Edited version of private ruling

Authorisation Number: 1011699413776

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Ruling

Subject: GST and supply of services

Question

Is the supply of services by the Australian entity to the overseas company GST-free under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice

From the information received, the Australian entity is making three specific supplies to the overseas company and they are:

1. Supply of product training to stockist's staff. This supply is a taxable supply under section 9-5 of the GST Act;

2. Supply of presentation and promotion of the overseas company's products. This supply is GST-free under paragraph (a) of item 2 in the table in subsection 38-190(1) of the GST Act; and

3. Supply of merchandising and processing reorders for current stockists. This supply is a taxable supply under section 9-5 of the GST Act.

Relevant facts

You are an Australian individual and your business activity is to promote products in outlets throughout Australia. You do not handle distribution or sale of the products that you promote.

You supply your services to an overseas company, and have provided us with a copy of the draft agreement you have with them.

You have provided the following information:

§ the overseas company has no branch or subsidiary company in Australia and is not registered for the Australian GST.

§ you supply the following services to the overseas company:

1. Hourly rate for labour when conducting product training and product demonstrations.

You provide the product training and demonstrations to stores that stock the range of the overseas company's products and require their staff to be competent in selling the products. The store managers request this service.

Product training is given to staff so that the staff can understand the features and benefits of recommending the products to their customers. The training is conducted within the store that retails the products, often in the front of shop and sometimes in training room on the store's premise.

2. Presentation and promotion of products in stores to gain new stockists. You receive a commission for this task which is based on percentage of the first order placed by the stockist with the Australian distributor.

The overseas company advises you the type of stores that they would like to have for stocking their products. You use this information to select the stores which would be best to approach to demonstrate and promote the range to as you have local knowledge of these stores.

All product presentations are done within the targeted store.

3. Merchandising and processing reorders for current stockists. You receive a commission for this task which is based on percentage of any orders placed by the stockist with the Australian distributor.

All stockists of the products are visited to receive support and the frequency is determined by the overseas company.

You call upon the store in person to assist with merchandising which includes cleaning the stock. The main aim of the merchandising is to improve the image of the brand in the store. You receive specifications from the overseas company on how to position the products on the shelf in the order that one would use them and you will check that the current stockist's products sit on the shelf in the correct order as per specifications received. Often products sitting on the stockists' shelves may be dusty and you will dust them when positioning them on the shelf.

You also ensure that the store has posters and brochures on display to promote the brand within the store. The overseas company send you the posters and brochures and you keep a stock pile of these on hand to supply stores free of charge.

You also monitor the products in the store while positioning the products on the shelf. Where you notice that the visited store requires additional stock while merchandising the products, you alert the store manager that they should look at placing an order for additional stock. If the store manager wishes to order stock then they themselves will place an order with the Australian distributor who manages the replenishment of the overseas company's products. The store has an account with the Australian distributor.

All orders are between the stockist and the Australian distributor. You play a support role only and do not hold stock, invoice stock or have stockist account. On occasion upon the request of the store manager you will fax an order to the Australian distributor on their behalf. The Australian distributor has no contact with you and you have never spoken with anyone from this company.

§ the overseas company may also call on you to promote their products to the end consumer within a store. This would entail setting up a store (which is a current stockist) with a small display. The aim is to encourage the end consumer to try the product and to make a purchase from the store. The overseas company is the one that decides which store will receive this service and then request you to provide it to the determined store.

§ the service you provide to department stores is set by the overseas company. You are given details of the store and the hours required to be covered. You attend the store and talk to the customers coming into the store. The aim is to encourage the end consumer to try the product, and give them information about the products and the overseas company. You encourage the end consumer to make a purchase from the store. You are paid at an hourly rate for this service.

§ you work directly with the overseas company and receive instructions from them for the provision of your services. You do not carry goods or invoice goods for the overseas company.

§ the Australian distributor provides the overseas company with a list of all orders they have taken at the end of each month. The overseas company advises you of the sales so that you can raise an invoice to them.

Reasons for decisions

Characterisation of supplies

A supply may be characterised as consisting of one or more things or parts. That is the supply may be regarded as commercially distinct in its own right or it may be regarded as having several identifiable parts.

Taking into consideration all the facts given, we consider that there are three equally dominant purposes (with each having an aim in itself) within the agreement you have with the overseas company and these supplies of services need to be individually recognised. The three supplies you are making are:

1. product training to stockist's staff;

2. present and promote the overseas company's products; and

3. merchandise and process reorders for current stockists.

The next step is to determine the GST status of these three supplies:

GST status of the three supplies

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

a) you make the supply for consideration;

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

c) the supply is connected with Australia; and

d) 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 will satisfy paragraphs 9-5(a) to 9-5(d) of the GST Act when you make these three supplies of services to the overseas company as:

a) you make the supply for consideration;

b) the supply is made in the course of an enterprise (business) that you carry on;

c) the supply is connected with Australia as you make the supply through a business that you carry on in Australia; and

d) you are registered for GST.

However, these three supplies of services are not a taxable supply to the extent that they are GST-free or input taxed.

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

GST-free supply

Subsection 38-190(1) of the GST Act specifies the circumstances where the supply of things other than goods or real property, for consumption outside Australia is GST-free.

Of particular relevance to your three supplies is item 2 in the table in subsection 38-190(1) of the GST Act (Item 2).

Item 2 provides that a supply that is made to a non-resident who is not in Australia when the thing supplied is done will be GST-free where:

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.

Accordingly, where the provisions in either (a) or (b) above are met, the supply will be GST-free if the non-resident is not in Australia when the thing supplied is done.

Not in Australia in relation to the supply

For a supply to be GST-free under Item 2, there is a precondition that the non-resident must not be in Australia in relation to the supply when the thing supplied is done.

Where the thing supplied is a service, when the service is done refers to the period of time during which the service is performed.

Goods and Services Tax Ruling GSTR 2004/7 (available at www.ato.gov.au) provides guidance on when a non-resident is not in Australia when the thing supplied is done.

A non-resident company is in Australia if the company carries on its business or 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.

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.

Paragraph (a) of Item 2

The requirements in paragraph (a) are 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.

Goods and Services Tax Ruling GSTR 2003/7 (available at www.ato.gov.au) provides guidance on when a supply is physically performed on goods and when a supply is directly connected with real property.

A supply is a supply of work physically performed on goods where something is done deliberately to the goods to change them or to otherwise affect them in some physical way. The repair of goods is an example of work that is specifically performed on goods.

For a supply to be a supply of work physically performed on goods, the wok physically performed does not have to bring about a fundamental change to the attributes of the goods. For example, cleaning goods is a supply of work physically performed on goods even though the cleaning does not make them into fundamentally different goods - the change is simply the difference between dirty goods and clean goods.

Where activities do not change or affect goods in a physical way, there is no supply of work physically performed on goods. For example, a supply of transporting goods is not work physically performed on goods because the supply only changes the location of the goods, not the goods themselves.

Paragraph (b) of Item 2

Under paragraph (b) of Item 2, a supply other than goods or real property is GST-free if the non-resident acquires the services in carrying on their business and is neither registered nor required to be registered for GST.

The supplier must be satisfied, on reasonable grounds that the non-resident is not required to be registered for GST before they can treat their supply as GST-free under paragraph (b) of Item 2. The supplier can check the GST registration status of an entity that they deal with by checking the Australian business register at www.abr.gov.au.

Where the supplier is not in a position to be aware of these circumstances, enquiries should be made of the non-resident. The Commissioner accepts that reasonable grounds to be satisfied, if the non-resident has provided a written statement, declaring that they are not required to be registered. This is only accepted where the supplier has no reason to believe the statement is not accurate.

Limitation - subsection 38-190(3) of the GST Act

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 arrangement 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.

Goods and Services Tax Ruling GSTR 2005/6 (available at www.ato.gov.au) provides guidance on the application of subsection 38-190(3) of the GST Act.

Subsection 38-190(3) of the GST Act applies if there is a supply of something, being a supply that is made to a non-resident and covered by Item 2, and the same supply is provided, or is required to be provided to another entity in Australia.

The word 'provided' is used in subsection 38-190(3) of the GST Act to contrast with the term 'made' in Item 2. In the context of section 38-190 of the GST Act, 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.

Accordingly, a supply is provided to another entity if the contractual flow is to one entity (the non-resident recipient) while the actual flow of that supply (for example, the doing of the thing supplied) is in whole or in part, to another 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 entity) and the actual flow of the supply is to another entity.

A clear understanding of the exact nature of the supply is essential in determining whether that supply is provided to another entity. It is only by having regard to what is in substance and reality being supplied that it is possible to identify to which entity that supply is provided.

The focal point in working out whether a supply is provided to another entity is the facts and circumstances of the doing of the thing supplied. By the supplier examining what it is required to do and in what circumstances, the supplier is able to objectively determine to whom the supply is provided.

Where the recipient is a company with employees in Australia, it is necessary to consider whether the supply is provided to the employees. We consider that a supply is provided to an employee of a company, if the supply is of a kind that must be rendered or received by the employee such as training services or the supply is personal to the employee.

Supply of product training to stockist's staff

From the facts given, this supply satisfies the requirements of Item 2 as:

§ the overseas company is a non-resident company that has no presence in Australia and does not carry on their business activity through a subsidiary or branch in Australia. As such the overseas company is not in Australia in relation to your supply of services. The supply is therefore made to a non-resident that is not in Australia at the time of the supply; and

§ the supply of product training services is neither a supply of work physically performed on goods situated in Australia when the training is done nor a supply directly connected with real property situated in Australia.

However, the supply is not GST-free to the extent that subsection 38-190(3) of the GST Act negates that GST-free status.

From the facts given, subsection 38-190(3) of the GST Act will negate the GST-free status of the supply as:

§ you make this supply under an agreement with the non-resident Antipodes; and

§ when you conduct the product training, the actual training services are provided to the staff of the stockists who are in Australia since they are the one in receipt of the product training.

Your supply of product training to stockist's staff is therefore not GST-free under Item 2 by virtue of subsection 38-190(3) of the GST Act. Your supply is a taxable supply and you will liable to pay GST on this supply.

Supply of presenting and promoting the overseas company's products

From the facts given, the supply is made to a non-resident that is not in Australia at the time of the supply and this supply satisfies the requirements of paragraph (a) of Item 2 as:

§ paragraph 142 of GSTR 2003/7 provides that a supply of advertising is about conveying the advertising message. Even though the subject matter of the advertisement may be goods or real property, this does not establish a direct connection with those underlying things. Although the advertising is caused by a need arising in relation to the goods or real property and would not occur but for the goods or real property, this does not make the supply of advertising directly connected with the goods or real property. This is because an advertising supply is directly connected with all the things necessary for the conveying of the message. Its immediate object is not to effect the sale of the goods or real property but the conveying of the message.

Accordingly, when you present and promote the overseas company's products, this 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.

However, the supply is not GST-free to the extent that subsection 38-190(3) of the GST Act negates that GST-free status

From the facts given, subsection 38-190(3) of the GST Act is not applicable as when you present and promote the products to potential customers (stores and end consumers), it is the overseas company that is receiving this service and not the potential customers. The potential customers are acquiring information on the products during the promotion or presentation.

Your supply of presenting and promoting the overseas company's products in Australia is GST-free under paragraph (a) of Item 2. You are not liable to pay GST on this supply.

Supply of merchandising and processing reorders for current stockists

From the facts given, this supply satisfies the requirements of Item 2 as:

§ the supply is made to a non-resident that is not in Australia at the time of the supply; and

§ you advised that the main aim of the merchandising is to improve the image of the brand in the stores that are currently selling the overseas company's products. You will visit them to merchandise the products in these stores, that is check the products are positioned correctly as per specifications received from the overseas company, dust them if dirty, have brochures and posters in display for the brand in the store. You will also notify the managers of the stores where you notice that additional stock is required while performing the merchandising and upon their request, fax their orders to the Australian distributor on their behalf.

In this circumstance, we consider that you are making a supply of services that are not performed on goods though they are directly connected to goods when providing the supply of merchandising and processing reorders to the current stockists. The dusting of the products is part of improving the image of the brand in the stores and therefore incidental to the merchandising (positioning of the products on the shelf in the stores).

Accordingly, the supply of merchandising services and processing reorders is neither a supply of work physically performed on goods situated in Australia when the services are done nor a supply directly connected with real property situated in Australia.

However, the supply is not GST-free to the extent that subsection 38-190(3) of the GST Act negates that GST-free status.

In this circumstance, subsection 38-190(3) of the GST Act will negate the GST-free status of the supply as:

§ you make this supply under an agreement with the non-resident Antipodes; and

§ you are providing your supply to another entity in Australia as it is the Australian current stockists that are receiving your supply.

Your supply of merchandising and processing reorders for current stockists is therefore not GST-free under Item 2 by virtue of subsection 38-190(3) of the GST Act. Your supply is a taxable supply and you will liable to pay GST on this supply.

Summary

You are making three specific supplies to the overseas company and they are:

1) Supply of product training to stockist's staff. This supply is a taxable supply under section 9-5 of the GST Act;

2) Supply of presentation and promotion of the overseas company's products. This supply is GST-free under paragraph (a) of item 2 in the table in subsection 38-190(1) of the GST Act; and

3) Supply of merchandising and processing reorders for current stockists. This supply is a taxable supply under section 9-5 of the GST Act.