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Subject: supply of insurance and administration services

Question 1:

Is the supply of public and products liability insurance by an overseas underwriter to a facilitator a taxable supply within the meaning of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer:

Yes, the supply of public and products liability insurance by an overseas underwriter to a facilitator is a taxable supply within the meaning of section 9-25 of the GST Act. As that supply is made by a non-resident (the overseas underwriter) through a resident agent (X Ltd) the GST on that supply is payable by X Ltd under paragraph 57-5(1)(a) of the GST Act.

Question 2:

Is the supply of administration services by X Ltd to the overseas underwriter a GST-free supply?

Answer:

Yes, the supply of administration services by X Ltd to the overseas underwriter is a GST-free supply.

Relevant facts and circumstances:

The parties:

X Ltd is an Australian not-for-profit body which is registered for GST .)

X Ltd obtained the relevant licence in order to provide facilitators with public liability insurance obtained under a Master Policy with the overseas underwriter.

Y Ltd is a global wholesale and reinsurance broker which has its headquarters overseas.

The overseas underwriter underwrote 100% of the risk under the Master Policy.

Z Ltd is the managing agent for the overseas underwriter.

The Master Policy:

The Master Policy consists of a Schedule plus a Liability Policy issued by the overseas underwriter.

The Schedule commences with the Risk Details, including the type of insurance policy (public and products liability insurance), the insured (X Ltd, the facilitators X Ltd's volunteers, servants, agents and employees), the period, and the interest, i.e.

The Risk Details state that there is a commission of Y% of the gross premium. X Ltd deducts this from the premium received by X Ltd from a facilitator before remitting the balance to the overseas underwriter.

The Schedule shows that 100% of the insurer's liability has been underwritten by the overseas underwriter.

The Fiscal and Regulatory section of the Schedule states that X Ltd is the 'Overseas Broker'.

The Liability Policy section of the Master Policy sets out the coverage, exclusions and conditions of the agreement between the overseas underwriter and X Ltd.

Evidence of Cover/tax invoice:

X Ltd issues a document entitled 'Public Liability Insurance Evidence of Cover' to the facilitator. That document bears X Ltd's letterhead and sets out the insurance policy certificate number, the period of insurance, and the amount payable by the facilitator That amount includes the premium, stamp duty on the premium, a 'X Ltd broker fee', and GST on the X Ltd broker fee. The Evidence of Cover is also a tax invoice issued by X Ltd in respect of the X Ltd broker fee as it includes the words 'tax invoice' and X Ltd's ABN.

The reverse of the Evidence of Cover' contains twelve paragraphs addressed to the facilitator and entitled 'Important Information about Your Insurance'.

Letter from Z Ltd:

A letter from Z Ltd, the managing agent for the overseas underwriter, states that X Ltd does not have authority under the Master Policy to bind the overseas underwriter and that all insurance cover is subject to referral to Y Ltd 'prior to binding'.

Further information provided by X Ltd:

After the ruling request was lodged X Ltd advised that X Ltd sends Y Ltd an e-mail each business day with the details of facilitators requiring insurance under the Master Policy and that Y Ltd then responds by e-mail with instructions to X Ltd to issue Evidence of Cover/tax invoices to those facilitators which the overseas underwriter has agreed to cover under the Master Policy. X Ltd also advised that X Ltd issues 95% of Evidence of Cover/tax invoices to facilitators by post and that the rest are issued to facilitators by e-mail.

X Ltd advised that the only remuneration which X Ltd receives from the overseas underwriter is the commission which is included in the premium stated on the face of the Evidence of Cover/tax invoice, collected by X Ltd from each facilitator, and deducted by X Ltd before X Ltd remits the balance of the premium to Y Ltd.

X Ltd also advised that X Ltd does not have either office space or staff which is specifically dedicated to the business of the overseas underwriter and that arranging insurance for facilitators is just one of several activities undertaken by X Ltd. Nor does X Ltd display the overseas underwriter's sign or logo at X Ltd's premises.

Reasons for decision:

Question 1:

Summary:

The supply of insurance is a taxable supply within the meaning of section 9-5 of the GST Act as it is:

o made for consideration (i.e. the premium);

o made in the course or furtherance of an enterprise carried on by the overseas underwriter;

o connected with Australia under paragraph 9-25(5)(a) of the GST Act, i.e. 'the thing is done in Australia' because the last act necessary to create a binding contract (i.e. communication to a facilitator of the overseas underwriter's acceptance of the facilitator's offer) is performed in Australia; and

o the overseas underwriter is liable to be GST registered as it exceeds the registration turnover threshold as a result of supplies of insurance to facilitator's being connected with Australia.

As the supply of insurance is a taxable supply made by a non-resident (the overseas underwriter) through a resident agent (X Ltd), section 57-5 of the GST Act provides that the GST on that taxable supply is payable by X Ltd and not payable by the UL underwriter.

Detailed reasoning:

Subsection 7-1(1) of the GST Act provides that GST is payable on taxable supplies and taxable importations. Section 9-5 of the GST Act provides that an entity makes a taxable supply if the entity makes the supply for consideration, in the course or furtherance of an enterprise that that entity carries on, the supply is connected with Australia, and the entity is registered for GST or required to be so registered.

In the present case the supply of insurance to a facilitator is made for consideration (as the premium appears on the Evidence of Cover/tax invoice) and is made in the course of an enterprise carried on by the overseas underwriter (as the definition of 'enterprise' in section 9-20 of the GST Act includes an activity done in the form of a business). It is less clear whether that supply is connected with Australia.

Section 9-25 of the GST Act provides rules for determining whether a supply is connected with Australia. Those rules vary according to whether the relevant supply is a supply of goods, real property, or a supply of anything other than goods or real property.

Supply by way of creation of a right:

Goods and Services Tax Ruling GSTR 2003/8 states (Para 95) that when an insurer and an insured enter into a contract of insurance the insurer makes a supply of creation of a right:

The general law recognises that what an insured obtains under a contract of insurance is a chose in action. Where, under the contract of insurance, the insurer agrees to compensate the insured for a loss that the insured may sustain through the happening of an event, this chose in action is a right to be indemnified if the insured event occurs. There is a supply by way of a creation of a right when the contract of insurance is entered into.

We therefore consider that the supply made by the overseas underwriter to a facilitator under the Master Policy is a supply of anything other than goods or real property for the purposes of subsection 9-25(5) of the GST Act. Such a supply is connected with Australia if either of the following tests in subsection 9-25(5) of the GST Act is satisfied:

(a) the thing is done in Australia; or

(b) the supplier makes the supply through an enterprise that the supplier carries on in Australia.

Paragraph 9-25(5)(a) the thing is done in Australia:

'Thing' is defined in section 195 of the GST Act as anything that can be supplied or imported. Goods and Services Tax Ruling GSTR 2000/31 states that 'thing' includes a right (Para 62) and that the meaning of 'done' depends on the nature of the thing supplied and can mean performed, executed, completed or finished, depending on what is supplied (Para 64).

GSTR 2000/31 provides the following example of where the supply of a right which is granted by way of agreement is 'done' (Para 76):

If, for example, a right is granted under an agreement to another to use certain intellectual property, the granting of that right to another is done where the agreement is made. If the agreement is made in Australia, the supply of that right is connected with Australia. If the agreement is made outside Australia, the supply is not connected with Australia under paragraph 9-25(5)(a). However, even if the agreement is made outside Australia the supply is connected with Australia under paragraph 9-25(5)(b) if the supplier makes the supply through an enterprise that the supplier carries on in Australia (refer paragraphs 78 to 89 below).

Footnote 27 to Para 76 in GSTR 2000/31 states:

A contract is made where the last act necessary to create a binding contract is performed (see W. A. Dewhurst and Co. Pty. Ltd. v. Cawrse [1960] V.R. 278 at 282).

At issue in W A Dewhurst was whether the Supreme Court of Victoria had jurisdiction under section 11(1)(b) of the Service and Execution of Process Act (Vic) in respect of a writ in which the plaintiff claimed damages for breach of a contract to supply meat to the plaintiff on the ground that the meat was not of merchantable quality. The plaintiff submitted that the Supreme Court of Victoria did have jurisdiction because the contract for sale of the meat was made or entered into in Victoria. However Dean J held that the contract was made in South Australia because the plaintiff (who was in Victoria) communicated acceptance of the defendant's offer to supply the meat by telephone to the defendant (who was in South Australia). Dean J set out the law as to where a contract is made where acceptance of an offer is communicated either by post or by telephone or teleprinter (p. 189):

Plaintiff has to make it appear that the contract for the sale of the meat in question was made in Victoria. This means that the offer was accepted here. It has been held recently by the Court of Appeal that the law applicable to the making of a contract by an acceptance by post or telegram is not the same as where the acceptance is by teleprinter, by telephone, or by any other instantaneous means. In the case of an acceptance by post, the acceptance is in the usual case completed by posting the letter of acceptance, even though it never reaches the offeror. The contract is made where the letter of acceptance is posted; but where acceptance is by telephone or teleprinter there is no acceptance until it is received. See Entores Ltd v Miles Far East Corporation, a case where a contract resulted from messages transmitted instantaneously between the parties by teleprinter. Denning LJ said: 'When a contract is made by post it is clear law throughout the common law countries that the acceptance is complete as soon as the letter is put into the post box, and that is the place where the contract is made'. His Lordship then turned to the case of instantaneous communications and said that the rule is different: 'The contract is only complete when the acceptance is received by the offeror; and the contract is made at the place where the acceptance is received'.

How a contract of insurance is made:

Creation of a binding contract requires offer and acceptance. In the case of an insurance contract, this is outlined in Halsbury's Laws of England (Fourth Edition, 2003 Reissue, Volume 25, Paras 70 and 71):

A contract of insurance, like any other contract, is created where there has been an unqualified acceptance by one party of an offer made by the other…Normally…the formal offer comes into existence when a proposal form is completed and submitted to the insurers by the proposer…The proposer, by completing, signing and submitting the form, commits himself to those terms and undertakes to pay whatever the insurers may charge by way of premium.

…

Unqualified acceptance of an insurance proposal in the normal form completes the contract; the insurers are bound to issue a policy, and the proposer to accept and pay the premium, in accordance with the stipulations of the proposal….In the normal case there is a conclusive acceptance of a proposal if a policy is issued in accordance with the proposal…

Where a contract of insurance is made with a facilitator under the Master Policy:

In the present case a facilitator makes an offer to the overseas underwriter via an Australian broker (X Ltd) and an overseas broker (Y Ltd). Halsbury states that if a person wishing to obtain non-marine insurance employs an insurance broker, as distinct from going direct to the insurers or their agents, the broker is his agent (Fourth Edition, 2003, Vol 25, Para 69) and Goods and Services Tax Ruling GSTR 2000/37 states that a broker generally acts on behalf of the insured (i.e. the educator), although a broker can also act as agent for the insurer if appropriately authorised (Para 10):

An intermediary may be authorised by another party to do something on that party's behalf. Generally, the intermediary is called an agent. The party who authorises the agent to act on their behalf is called the principal. For an insurance policy, the intermediary is often called an insurance broker. The party who authorises an insurance broker to act on their behalf is called the insured (the recipient of the supply). Also, if appropriately authorised, an insurance broker could act as an agent on behalf of the insurer.

In the present case the Evidence of Cover/tax invoice indicates that X Ltd is acting as the facilitator's broker because X Ltd charges the facilitator a 'X Ltd broker fee' (to which GST is added). The Evidence of Cover/tax invoice is also issued by X Ltd (as agent for the overseas underwriter) to the facilitator in respect of the supply of insurance by the overseas underwriter to the facilitator as it also sets out the premium and stamp duty on the premium (but no GST on the premium). We note that subsection 153-25(1) of the GST Act provides:

If an insurer supplies an insurance policy through an insurance broker acting on behalf of the recipient of the supply, this Subdivision has effect as if the supply were made through the insurance broker as agent of the insurer.

and section 153-15 of the GST Act provides that if an entity makes a taxable supply through an agent either the entity or the agent may issue the relevant tax invoice.

Z Ltd, the managing agent for the overseas underwriter, stated in a letter annexed to the ruling request that X Ltd does not have authority to bind the overseas underwriter and that all insurance is subject to referral to Y Ltd 'prior to binding'. The ruling request described the process as follows:

X Ltd is required to send to the overseas underwriter (through Y Ltd) on a daily basis, a list of the [facilitators] who have approached X Ltd for insurance and who fit the Master Policy requirements. The overseas underwriter then advise whether they accept these facilitators and whether they will bind cover. Once the overseas underwriter advise they will bind cover for these members they advise X Ltd to issue an Evidence of Cover document.

The Evidence of Cover/tax invoice supplied with the ruling request clearly communicates to the facilitator that the facilitator's offer has been accepted by the overseas underwriter as it is addressed to the facilitator, sets out on its face an 'Insurance Policy Certificate Number' and 'Period of Insurance', states:

We have enclosed a copy of the policy wording

and sets out the 'Terms of the Insurance Contract' on the reverse.

X Ltd advised that X Ltd sends 95% of Evidence of Cover/tax invoices to facilitators by post. Those Evidence of Cover/tax invoices must be posted in Australia because X Ltd advised that they are issued by X Ltd following receipt of instructions by e-mail from Y Ltd.

As the overseas underwriter's acceptance of the facilitator's offer is communicated to the facilitator by post, the rule in A W Dewhurst that a contract is made where the communication of acceptance is posted applies. We therefore consider that the agreement for the supply of insurance to a facilitator under the Master Policy is made in Australia and 'the thing is done in Australia' for the purposes of paragraph 9-25(5)(a) of the GST Act. Consequently the supply of insurance is connected with Australia. We consider that the present case is similar to Example 34 in GSTR 2000/31 where an offshore entity grants a right by written contract which is made in Australia:

203. Whether a right is created, granted, transferred, assigned or surrendered in Australia will depend on how, in any given case, the creation, grant, transfer assignment or surrender is effected. For example, if the right to use intellectual property is granted by the execution of a written contract, the grant of that right is done in Australia if that contract is made in Australia.

Example 34 - Right to use intellectual property provided in Australia

204. Boffin Co (a US resident) grants Cyber Co (an Australian resident) the right to use the Boffin II software in Australia for 3 years. The right to use the intellectual property is granted under a written agreement. That agreement is made in Australia and accordingly the granting of the right is a supply that is connected with Australia.

X Ltd advised that X Ltd issues approximately X% of Evidence of Cover/tax invoices to facilitators by e-mail. Cheshire & Fifoot's Law of Contract (9^th ed, 2008, Para 3.44) suggests that in cases involving communication of acceptance by e-mail either the 'postal rule' or the rule in A W Dewhurst applicable to communication of acceptance by instantaneous means such as telephone or telex (i.e. the contract is made at the place where communication of acceptance is received) could apply:

Problems such as the 'battle of the forms' can arise and are no more easily solved in electronic transactions that they are in more conventional agreements. Similarly a 'postal rule' problem could arise but is probably dealt with by the electronic transactions legislation, discussed below. This may seem odd in the context of electronic communications, but it arises because the network may include electronic 'mailboxes' that have to be 'cleared' from time to time. There are in fact two mailboxes, the sender's and the recipient's. A message is generated and deposited in the sender's mailbox. It is then transferred to the recipient's mailbox. The recipient periodically clears its mailbox. The question arises: when is the message effectively communicated? If the message is an acceptance of an offer, when is it effective? These questions have not been tested in the courts…Perhaps the postal rule will have a renaissance. On the other hand, custom in relation to electronic commerce may establish the rule that communication is essential and this would be a more sensible approach.

Whether the postal rule or the instantaneous rule applies where acceptance is communicated by e-mailing the Evidence of Cover/tax invoice to a facilitator, the contract of insurance is made in Australia (because that is where communication of acceptance is posted to and received by the educator) and the supply of insurance is connected with Australia.

We have also considered whether a qualification to the principle stated above that an insurance contract is made by unqualified acceptance by the insurer of the insured's proposal applies. That qualification applies where the insurance contract is an open cover insurance contract, as described in BP plc v GE Frankona Reinsurance [2003] EWHC 344 Creswell J (Para 17)

The open cover was a facultative/obligatory contract. It was a standing offer whereby the defendants [i.e. the insurers] agreed to accept liability in respect of any declaration made within the terms of the cover. BP was free to choose in its own interest which projects to declare to the Open Cover, and which projects to insure under other arrangements or not at all. The defendants were bound to accept liability in respect of all of BP's declarations which fell within the terms of the cover.

Creswell J outlined the legal principles governing how a contract is made under an open cover and declaration regime (Paras 82-85):

The Open Cover was a standing offer whereby the defendants agreed to accept liability in respect of any declarations made within the terms of the cover…When a declaration was made by the claimant [i.e. the insured] under the Open cover within the terms of the cover , a contractually binding obligation was created…A declaration within the terms of the cover constituted an acceptance of the standing offer contained in the Open Cover…If the risk is declared is within the terms of the cover there is no need for any specific acceptance by the underwriter, but the underwriter is not bound until receipt of the declaration…A declaration serves to inform the underwriter of what risks have attached to the cover and enables him to calculate as necessary and collect the premium due.

In our view the terms of the Master Policy do not provide open cover, i.e. a standing offer to cover all facilitators which X Ltd declares to the overseas underwriter. The letter from the managing agent (Z Ltd) states that the Master Policy does not allow X Ltd to bind the overseas underwriter and that all cover is subject to referral to Y Ltd.

X Ltd's submissions and previous rulings issued by the ATO::

X Ltd made the following submission in relation to paragraph 9-25(5)(a) of the GST Act:

The 'thing,' being the provision of insurance, is 'done' outside Australia because the last act to create a binding insurance contract is undertaken by [the overseas underwriter] in London.

In our view the analysis in A W Dewhurst referred to in GSTR 2000/31 indicates that the last act necessary to create a binding contract is communication of acceptance of the offer and Halsbury states that, in the case of a contract of insurance, there is a conclusive acceptance of a proposal if the insurer issues a policy in accordance with the proposal (Vol 25, Para 71). In the present case the overseas underwriter (via Y Ltd) instructs X Ltd to issue to a facilitator the Evidence of Cover/tax invoice with a copy of the policy wording enclosed. Most of those documents are sent to facilitators by post and are posted by X Ltd in Australia. Under the rule in A W Dewhurst applicable to communication of acceptance by post, the contract of insurance between the overseas underwriter and the facilitator is made at the place where the Evidence of Cover/tax invoice is posted, i.e. in Australia. To the extent that X Ltd sends those documents by e-mail, either the postal rule applies or the rule for instantaneous communication of acceptance applies and, under either rule, the contract is made in Australia. We therefore consider that the supply of insurance is connected with Australia under paragraph 9-25(5)(a) of the GST Act.

X Ltd submitted that GST private ruling (Authorisation Number 12700) was distinguishable on the ground that there the ATO ruled that a supply of insurance was connected with Australia because an Australian entity had the power to bind the offshore insurer in relation to that supply, whereas X Ltd merely facilitates the supply of insurance by the overseas underwriter to a facilitator. GST private ruling (Authorisation Number 12700) involved a Master Policy issued by Z Ltd to an Australian company (A) which sold mobile telephone airtime plans to subscribers and provided subscribers' details to another Australian company (B) which administered the Master Policy on behalf of Z Ltd. A also issued a brochure to each subscriber which stated that the subscriber's name had been added to the Master Policy and that the subscriber was insured against loss or damage to the subscriber's mobile telephone provided the subscriber had paid the premium. The ATO ruled that the supply of the insurance was connected with Australia under paragraph 9-25(5)(a) of the GST Act. In our view GST private ruling (Authorisation Number 12700) involved an open cover insurance policy as discussed above, i.e. the contract of insurance was formed when A presented the subscriber's details to B (which administered the Master Policy on behalf of Z Ltd). As that occurred in Australia, the supply of insurance was a thing done in Australia and deemed by paragraph 9-25(5)(a) of the GST Act to be connected with Australia. In our view the Master Policy in the present case is not an open cover policy, but the supply of insurance is nevertheless a thing done in Australia because communication of acceptance occurs in Australia.

X Ltd also referred to GST private ruling (Authorisation Number 12699). There the ATO ruled that a supply of insurance was not connected with Australia. A company located overseas (X) ascertained the terms on which oversee underwriters would insure an Australian entity in respect of the risk, e-mailed those terms to X's representative in Australia (Y) who passed them on to the Australian entity's broker. If the Australian entity's broker communicated acceptance of those terms to Y then Y sent an e-mail to X asking that cover be effected. X then posted a copy of the policy from overseas to the insured in Australia. It appears that the ATO ruled that the supply of insurance was not a thing done in Australia because X issued the policy overseas and posted it to Australia. In the present case the Evidence of Cover/tax invoice (with the policy wording enclosed) is posted in Australia.

Paragraph 9-25(5)(b):

GSTR 2000/31 states that even if a supply is not a thing done in Australia, it can nevertheless be connected with Australia pursuant to section 9-25(5)(b) of the GST Act:

However, even if the agreement is made outside Australia the supply is connected with Australia under paragraph 9-25(5)(b) if the supplier makes the supply through an enterprise that the supplier carries on in Australia (refer paragraphs 78 to 89 below).

Subsection 9-25(6) of the GST Act provides that an enterprise is carried on in Australia if the enterprise is carried on through a permanent establishment (as defined in section 6 of the Income Tax Assessment Act 1936) or a place that would be such a permanent establishment if paragraph (e), (f), or (g) of that definition did not apply. GSTR 2000/31 states (Paras 87 and 88):

The definition of permanent establishment for the purposes of subsection 9-25(6) is wider than the definition of permanent establishment found in subsection 6(1) of the Income Tax Assessment Act 1936. This is because the exclusions from a permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936 - paragraphs (e), (f) and (g) are not similarly excluded from the definition of permanent establishment for the purposes of subsection 9-25(6).

Thus, permanent establishment for the purposes of subsection 9-25(6) means a place at or through which a person carries on any business and, without limiting the generality of the foregoing, includes:

(a) a place where the person is carrying on business through an agent;

(b) a place where the person has, is using or is installing substantial equipment or substantial machinery;

(c) a place where the person is engaged in a construction project; and

(d) where the person is engaged in selling goods manufactured, assembled, processed, packed or distributed by another person for, or at or to the order of, the first-mentioned person and either of those persons participates in the management, control or capital of the other person or another person participates in the management, control of both of those persons - the place where the goods are manufactured, assembled, processed, packed or distributed.

A place at or through which Z Ltd carries on business:

The 'permanent establishment' definition commences as follows:

'Permanent establishment', in relation to a person…means a place at or through which the person carries on any business…

Taxation Ruling TR 2002/5 refers (Para 18) to the discussion of the first paragraph of the 'permanent establishment' definition in the 2000 Commentaries on the OECD Model Tax Convention on Income and on Capital and states that the words 'a fixed place of business through which the business of an enterprise is wholly or partly carried on' contain the following conditions:

The existence of a 'place of business', i.e. a facility such as premises or, in certain instances, machinery or equipment;

This place of business must be 'fixed', i.e. it must be established at a distinct place with a certain degree of permanence;

The carrying on of the business of the enterprise through this fixed place of business. This usually means that persons who, in one way or another, are dependent on the enterprise (personnel), conduct the business of the enterprise in the State in which the fixed place is situated.

The first two requirements set out above are the existence of a place of business in a distinct place with a degree of permanence. X Ltd's premises satisfy these requirements. The 2000 OECD Commentaries state (Para 4, p. 75) that the term 'place of business' covers any premises used for carrying on the business of the overseas underwriter and that it is immaterial whether the overseas underwriter owns or rents the premises or the premises are otherwise at the overseas underwriter's disposal and that that place of business may be situated in the business facilities of another enterprise. We doubt that X Ltd's personnel conduct the overseas underwriter's business at X Ltd's premises as X Ltd advised that no X Ltd personnel were dedicated to the overseas underwriter's business, although X Ltd deals with all matters relevant to facilitators, including insurance.

Carrying on business in Australia through an agent:

It is also necessary to consider whether X Ltd's premises fall within paragraph (a) of the 'permanent establishment' definition, i.e. a place in Australia where the overseas underwriter is carrying on business through an agent. As noted above, GSTR 2000/37 states that an insurance broker (i.e. X Ltd) generally acts on behalf of the insured although a broker can also act as agent for the insurer (i.e. the overseas underwriter) if appropriately authorised (Para 10).

In the present case X Ltd does act for the overseas underwriter and is remunerated by way of commission. In the ruling request X Ltd advised that X Ltd 'is required' to send the overseas underwriter lists of facilitators who need insurance and fit the Master Policy, that if the overseas underwriter advises X Ltd that the overseas underwriter accepts the risk, X Ltd issues the Evidence of Cover/tax invoice and 'Policy Information' to the facilitator, that X Ltd pays insurance premiums received from facilitators into a separate trust account and deducts a commission for these 'administration services' before remitting the balance to the overseas underwriter. In addition, the Master Policy requires X Ltd to undertake claims administration in accordance with the Claims Handling Procedures, including supplying claims reporting information and forms to facilitators, notifying the overseas underwriter and the third party claims administrator (W Ltd), and referring any renewal to the overseas underwriter where there is a pending Category A claim.

Goods and Services Tax Ruling GSTR 2004/7 lists (Para 281) a number of factors which were applied in Adams v Cape Industries plc [1991] 1 All ER 929, 1014 to determine whether a corporation had a presence in a jurisdiction by reason of having a representative which carried on the company's business from a fixed place in that jurisdiction for more than a minimal time:

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?

X Ltd advised that X Ltd acquired its premises to carry on X Ltd's business, that the overseas underwriter does not reimburse or finance X Ltd except by payment of commission for the administrative services, that the overseas underwriter does not control X Ltd's business, that the insurance is dealt with by X Ltd (which deals with all matters related to facilitators, including insurance), that X Ltd advises facilitators that the insurer is 'Z Ltd insurance' but does not display any Z Ltd name or logo. In our view X Ltd carries on its own business as a principal, and although X Ltd does make contracts with facilitators so as to bind the overseas underwriter, X Ltd requires specific authority in advance to do that.

GSTR 2004/7 also states (Paras 282-3):

If the business of a non-resident company involves the making of contracts for sales, leases or similar, the authority of the agent to conclude contracts in Australia on behalf of the non-resident is an important factor in establishing whether the non-resident is carrying on business in Australia.

If an agent has the power to make contracts on behalf of the non-resident company without seeking the company's approval before binding the non-resident to contractual obligations, this is a factor of great importance in establishing that the agent is carrying on the non-resident company's business. While it is not the sole determinative factor, when coupled with other factors such as the agent displaying the name of the non-resident company on the agent's premises, or the non-resident company reimbursing the rent and staff costs of the agent, there will be little difficulty in establishing that the agent is carrying on in Australia the business of the non-resident. In these circumstances, the non-resident company has, in effect, adopted the agent's place of business as its own, and the non-resident company is in Australia.

The business of the overseas underwriter involves the making of contracts of insurance. X Ltd and the overseas underwriter's managing agent advised that X Ltd does not have the power to make such contracts on the overseas underwriter's behalf without seeking the overseas underwriter's prior approval.

Taking into account the factors referred to above, we consider that the overseas underwriter does not carry on business in Australia through an agent.

Supply made 'through' an enterprise that the supplier carries on in Australia:

Even if the overseas underwriter did carry on an enterprise in Australia within the meaning of subsection 9-25(6) of the GST Act, we doubt that the supply of insurance would be made 'through' that enterprise (as required by paragraph 9-25(5)(b)).

GSTR 2000/31 states (Para 84) that for a supply to be connected with Australia under paragraph 9-25(5)(b) a connection must be established between the Australian permanent establishment and the supply, and (Para 86):

There is no specific set of circumstances which must be satisfied before a supply is connected with a permanent establishment. Rather, each case will be determined on the basis of the individual facts and circumstances. However, some factors that will usually indicate that the supply is made through a permanent establishment include:

· the permanent establishment has the authority to sign contracts or accept purchase orders for the supply;

· the permanent establishment has the authority to make important decisions in respect of the supply;

· the permanent establishment physically makes for example, manufactures or produces, the supply;

· if the supply is a service, the service is provided by the permanent establishment;

· if the supply is the provision of advice or information such as a legal opinion, the permanent establishment provides that advice or information;

· if the supply is the grant, creation, assignment, transfer or surrender of a right, the permanent establishment grants, creates, assigns, transfers or surrenders that right.

Applying the factors listed above which are relevant to the supply of insurance, we consider that X Ltd does not have authority to make important decision in respect of the supply of insurance to a facilitator because X Ltd merely submits a list of facilitators to the overseas underwriter and issues an Evidence of Cover/tax invoice to a facilitator only after the overseas underwriter advises X Ltd that the overseas underwriter will insure a facilitator and instructs X Ltd to issue the Evidence of Cover/tax invoice. For the same reasons we consider that the overseas underwriter, rather than X Ltd, creates the relevant right.

For the reasons set out above, we do not consider that the supply of insurance to a facilitator is connected with Australia under paragraph 9-25(5)(b) of the GST Act, i.e. through an enterprise that the overseas underwriter carries on in Australia.

Is the overseas underwriter required to be registered for GST?

The final requirement in section 9-5 of the GST Act which must be satisfied in order for a supply of insurance to a facilitator to be a taxable supply is that the entity making the supply (i.e. the overseas underwriter) is GST registered or required to be GST registered.

Subsection 184-1(1) provides that 'entity' means, inter alia a partnership and any other unincorporated body of persons.

Section 23-5 of the GST Act provides that an entity is required to be GST registered if the entity is carrying on an enterprise and the entity's GST turnover meets the 'registration turnover threshold', i.e. $75,000 (regulation 23-15.01 of the A New Tax System (Goods and Services Tax) Regulations 1999). Section 188-10 of the GST Act provides that an entity's turnover meets a turnover threshold if that entity's 'current GST turnover' is at or above the turnover threshold and the ATO is not satisfied that the entity's projected GST turnover is below that turnover threshold or the entity's 'projected GST turnover' is at or above the turnover threshold.

Paragraphs 188-15(3)(a) and 188-20(3)(a) of the GST Act provide that supplies which are not connected with Australia are disregarded when calculating 'current GST turnover' or 'projected GST turnover' respectively. Consequently our view that supplies of insurance by the overseas underwriter are connected with Australia impacts calculation of the overseas underwriter's current GST turnover and projected GST turnover. X Ltd advised that there are approximately X facilitators in Australia and the Evidence of Cover/tax invoice shows a premium of $X. On that basis, the overseas underwriter's GST turnover meets the registration turnover threshold, the overseas underwriter is liable to be registered for GST, and the supply of insurance to a facilitator is a taxable supply in respect of which GST is payable.

Division 57 of the GST Act:

The general rule in section 9-40 of the GST Act is that an entity must pay the GST on taxable supplies which that entity makes. However subsection 57-5(1)(a) of the GST Act provides that GST payable on a taxable supply made by a non-resident through a resident agent is payable by the agent and not payable by the non-resident and subsection 57-5(2) provides that section 57-5 has effect despite section 9-40.

Section 195-1 of the GST act defines 'non-resident' as an entity that is not 'Australian resident' and defines 'Australian resident' as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 ('ITAA'). Section 6(1) of the ITAA defines 'resident' in relation to both a person other than a company and a company. Applying that test to the overseas underwriter, there is no evidence that the overseas underwriter is either incorporated in Australia, carries on business in Australia, has its central management and control in Australia, or has its voting power controlled by Australian resident shareholders. Consequently we consider that the supply of insurance to a facilitator is made by a 'non-resident' for the purposes of section 57-5 of the GST Act.

The next issue is whether the supply of insurance to a facilitator is made through a 'resident agent'. 'Resident agent' is defined in section 195-1 as an agent that is an 'Australian resident' (the definition of which has been discussed above - as X Ltd is a company incorporated in Australia, it falls within paragraph (b) of the definition of 'resident of Australia' in section 6(1) of the ITAA.

In relation to Division 57 GSTR 2000/37 states (Paras 45 and 47);

When an agent is authorised to undertake a transaction on behalf of the principal, thereby binding the principal to the legal effects of the transaction, then the transaction is made by the principal through the agent…

When the supply is made through an agent, it is necessary for the agent to make a supply for consideration on behalf of the principal and it can only do that if it has the authority of the principal.

When discussing whether the supply of insurance by the overseas underwriter was connected with Australia as being made through an enterprise carried on in Australia by the overseas underwriter we concluded that the overseas underwriter does not carry on business in Australia through an agent. That was because, where the relevant business involves entering into contracts, the most important factor referred to in GSTR 2004/7 (Para 283) is:

If an agent has the power to make contracts on behalf of the non-resident company without seeking the company's approval before binding the non-resident to contractual obligations, this is a factor of great importance in establishing that the agent is carrying on the non-resident company's business.

and it is clear that X Ltd must obtain the overseas underwriter's approval before accepting a facilitator's offer. The test prescribed in GSTR 2000/37 (Para 45) for Division 57, on the other hand, is whether an agent is:

…authorised to undertake a transaction on behalf of the principal, thereby binding the principal.

We have noted how X Ltd acts for the overseas underwriter and is remunerated by way of commission and referred to the statement in GSTR 2000/37 (Para 10) that an insurance broker can also act as agent for the insurer if appropriately authorised. We therefore consider that X Ltd is the overseas underwriter's agent for the purposes of Division 57. We also consider that, once X Ltd receives an e-mail from Y Ltd instructing X Ltd to issue an Evidence of Cover/tax invoice and policy documents to a facilitator, X Ltd is 'authorised to undertake a transaction on behalf of the principal, thereby binding the principal' as required by GSTR 2000/37. Consequently subsection 57-5(1) is satisfied and GST payable on the supply of insurance to a facilitator is payable by X Ltd.

Question 2

Summary:

The supply of administration services by X Ltd is GST-free under Item 2(a) in subsection 38-190(1) of the GST Act and is not a supply that is provided to another entity in Australia within the meaning of paragraph 38-190(3)(b) of the GST Act.

Detailed reasoning:

Section 9-5 of the GST Act states that a supply which otherwise would be a taxable supply is not taxable to the extent that it is GST-free or input taxed.

In the ruling request it was submitted that three 'administrative services' supplied by X Ltd (.e. receiving premiums, issuing Evidence of Cover notes, and printing and issuing receipts and policy documentation) are GST-free under Item 2(a) in subsection 38-190(1) of the GST Act:

2. 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 nether 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.

Supply made to a non-resident:

Goods and Services Tax Ruling GSTR 2005/6 states that a supply is 'made' to the entity to which that supply flows contractually (Para 60) or which enters into an agreement for the supply (Para 180). In the present case X Ltd stated in the ruling request that X Ltd supplies the administration services to the overseas underwriter and receives the commission from the overseas underwriter in return.

Section 195 of the GST Act defines 'non-resident' as an entity that is not an 'Australian resident'. 'Australian resident is defined in section 195-1 as a person who is a resident of Australia for the purposes of the ITAA. Applying the tests in section 6(1) of the ITAA to the overseas underwriter, there is nothing to indicate that the overseas underwriter is either incorporated in Australia, carries on business in Australia, has its central management and control in Australia, or has its voting power controlled by Australian resident shareholders. Consequently we consider that the supply of administration services is made to a 'non-resident'.

Not in Australia when the thing supplied is done:

GSTR 2004/7 states (Para 199) that, consistent with the view expressed in GSTR 2000/31, if the thing supplied is a service, 'when the thing is done' refers to the period of time during which the service is performed.

GSTR 2004/7 sets out the tests for determining whether an entity is 'in Australia' for the purposes of Item 2 in subsection 38-190(1). We have already discussed those tests in relation to the issue of whether the overseas underwriter carries on an enterprise in Australia and concluded that the overseas underwriter does not have an Australian presence and is not 'in Australia'.

Not a supply of work physically performed on goods situated in Australia:

GSTR 2003/7 states that there is not a supply of work physically performed on goods where activities do not change or affect goods in a physical way:

57. The range of supplies that are directly connected with goods includes supplies of work physically performed on goods. That is, a supply of work physically performed on goods is always directly connected with goods. However, not all supplies directly connected with goods are also supplies of work physically performed on goods. A supply of work physically performed on goods requires a much closer connection with the goods: it requires a physical intervention with the goods. For example, a supply of legal services in preparing an agreement for the lease of goods is directly connected with goods but it is not a supply of work physically performed on goods as there is no physical intervention with the goods.

58. 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 physically performed on goods.

59. In contrast, 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.

As the supply of administration services does not change or affect goods in a physical way, it is not a supply of work physically performed on goods in Australia.

Not a supply directly connected with real property situated in Australia:

Example 25 in GSTR 2003/7 confirms that the supply of public liability insurance is not directly connected with real property in Australia:

Example 25: Supply of public liability insurance

Question: Is this supply of public liability insurance a supply directly connected with real property situated outside Australia?

Answer: No. The supply of public liability insurance relates to the risk of negligent acts that could cause loss, damage or injury to the public. The supply does not protect the value of the real property. It is not directly connected with real property.

If a supply of public liability insurance is not directly connected with real property situated in Australia then the supply of administration services related to such insurance is unlikely to be directly connected with real property situated in Australia.

For the reasons set out above we consider that the supply of administration services is GST-free under Item 2(a) in subsection 38-190(1) of the GST Act.

Subsection 38-190(3):

Subsection 38-190(3) of the GST Act provides that a supply covered by Item 2 in subsection 38-190(1) 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.

GSTR 2005/6 explains the intended operation of subsection 38-190(3) by reference to an Example in the Explanatory Memorandum to the Indirect Tax Consequential Amendments Bill (No. 2) 1999:

184. The requirement that the non-resident is not in Australia when the thing supplied is done is based on the underlying presumption that if the non-resident recipient (that is, the non-resident entity to which the supply is made) is not in Australia at that time, the supply is for consumption outside Australia and should, therefore, be GST-free (provided the other requirements of the item are met).

185. However, if a non-resident enters into an agreement for the supply of a thing, the non-resident is not always the entity to which the supply is provided. If the supply is provided to another entity in Australia, the presumption that the supply is for consumption outside Australia because the non-resident recipient is not in Australia is not sound.

186. Subsection 38-190(3) addresses this circumstance. If the supply is provided (or is required to be provided) to another entity in Australia, subsection 38-190(3) negates the GST-free status that would otherwise apply under item 2. Although the non-resident recipient of the supply is not in Australia, consumption of the supply is considered to be in Australia because the supply is provided to another entity in Australia.

187. The following example is provided in the Supplementary Explanatory Memorandum for the Bill which inserted subsection 38-190(3).

A school in Australia provides tuition to overseas students in Australia. However, it bills the overseas parents of the students directly. As the supply is being made to students in Australia the supply will not be GST-free under item 2 in the table in subsection 38-190(1).

(The example refers to the 'supply... being made' to students. To be consistent with the wording used in subsection 38-190(3) the word 'provided' should have been used instead of 'made.')

188. In that example, non-resident parents contract for the supply of tuition services but other entities, their children, who are in Australia, are provided with the services. The parents have paid for tuition services to be provided to their children in Australia.

GSTR 2005/6 states (Paras 256 -7) that determining the application of subsection 38-190(3) to a supply involves the following process:

First consider whether paragraph 38-190(3)(a) is satisfied (i.e. is the supply under an agreement entered into, directly or indirectly, with a non-resident);

Then determine whether the requirements of paragraph 38-190(3)(b) are satisfied, using a two part process:

· establish whether the supply is provided to another entity; and

· determine whether the supply is provided to that other entity in Australia.

Paragraph 38-190(3)(a):

In our view paragraph 38-190(3)(a) is satisfied. X Ltd advised that X Ltd receives the commission from the overseas underwriter in return for performing the administration services and the Master Policy (to which both the overseas underwriter and X Ltd are parties) provides for payment of the commission (p. 4). GSTR 2005/6 states (Paras 200-1) that an agreement may be written or oral and is entered into directly with a non-resident if the parties to it are the non-resident and the supplier. We have already set out above the reasons why we consider the overseas underwriter to be a non-resident.

Paragraph 38-190(3)(b):

Paragraph 38-190(3)(b) applies where the supply is provided, or the agreement requires it to be provided, to another entity. GSTR 2005/6 explains the meaning of 'provided':

221. 'Provided' is used in subsection 38-190(3) to contrast with the term 'made' in item 2. As indicated by the example in the Supplementary Explanatory Memorandum, (reproduced at paragraph 187), the intention of subsection 38-190(3) is to negate the GST-free status that would otherwise apply to a supply 'made' to a non-resident if that supply is 'provided' to another entity in Australia. In that example, the education services are made to the non-resident parents and provided to the children, each another entity, in Australia.

GSTR 2005/6 states (Para 258) that before it can be determined whether a supply is provided to another entity, the character of the supply must be determined as either a supply of a service, right, or some other thing. We consider the character of administration services to be a supply of services.

GSTR 2005/6 also requires (Para 259) the nature of the supply (i.e. what in substance and reality is being supplied) to be determined. In relation to determining the nature of a supply of services, GSTR 2005/6 states:

283. In the case of other supplies, for example, supplies that involve the supply of legal, accounting, auditing or advertising services, the question of whether the supply is provided to another entity depends on the facts and circumstances in any given case.

284. For example, consider a supply of tax return preparation services made to a non-resident company. If what is really being supplied are services to complete tax returns for particular employees that meet their personal tax obligations, those services are provided to each employee. If, on the other hand, the tax return services are to complete the non-resident company's tax return, meeting its tax obligations, the tax return preparation services are provided to the non-resident company.

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 there is no evidence that the contracting entity (the overseas underwriter) simply contracts and pays for the administration services to be provided to the facilitator and then has no further participation in the provision of the supply. Although the ruling request identified three administration services supplied by X Ltd (receiving premiums, issuing Evidence of Cover, and printing and issuing receipts and policy documentation) the Master Policy suggests that the commission is received by X Ltd in return for a broader range of services such as involvement in claims administration, including supplying claims forms to facilitators, notifying the overseas underwriter and the third party claims administrator, and referring any renewal to the overseas underwriter where a Category A claim is pending. Such supplies are likely to involve ongoing participation by the overseas underwriter. We therefore consider that the supply of administration services made by X Ltd is not provided to another entity for the purposes of subsection 38-190(3).

As we have concluded that the supply of administration services is not provided to another entity, it is unnecessary to consider whether those services are provided to another entity in Australia.