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Ruling

Subject: GST and international services

Question

Is the supply of your services to B under the management agreement (MA) GST-free under Item 2 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) (Item 2)?

Answer

Yes, the supply of your services to B under the MA is GST-free under Item 2.

Facts

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-190(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-190(3).

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

Summary

The supply of your services to B under the MA is GST-free under Item 2.

Detailed reasoning

Under section 38-190 of the GST Act, certain supplies of things other than goods or real property, for consumption outside of Australia, are GST-free.

Item 2 provides that a supply of a thing (other than goods or real property) made to a non-resident is GST-free if the non-resident is not in Australia when the thing supplied is done and:

(a) the supply is neither the 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 for GST.

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

A company is a resident of Australia if:

§ the company is incorporated in Australia, or

§ the company is not incorporated in Australia but has either its central management and control in Australia or its voting power is controlled by shareholders who are residents of Australia.

On the information available B is not a resident of Australia.

Goods and Services Tax Ruling GSTR 2004/7 provides guidance on when a non-resident is 'not in Australia' for the purposes of item 2.

The requirement that the non-resident in item 2 is not in Australia when the thing supplied is done is a requirement that the non-resident is not in Australia in relation to the supply when the thing supplied is done.

The meaning of 'not in Australia'

The requirement that a supply is made to a non-resident who is 'not in Australia' 'when the thing supplied is done' is in effect a proxy test for determining where the supply to that entity is consumed.

Paragraph 184 of GSTR 2004/7 states:

As the Australian location of the entity to which the supply is made at the relevant time is a proxy test for identifying when consumption occurs in Australia, we consider that the expression 'not in Australia' should be interpreted in the context of the supply in question. The expression 'not in Australia' requires, in our view, that the non-resident or other recipient is not in Australia in relation to the supply. This means that a non-resident or other recipient of a supply may satisfy the 'not in Australia' requirement if that entity is in Australia but not in relation to the supply…

Paragraphs 230 to 332 of GSTR 2004/7 discuss when a non-resident company is in Australia for the purposes of item 2 (and paragraph (b) of item 4).

A company being an artificial legal entity does not have a precise location and its presence can only be established through the presence of its representatives. The representatives of a company may take on a variety of forms and capacity and can include a branch of the company.

The presence of a non-resident company in Australia is the means by which consumption of the supply in Australia is identified.

We determine the presence of a foreign company in a jurisdiction according to jurisdictional law. At common law, a foreign company is amenable to the jurisdiction of an Australian court if the company carries on business within the court's jurisdiction through its own office or through an agent acting on behalf of the company and that office or agent has a fixed and definite place within the jurisdiction and the business has continued for a sufficiently substantial period of time. (paragraph 239 of GSTR 2004/7)

At paragraph 241 of GSTR 2004/7, we established a test where we consider that a non-resident company is in Australia if that company carries on business (or in the case of a company that does not carry on business, carries on its activities) in Australia:

(a) at or through a fixed and definite place of its own for a sufficiently substantial period of time, or

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

Paragraph 247 of GSTR 2004/7 provides that a non-resident company is in Australia if:

§ the company is registered with ASIC, or

§ the company has a permanent establishment is Australia for income tax purposes.

A company that is incorporated outside Australia is required to register as a foreign company with ASIC if it wishes to carry on a business in Australia.

Although registered with ASIC, a non-resident company to which the supplier makes a supply may be able to demonstrate to the supplier that, even though it is registered with ASIC or has a permanent establishment, on application of the test to its particular circumstances, the non-resident company is not in Australia. Alternately, even if a company is not registered with ASIC, it may still be in Australia on an application of the test. Similarly, even if a company does not have a permanent establishment in Australia for income tax purposes, it may still be in Australia on application of the test to its particular circumstances.

B is registered with ASIC as a foreign company under the Corporations Act 2001. The registration was required as a precursor to listing on the ASX, furthermore the registration required that a local agent be appointed (you).

The non-resident carries on a business 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

A non-resident company is considered to be carrying on business in Australia even though the activities carried on in Australia are not a substantial part of, or are no more than incidental to, the main objects of the company.

A non-resident company has a place of its own if it leases or owns a place at which it conducts through its servants or agents. However, a place of its own is not limited to such a place. A non-resident company occupies a place as a place of its own if it has a right to be there. Evidence of that right is generally to be found in the fact that the company's employees or agent occupy that place for the purposes of its business.

If a non-resident company does not have a fixed and definite place in Australia at, or through which, the business of the non-resident company is carried on in Australia, the company is not in Australia.

The word 'fixed' connotes a degree of permanence in the same location. A place may be fixed even if it only exists for a short time. Although 'fixed place' excludes a place that is purely temporary, it does not mean everlasting. It is a geographical place with some degree of permanence. The word 'definite' is used in the sense of a distinct place; that is a place that can be pointed to as the place at which the non-resident company's business is carried on.

For a non-resident company to be considered to be in Australia, the business of the non-resident company must have continued, or be intended to continue, at a fixed and definite place for a sufficiently substantial period of time. Sufficiently substantial period of time simply means that there is a period sufficient for the business of the non-resident company to be conducted in Australia.

If a non-resident company has no fixed or definite place of its own in Australia, it may still carry own business in Australia through an agent from some fixed and definite place. The key issue in this kind of situation is whether the non-resident company is itself carrying on business in Australia through a duly appointed agent, or whether the business being conducted is the agent's own business and the non-resident is merely one of its customers.

Paragraph 281 of GSTR 2004/7 lists factors which may be taken into account in determining whether a non-resident company can properly be regarded as carrying on business in Australia through an agent.

On the information provided, B did not directly lease or otherwise occupy premises in Australia apart from what was required for the minimal presence when conducting a board meeting by phone with two directors in Australia and a presence during retail road shows. At the time B did not conduct its medical business in Australia beyond its capital raising.

Furthermore, there is nothing to indicate that B is carrying on its business in Australia, through an agent.

Hence, B is 'not in Australia' in relation to the supply of your services.

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

The supply of your services must also satisfy the requirements of either paragraph (a) or paragraph (b) of item 2 for the supply to be GST-free.

'Directly connected with goods or real property' and 'a supply of work physically performed on goods'

Goods an Services Tax Ruling GSTR 2003/7 examines the meaning of the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods' as used in subsection 38-190(1) of the GST Act.

Paragraph 21 of GSTR 2003/7 states:

21. Under items 1, 2 and 3 it is only where the connection between the supply and the goods or real property is a direct one that the location of goods or real property is regarded as the place where consumption occurs. The addition of the adverb 'directly' to the phrase 'connected with' implies a more emphatic connection between the supply and goods or real property. The inference is that the supply is so closely aligned with goods or real property that it is appropriate to treat the location of the goods or real property as the place where consumption occurs.

On the information provided, the supply of your services under the MA is not the supply of work physically performed on goods situated in Australia. In addition, it is not a supply directly connected with real property situated in Australia. As such, the supply of your services to B satisfies the requirements of paragraph (a) of item 2.

As the requirements of paragraph (a) of item 2 are satisfied, there is no need to consider if the requirements of paragraph (b) of item 2 are met.

Exclusion

The scope of item 2 is limited by subsection 38-190(3) of the GST Act which provides that a supply covered by item 2 is not GST-free if:

§ it is a supply under an agreement entered into, whether directly or indirectly with a non-resident, and

§ the supply is provided or the agreement requires it to be provided, to another entity in Australia.

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

The MA provides that you are required to supply your services to B and there is nothing to indicate that you are required to provide the services to other entities in Australia. Hence, the contractual and actual flow of the services is to B.

Therefore, subsection 38-190(3) of the GST Act does not exclude your services from being GST-free under item 2 as the supply of your services is made and provided to B, a non-resident company not in Australia when the supply is made.

Accordingly, the supply of your services to B is GST-free under Item 2.

Correcting GST mistakes

Where you have incorrectly calculated your GST payable, you have to correct this mistake in your activity statement. Refer to the fact sheet Correcting GST Mistakes.

All the GSTRs and publications referred to in this ruling are available on our website www.ato.gov.au