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Ruling

Subject: GST and acquisitions from an Australian resident

Question 1

Assuming you retrospectively registered for GST from a specific month in 20XX, are you entitled to claim an input tax credit on its acquisition of the services of B under the management agreement (MA)?

Answer

No, you are not entitled to an input tax credit on your acquisition of B's services.

Question 2

Are you 'in Australia' to any extent for the purpose of 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) in relation to B's services during the Process period?

Answer

No, you are not 'in Australia' for the purpose of Item 2.

Relevant facts and circumstances

You are an overseas based company. You are incorporated overseas and your principal office is also overseas.

B is an Australian-based corporate advisory firm. B provides various services, including advising in relation to capital raisings, mergers, acquisitions and project financing.

Recently, you completed a specific Process in relation to your shares, comprising an issue of a Financial Product on the Australian Securities Exchange (ASX). The Process comprised the offer of the Financial Product to investors in Australia and overseas.

Your presence in Australia

Other than as set out below, you have not had, and do not currently have any employees in Australia, do not conduct your business in Australia and do not have any assets, presence or any employees in Australia.

During the Process period, senior personnel visited Australia a number of times for limited periods. A number of Australian independent, non-executive directors were appointed to your board prior to the Process.

Subject to the board meeting referred to above, board meetings have not previously been, and are unlikely in the future to be, held in Australia and generally take place periodically via conference calls. You have engaged a number of independent, Australian based advisers. All instructions to Australian advisers originate from your personnel overseas.

You do not have an Australian bank account. Your share registry opened an account in relation to the Process. Certain Australian service providers (including B) were paid from this account.

You registered as a foreign company in Australia with ASIC (under the Corporations Act 2001) and have complied with ASX requirements and the Corporations Act 2001 as required. For instance, you nominated B as your local agent under the Corporations Act 2001.

B is registered for GST.

You are not currently registered for GST.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20.

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.

Income Tax Assessment Act 1936 Subsection 6(1).

Reasons for decision

Question 1 and 2

Summary

During the Process period, you were not 'in Australia' in relation to B's services. Your acquisition of B's services during that time was not a creditable acquisition. Hence, you are not entitled to claim an input tax credit on this acquisition.

Detailed reasoning

Under section 11-20 of the GST Act you are entitled to an input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

o you acquire anything solely or partly for a *creditable purpose; and

o the supply of the thing to you is a *taxable supply; and

o you provide, or are liable to provide, *consideration for the supply; and

o you are *registered, or *required to be registered.

(*denotes a defined term in the GST Act)

In your case, the issue to consider is whether B's supply to you of its services is a taxable supply.

Section 9-5 of the GST Act provides that a taxable supply is made if:

o you make the supply for consideration

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

o the supply is connected with Australia, and

o you are registered, or required to be registered.

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

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:

· 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

· 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 you are 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:

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

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

Paragraph 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.

You are 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 (B) be appointed.

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, you did not directly lease or otherwise occupy premises in Australia apart from what was required for the minimal presence when conducting board meetings and presentations. At the time you did not conduct your business in Australia beyond activities relating to the Process.

Furthermore, there is nothing to indicate that you are carrying on your business in Australia, through an agent.

Hence, you are 'not in Australia' in relation to the supply of B's 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 B's 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 B's services to you 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 B is required to supply its services to you and there is nothing to indicate that B is required to provide the services to other entities in Australia. Hence, the contractual and actual flow of the services is to you.

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

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

As the supply to you of B's services is not a taxable supply, you have not made a creditable acquisition. Hence, you are not entitled to an input tax credit.