supplies to Y are GST-free under Item 2. These supplies are not taxable supplies to Y.

Application of Item 3 to supplies from (ii) to (vi) (various supplies)

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 Goods and Service Tax Ruling 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, where X makes and provide various supplies directly to Y, Y is the providee entity. We consider that in all circumstances Y has the actual use or enjoyment of X's supplies. Our conclusion is that the actual flow of X's supplies is to Y.

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 Y, Y is not in Australia when X provides various supplies. In this circumstance, the use and enjoyment of the supplies is outside Australia.

It is noted, as discussed above, that the supply of X's various supplies 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 X's various services to Y is also GST-free under Item 3, where the services are made to and provided directly to Y (that is, in such circumstances, Y is the providee entity).

In summary, the supply of X's various supplies to Y is GST free under both Items 2 and 3 in the table in subsection 38-190(1) of the GST Act.