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Ruling

Subject: GST and supply of training services to a non-resident

Question

Are you making a taxable supply when you supply training services to and offshore company (company A)?

Answer

Yes.

Relevant facts and circumstances

You are an Australian company and registered for GST.

You specialise in the provision of training services in a specified industry.

You will enter into a contract with company A to provide training services to company A's staff in Australia. You will invoice company A for the training services that you provide to them.

You advised that you cannot provide a copy of the contract as the contract is still being negotiated.

Company A was incorporated outside Australia and is not a resident of Australian for income tax purposes. Company A does not carry on an enterprise in Australia either through a branch, agent or representative and does not have a permanent establishment in Australia. Company A is not registered with the Australian Securities and Investments Commission (ASIC). Company A is not registered for GST in Australia.

You engage another offshore company (company B) to provide the training services to company A's staff. Company B is a non-resident but is owned by an individual who is a resident of Australia. The resident individual provides the training to company A's staff in Australia.

The contract is between you and company B and not the resident individual. You pay company B for the services that it provides to you.

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 Subsection 38-190(1).

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

Reasons for decision

Summary

The supply of your training services made to company A and provided to company A's staff in Australia is a taxable supply. You are liable to pay GST equal to 1/11 of the consideration that you receive for the supply of your training services.

Detailed reasoning

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply that you make.

Section 9-5 of the GST Act states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) 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.

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

The supply of your training services to company A meets the requirements of paragraphs

9-5(a) to 9-5(d) of the GST Act as:

o the supply is for consideration

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

o the supply is connected with Australia as the services are performed in Australia, and

o you are registered for GST.

The supply of your training services is not input taxed under a provision of the GST Act or a provision of another Act. Therefore, what is left to consider is whether the supply is GST-free.

GST-free

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

As the supply of the training services is neither a supply of goods nor a supply of real property, Item 2 in the table in subsection 38-190(1) of the GST Act (Item 2) and Item 3 in the table in subsection 38-190(1) of the GST Act (Item 3) are relevant for consideration.

Item 2 provides that a supply that is 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 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 for GST.

Item 3 provides that a supply, other than a supply of work physically performed on goods situated in Australia when the thing supplied is done or a supply directly connected with real property situated in Australia, is GST-free if:

(a) the recipient is not in Australia when the thing supplied is done, and

(b) the effective use or enjoyment of the supply takes place outside Australia.

Application of Item 2

Non-resident

Item 2 applies where the recipient of the supply is a non-resident for Australian income tax purposes.

You advised that company A is not a resident of Australia for income tax purposes.

Not in Australia

For the supply of the training services to be covered under Item 2, there is a precondition that the non-resident must not be in Australia in relation to the supply when the supply is performed/provided.

Goods and Services Tax Ruling GSTR 2004/7 discusses when an entity is considered not to be in Australia when the thing supplied is done.

Paragraphs 37 to 41 of GSTR 2004/7 state:

37. 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.

38. We consider that it would be reasonable for a supplier to conclude that a non-resident company is in Australia if:

o the company is registered with ASIC; or

o the company has a permanent establishment in Australia for income tax purposes.

39. However, 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 (at paragraph 37) to its particular circumstances, the non-resident company is not in Australia.

40. Suppliers should be aware that even if a company is not registered with ASIC, it may still be in Australia on an application of the test (at paragraph 37). 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.

41. 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, for example, its Australian branch. If the supply is not for the purposes of the Australian presence but that Australian presence is involved in the supply, the company is in Australia in relation to the supply, except where the only involvement is minor.

You advised that company A does not carry on an enterprise in Australia either through a branch, or agent or representative in Australia. Further, company A is not registered with ASIC and does not have a permanent establishment in Australia.

Based on the information provided, company A is not in Australia in relation to the supply of your training services.

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

Where a non-resident is not in Australia in relation to the supply when the thing supplied is done, it is necessary to determine if the requirements of either paragraph (a) or (b) of Item 2 are satisfied.

For the purposes of paragraph (a) of Item 2, the supply must be analysed to determine whether it is properly characterised as a supply of work physically performed on goods or is directly connected with real property situated in Australia. This is examined in Goods and Services Tax Ruling GSTR 2003/7.

From the information provided, the nature of your supply is the provision of training services to company A's staff. The supply of your services is neither a supply of work physically performed on goods situated in Australia nor a supply directly connected with real property situated in Australia. Therefore, the supply of your services to company A satisfies the requirement of paragraph (a) of Item 2. Consequently, the supply of your training services to company A is covered by Item 2.

However, the scope of Item 2 is limited by subsection 38-190(3) of the GST Act.

Subsection 38-190(3)

Subsection 38-190(3) of the GST Act states that a supply covered by Item 2 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.

Goods and Services Tax Ruling GSTR 2005/6 explains the operation of subsection 38-190(3) of the GST Act. This ruling provides that subsection 38-190(3) of the GST Act only applies if there is a supply of something, being a supply that is made to a non-resident and is 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 (the non-resident) and the actual flow of the supply is to another entity in Australia.

The intent of this provision is to impose a further location test where the supply is provided, or required to be provided, to another entity. If that other entity is in Australia, subsection 38-190(3) of the GST Act operates to negate the GST-free status that would otherwise apply under Item 2.

Based on the information that you have provided, paragraph 38-190(3)(a) of the GST Act is satisfied as the supply of your services is under an agreement entered into with a non-resident.

In order to determine whether the requirement of paragraph 38-190(3)(b) of the GST Act is met, it must be established to which entity the supply is 'provided'.

Paragraph 74 of GSTR 2005/6 provides that in some instances, it is inherent in the nature of the supply that the supply is provided to a particular entity. For example travel, training or entertainment services are, by their very nature, provided to the individual that travels, or is trained or entertained, respectively. In these instances, the presence of the individual at that location is integral to the performance, receipt or delivery of such supplies.

Paragraphs 441 to 449 of GSTR 2005/6 consider the application of subsection 38-190(3) of the GST Act to a supply of training services provided to an individual in Australia. These paragraphs state:

A supply of training services made to a non-resident employer and provided to employees in Australia

441. A supply of training services, the nature of which requires the physical attendance of the individual at that training in Australia is a supply provided to that individual in Australia. Consider the following example.

Example 15 - supply of flight training services made to a non-resident company and provided to another entity, a non-resident employee, in Australia

442. An Australian-based flight training school enters into an agreement with a non-resident airline company in China to train employee pilots at its flight training school in Australia.

443. The contractual arrangement is between the non-resident airline company and the flight school. The supply is made to the non-resident airline company which does not carry on business in Australia either through a place of business of its own or through an agent acting on its behalf. The employees, who are based in China, are required under the agreement to attend the training course in Australia.

Item 2

444. The supply of training services is made to a non-resident, the airline company, which is not in Australia when the training services are performed. The supply satisfies the requirements of item 2 and is, therefore, a supply covered by item 2.

Subsection 38-190(3)

445. The supply of training services by the Australian-based flight training school to the non-resident airline company in China is a supply under an agreement entered into with a non-resident. Paragraph 38-190(3)(a) is therefore satisfied.

(i) Provided to another entity

446. What is being supplied is the teaching and tutoring of the employees of the non-resident airline company. It is in the nature of such training services that it is the individuals that are trained, rather than the individuals' employer, and it is therefore the individual who is provided with the training. These services are of a kind that can only be provided to the employee. The flow of the actual services of teaching and tutoring is to the employee pilots and not to the non-resident airline company. The supply is provided to another entity, the employee.

(ii) Provided to that other entity in Australia

447. The employee pilots are required to physically attend training in Australia. As their presence in Australia is integral to the performance of the supply, the supply is provided to the employees in Australia.

448. As the supply is provided to another entity (that is, each employee) in Australia, subsection 38-190(3) negates the GST-free status otherwise applicable to the supply of training services covered by item 2.

449. While the services that effect provision of a supply to an entity might take place in Australia, that supply may nonetheless be provided to an entity that is not in Australia. If the supply of training in Example 15 was on-line (that is, via the internet to employees in China rather than physical attendance in a classroom in Australia), the supply is not provided to another entity in Australia. The non-resident individuals are not in Australia when the training services are performed.

In your case, you provide the training services to company A's staff in Australia. Accordingly, you are providing and the agreement requires you to provide your training services to another entity in Australia. Therefore, the requirement of paragraph 38-190(3)(b) of the GST Act is also satisfied. As such, subsection 38-190(3) of the GST Act excludes the supply of your training services to company A from being GST-free under Item 2. Therefore, the supply of your training services is not GST-free under Item 2.

Application of Item 3

Paragraph (a) of Item 3

Item 3 also requires that the recipient of the supply not to be in Australia in relation to the supply when the supply is done.

The test that applies for determining whether a company that is incorporated outside Australia is in Australia for the purposes of Item 3 is the same test that applies for determining whether a non-resident company is in Australia for the purposes of Item 2 as outlined above.

In your case, as stated earlier, company A is not in Australia in relation to the supply of your training services. Therefore, the requirement of paragraph (a) of Item 3 is satisfied.

Paragraph (b) of Item 3 - effective use or enjoyment

The requirement of paragraph (b) of Item 3 is met when the effective use or enjoyment of a supply takes place outside Australia.

Goods and Services Tax Ruling GSTR 2007/2 explains when the effective use or enjoyment of a supply takes place outside Australia for the purposes of paragraph (b) of Item 3.

At paragraph 39, GSTR 2007/2 provides that paragraph (b) of Item 3 requires that the place of the effective use or enjoyment of a supply to be determined (that is, whether the place is outside Australia). As paragraph (b) of Item 3 refers to the 'effective' use or enjoyment of the supply, it is necessary to inquire as to the entity that has the actual use or enjoyment of the supply.

Paragraphs 40 and 41 of GSTR 2007/2 provide that the requirement in paragraph (a) of Item 3 refers to the recipient of the supply. The recipient of the supply is the entity to which the supply is made. A supply that is made to a recipient entity may be provided to another entity. If the supply is made to a recipient and provided to another entity, the entity that actually uses or enjoys the supply is that other entity (providee). That is, while the contractual flow of the supply is to the recipient entity, the actual flow of the supply is to another entity.

Paragraph 49 of GSTR 2007/2 states:

49. Thus to work out whether effective use or enjoyment of a supply takes place outside Australia we take a two step approach. First, we determine the entity to which the supply is provided - the providee entity (we explain how to determine this at paragraphs 52 to 81). We then determine whether provision of the supply to the providee entity is outside Australia (we explain how to determine this at paragraphs 82 to 136). Effective use or enjoyment of the supply takes place outside Australia if there is provision of the supply to the providee entity outside Australia. This two step approach is summarised in flowchart form at pages 33 to 36.

Generally, if the providee entity is outside Australia the effective use or enjoyment of a supply takes place outside Australia. On the other hand, if the supply is provided to the providee entity in Australia the effective use or enjoyment of a supply does not take place outside Australia.

In your case the providee entities are company A's staff who will be provided with the training.

Having indentified company A's staff as the providee entities, it is then necessary to consider whether the effective use or enjoyment of the supply by those individuals takes place outside Australia and thus whether paragraph (b) of Item 3 is satisfied.

Paragraphs 91 to 115 of GSTR 2007/2 explain when the effective use or enjoyment of the supply takes place outside Australia, where the providee entity is an individual.

Generally to determine whether a supply is provided to an individual in Australia or outside Australia there is a need to distinguish between resident and non-resident individuals and whether they are physically in or outside Australia when the thing supplied is done. However, as stated in GSTR 2007/2, there are certain supplies where the presence of the individual at that location is integral to the performance, receipt or delivery of the supply. The knowledge of the residence status of an individual to whom the supply is provided is unnecessary if it is clear in any case that a supply is provided to an individual at a particular location. One such supply is the supply of training.

Example 8 in GSTR 2007/2 considers the application of Item 3 to a situation where the presence of the individual is considered to be integral to the performance, receipt or delivery of the supply. Paragraphs 325 to 329 of GSTR 2007/2 state:

Example 8 - supply of face to face training and entertainment provided to a non-resident employee of a non-resident company

325. A non-resident US company contracts with an Australian firm to provide training to its employee, Kris (also a non-resident). Kris is required to attend the training in Melbourne. As Kris is in Australia over a weekend the company also purchases tickets for Kris to attend a football game and to take a bus tour of the Great Ocean road.

326. The non-resident company does not carry on business in Australia through a place of its own or through an agent.

Paragraph (a) of item 3

327. Each of the supplies mentioned (that is, the training, the football game and the bus tour) are made to the non-resident company that is not in Australia in relation to the supply when the thing supplied is done. Each supply therefore satisfies paragraph (a) of item 3.

Paragraph (b) of item 3

328. With respect to the training, what is being supplied is the teaching and tutoring of Kris. It is in the nature of such training services that it is Kris who is trained, not her employer, and it is therefore Kris who is provided with the training. Similarly with the supply of the football game and the bus tour, it is Kris that travels and is entertained, respectively. These services are of a kind that can only be provided to the individual, Kris. The flow of the actual services of training, travel and entertainment is to Kris and not to her non-resident employer. Each supply is therefore provided to Kris.

329. The contract with the supplier of the training course requires Kris to attend the training course in Melbourne. As Kris' presence in Australia is integral to her receiving the training, the supply is provided to Kris in Australia. Similarly Kris' presence in Australia is integral to partaking of the football game and undertaking the bus tour. Each supply is therefore provided to Kris in Australia and effective use or enjoyment of each supply does not take place outside Australia. Paragraph (b) of item 3 is not satisfied with respect to any supply and therefore the supplies of training, football game and bus tour are not GST-free under item 3.

Similarly in your case, the presence of company A's staff (whether resident or non-resident) in Australia is considered to be integral to them receiving the training. The supply is provided in Australia to company A's staff and therefore the effective use or enjoyment of the supply does not take place outside Australia. As such the requirement of paragraph (b) of Item 3 is not met. Therefore, the supply of your services to company A is not GST-free under Item 3.

In summary, the supply of your training services to company A under the circumstance described is not GST-free under Item 2 or Item 3.

Further, the supply of your training services to company A is not GST-free under any other provision of the GST Act or a provision of another Act. Therefore the supply of your training services to company A which is provided to company A's staff in Australia is a taxable supply as it meets all the requirements of section 9-5 of the GST Act.

It should be noted that the services that company B supplies to you is a separate supply to the supply that you make to company A. The GST status of the supply made by company B to you will depend on the circumstances of that supply. The supply will be a taxable supply if it meets all the requirements of section 9-5 of the GST Act.