Edited version of private ruling

Authorisation Number: 1011679105704

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Ruling

Subject: GST and international supplies

Question

Is the supply of services made by an Australian entity pursuant to the Service Level Agreement (SLA) GST-free under item 1 or 3 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Act) 1999 Act (GST Act)?

Advice

Yes, the supply of services made by the Australian entity under the SLA is GST-free under item 3 in the table in subsection 38-190(1) of the GST Act by virtue of subsection 38-190(4) of the GST Act.

Further, the supply of services under the SLA is GST-free under item 1 in the table in subsection 38-190(1) of the GST Act where these services are directly connected with goods or property located outside Australia.

Relevant facts

You are registered for the goods and services tax (GST) and is responsible for managing and co-ordinating the overseas operations of overseas departments (often referred to as 'posts') on behalf of Australian agencies.

These management services are provided pursuant to a Service Level Agreement (SLA) you have with the relevant Australian agency whose staff are located in the relevant country (usually based at the post).

SLA

The purpose of the SLA is to provide a framework in which to identify the common management services, department and/or agency obligations, key performance indicators and cost recovery arrangements for the term of the agreement.

The delivery of the SLA services at post (listed in Attachment A) will be managed by your Australian based (A-Based) Senior Administrative Officer (SAO).

As per paragraph 4 in the SLA, the services listed are provided to the Australian agency's staff at overseas locations.

Attachment A - services to be provided under the SLA

Attachment A lists the management services to be provided by you to A-Based staff, the department's obligations and key performance indicators. The management services are as follows.

· financial management and office services including purchasing and payment processing, cash management, revenue receipting, financial reporting, asset management and other financial services;

· official travel services including assistance with obtaining visas, access to post-preferred travel providers, the calculation and payment of travel advances, access to post vehicles and services relating to individual agency-owned official vehicles;

· office services including telephone reception and direction of calls and clients, screening and sorting of incoming mail and access to office equipment;

· human resource (HR) management services including recruitment, appointment, induction and termination of staff, payroll services, customs clearances and personal services to arriving A-Based staff; and

property management services:

· liaison with the contracted facilities management providers - for example notifying the facility manager of any urgent and non urgent property matters that require attention;

selection and negotiation of leased premises - you will provide:

· assistance with property search for commercially leased residential accommodation and commercially leased chancery;

· advice on property search, property security and occupational health and safety standards. This may include information on market rents, reputable real estate agents, suitable neighbourhood and accommodation standards;

· inspection of property and assessment to ensure compliance with minimum security standards;

· lease negotiations and lease execution in accordance with overseas property management guide.

property set-up and establishment services:

· coordinate provision of furniture;

· advice on connection of utilities and arrange connection of utilities;

· maintain property record/file, inventory preparation and condition inspection report.

and ongoing property maintenance services:

· facilitate property repairs and maintenance;

· maintain landlord/less or relationship where applicable;

· lease/contract renewals including market rental data;

· lease completion and property vacation including organising for disconnection of services and utilities.

You have provided the following information:

All the services under the SLA take place overseas and are provided from the overseas post. The majority of the SLA services are performed on the premises of the relevant overseas post. On occasion, services may be provided to staff other than at the post, referred to as 'remote staff'.

Generally, the only presence of the Australian agency is the overseas staff, who are provided with your services under the SLA. Hence, the staff of the relevant Australian agency are reliant upon the services you provided at your managed posts. The supplies are provided to them while they are physically located outside Australia.

The SLA services do not extend to administrative or logistical activities associated with the delivery of individual department or agency programs.

The monitoring of the SLA services is conducted from the relevant overseas post by the SAO and SLA committee. Each post SLA committee is made up of one of your senior representative and representatives from each attached agency. An Australian agency may undertake its own review at a post to evaluate service delivery, and any such review would most likely be undertaken at the overseas post.

The Australian agency has no interaction with or participation in the provision of the SLA services other than contracting for, and paying for the supply.

Reasons for decision

GST is payable on a taxable supply. Under section 9-5 of the GST Act you make a taxable supply if:

· you make the supply for consideration;

· the supply is made in the course or furtherance of an enterprise that you carry on;

· the supply is connected with Australia; and

· you are registered or required to be registered for GST.

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

From the information received you satisfy paragraphs 9-5(a) to 9-5(d) of the GST Act when supplying the management services under the SLA as:

· you make the supply for consideration;

· the supply is made in the course of an enterprise that you carry on;

· the supply is connected with Australia as you make the supplies through an enterprise that you carry on in Australia; and

· you are registered for GST.

However, the supply of management services under the SLA is not a taxable supply to the extent it is GST-free or input taxed.

There is no provision under the GST Act that makes your supplies input taxed. The next step is to determine whether the supply is GST-free.

GST-free Supply

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. A 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 your supply of management services are items 1 and 3 in the table in subsection 38-190(1) of the GST Act (Items 1 and 3). If the requirements in either Item 1 or 3 are met, the supply is GST-free provided subsection 38-190(2) or (2A) of the GST Act does not negate that GST-free status.

Subsection 38-190(2) of the GST Act provides that a supply covered by any of items 1 to 5 in the table in subsection 38-190(1) of the GST Act 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 Australia and would not be GST-free.

Subsection 38-190(2A) of the GST Act provides that a supply covered by any of items 2 to 4 in the table in subsection 38-190(1) of the GST Act 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 Australia that would be wholly or partly, input taxed under subdivision 40-B or 40-C of the GST Act.

Item 1

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.

In many cases, the description of the supply is likely to be clear enough in itself to establish whether or not the supply is directly connected with goods or real property. However, in other cases, to establish whether there is a direct connection between the supply and the goods or real property, a close analysis of the supply is necessary to reveal what the supply is really for.

Thus, there will be cases where the arrangement between the supplier and the recipient must be examined to establish what the supply is for. It is also important to understand the exact nature of what the supplier is supplying to the recipient so that in assessing whether there is a direct connection between that supply and particular goods or real property the transaction is analysed correctly.

If a supply is directly connected with goods or real property, it is treated for the purposes of subsection 38-190(1) of the GST Act as being consumed where the goods or real property are located. The place of consumption is in effect determined by the location of the goods or real property.

The location of the recipient of the supply is not relevant in deciding whether a supply is directly connected with goods or real property outside Australia under Item 1. Rather, the issue is one of determining whether the relationship between the supply and the goods or real property is sufficiently close to be directly connected, that is, the supply is so closely aligned with goods or real property.

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.

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.

Paragraphs 37 to 43 of GSTR 2003/7 provide examples of supplies that are directly connected with goods or real property and include the following:

· the installation, alteration, repair, cleaning, restoration, modification of goods;

· transport services - the removal of goods from one place to another;

· security services in relation to goods or real property;

· counting goods, for example, a stocktake of goods;

· the examination of goods or real property to establish a value;

· services in preparing a lease agreement for a lease of real property.

From the information received, some of the services under the SLA (for example lease execution, property set up, screening and sorting of mail, office equipment and office supplies and so on) are directly connected with specific goods or real property located outside Australia.

Accordingly, where any of the services under the SLA are directly connected to specific goods or real property located outside Australia, that supply will be GST-free under Item 1.

Further, subsections 38-190(2) and (2A) of the GST Act do not negate the GST-free status of the supply.

Item 3

Item 3 applies to supplies used or enjoyed outside Australia. Item 3 appears as follows:

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

For a supply to be GST-free under Item 3 both paragraphs (a) and (b) of Item 3 must be satisfied and the supply is neither work physically performed on goods nor directly connected with real property situated in Australia.

Goods and Services Tax Ruling 2003/7, 2004/7 and 2007/2 (available at www.ato.gov.au) provide guidance on the application of Item 3.

Paragraph (a) of Item 3

To be GST-free, paragraph (a) of Item 3 requires that the recipient is not in Australia when the thing supplied is done. A recipient, in relation to a supply, is the entity to whom the supply was made. It is not a requirement of Item 3 that the recipient is a non-resident entity.

The term 'thing supplied is done' refers to the period of time in which the supply occurs. In the case of the management services, the thing supplied is done during the period of time the services are performed.

Accordingly, where an Australian resident is the recipient of the supply of management services, paragraph (a) of Item 3 will not be satisfied as the requirement 'not in Australia' is not met.

However, where a supply is made to a recipient who fails the 'not in Australia' requirement in paragraph (a) of Item 3, it is necessary to consider whether subsection 38-190(4) of the GST Act applies.

Subsection 38-190(4) of the GST Act

Subsection 38-190(4) extends the scope of Item 3. The subsection provides that a supply to a recipient who is in Australia in relation to the supply is taken for the purposes of Item 3, to be a supply made to a recipient who is not in Australia if:

· the supply is made under an agreement entered into, whether directly or indirectly, with an Australian resident; and

· the supply is provided, or the agreement requires it to be provided, to another entity outside Australia.

Goods and Services Tax Ruling GSTR 2004/7 provides guidance on the application of subsection 38-190(4) of the GST Act.

The expression 'provided to another entity' in subsection 38-190(4) of the GST Act, seeks to identify the entity to which the Item 3 supply actually flows. A supply is provided to another entity if, in the performance of a service (or in the doing of some thing), the actual flow of that supply is to an entity that is not the recipient. The contractual flow is to the recipient and the actual flow of the supply is to another entity (the providee).

Accordingly, if the supply is made under an agreement with an Australian resident recipient but the thing supplied is provided, or the agreement requires it to be provided to another entity located outside Australia, subsection 38-190(4) applies and the 'not in Australia' requirement in paragraph (a) of Item 3 is satisfied.

From the information received, you enter into a SLA with Australian agencies. Under the SLA you are required to provide these management services to another entity (the staff representing the Australian agencies and who are located outside Australia). Paragraph (a) of Item 3 is therefore satisfied by virtue of subsection 38-190(4) of the GST Act since the supplies in these SLA are for the purposes of the representatives of the Australian agencies located outside Australia, hence provided to them.

Further when you provide financial reports to the Australian agency and their representative located outside Australia, we consider the provision of the financial report by you is incidental to the provision of the financial services to be provided to the representatives of the Australian agency located outside Australia under the SLA as the provision of the report is merely part of your mechanism of accounting for the consideration you received under the SLA.

Paragraph (b) of Item 3

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). As paragraph (b) 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.

If the supply is made to one entity (that is the recipient) but is provided to another entity, that other entity is the providee entity. We determine whether the effective use or enjoyment of the supply takes place outside Australia with reference to the providee entity and not the recipient entity.

As the supply is provided to the representatives of the Australian agency who are located outside Australia, the effective use or enjoyment of the supply takes place outside Australia. Paragraph (b) of Item 3 is therefore satisfied and the supply is GST-free under Item 3 if the other requirements of Item 3 are satisfied.

Other requirements of Item 3

A supply will not satisfy the requirements of Item 3 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.

From the information received, all the services are performed outside Australia and some of the services may be connected with real property or goods located outside Australia. Accordingly, the other requirements of Item 3 are satisfied.

Further, subsections 38-190(2) and (2A) of the GST Act do not negate the GST-free status of the supply.

Summary

The supply of services you made under the SLA is GST-free under item 3 in the table in subsection 38-190(1) of the GST Act by virtue of subsection 38-190(4) of the GST Act.

Further, the supply of services under the SLA is GST-free under item 1 in the table in subsection 38-190(1) of the GST Act where these services are directly connected with goods or property located outside Australia.