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

Question 1

Is your supply of training services to an offshore company (the offshore company) a taxable supply where the training is conducted in Australia using the offshore company's machinery?

Answer

Yes.

Question 2

Is your supply of training services to the offshore company a taxable supply where the training is conducted in Australia using your machinery?

Answer

Yes.

Question 3

Is your supply of training services to the offshore company a taxable supply where the training is conducted overseas using the offshore company's machinery?

Answer

No.

Relevant facts and circumstances

You are and Australian resident company and registered for GST.

You provide specified training to the employees of other companies. At times you also supply the machinery on which the training is conducted at a separate additional cost.

You have entered into an arrangement with the offshore company for the provision of specified training services (training services). The offshore company is based in a specified overseas country and its Head Office and Administration is in the overseas country. Accounts are invoiced to and paid from the overseas country by direct deposit to notified bank accounts in Australia (or wherever).

The trainees are employees of the offshore company who are qualified in a specified field. The employees are trained by you to use more advanced machinery. To use this type of machinery, the employees must be trained and certified to be competent to use that machinery.

One of your employees/trainer has the necessary qualifications to provide the training and issue qualifications to the offshore company's employees.

Once the training is provided, your trainer conducts a test to ensure that the offshore company's employees can use the machinery. Your trainer then issues a qualification which would enable the employees of the offshore company to use the machinery in the overseas country.

You provide this type of training services and tests to Australian residents as well. In those situations you treat the supplies as taxable and include GST in the price.

You also provide other training courses. Some of these courses are GST-free.

The offshore company is a non-resident for Australian income tax purposes. The offshore company was not incorporated in Australia and its central management and control is outside Australia. The offshore company does not have an agent, branch, representative or base in Australia.

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

Questions 1 and 2

Summary

The supply of your training services to the offshore company where the training services are provided to the employees of the offshore company in Australia is a taxable supply.

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 provides that you make a taxable supply if:

(a) you make the supply for consideration

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

(c) the supply is connected with Australia, and

(d) you are registered, or required to be registered for GST.

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

When you conduct the training in Australia you satisfy the requirements of paragraphs 9-5(a) to

9-5(d) of the GST Act for the following reasons:

· you supply your services to the offshore company for consideration

· the supply of your services is in the course or furtherance of your enterprise

· the supply of your services is connected with Australia as the services are performed in Australia, and

· you are registered for GST.

The supply of your services is not input taxed under the GST Act or under a provision of another Act. Therefore, it remains to be determined whether the supply is GST-free.

GST-free

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.

As your 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.

Application of Item 2

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.

Goods and Services Tax Ruling GSTR 2004/7 provides guidance on when a supply is made to a non-resident who is not in Australia for the purposes of Item 2.

Non-resident

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.

Based on the information that you have provided, the offshore company is not a resident of Australia for Australian income tax purposes.

Not in Australia

As stated at paragraph 37 of GSTR 2004/7, 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.

Based on the information that you have provided, the offshore company does not have a permanent establishment in Australia and does not carry on a business of its own in Australia nor does it carry on a business through an agent or representative in Australia. Therefore, the offshore company is not in Australia in relation to your supply of training services when such supply is made.

Paragraph (a) or paragraph (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.

Your supply of training services is not a supply of work physically performed on goods situated in Australia nor is it a supply directly connected with real property situated in Australia. As such, the supply of your services to the offshore company satisfies the requirements of paragraph (a) of Item 2 and therefore is covered under 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.

Paragraph 441 of GSTR 2005/6 provides that 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.

In your case, when you provide the training services to the offshore company's employees in Australia, you are providing your training services to another entity (the employees) in Australia. Therefore, the requirement of paragraph 38-190(3)(b) of the GST Act is also satisfied. In these circumstances, subsection 38-190(3) of the GST Act excludes the supply of your training services to the offshore company from being GST-free under Item 2.

For further information refer to GSTR 2005/6, in particular, Example 15 (paragraphs 442 to 449) which outlines the application of subsection 38-190(3) of the GST Act to a supply of flight training services made to a non-resident company and provided to another entity, a non-resident employee, in Australia.

Application of Item 3

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.

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, the offshore company 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 the offshore company's employees who are provided with the training.

Having identified the offshore company's employees as the providee entities, it is 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.

Similarly in your case, the presence of the offshore company's employees (whether resident or non-resident) in Australia is considered to be integral to them receiving the training. The supply is provided in Australia to the offshore company's employees 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 training services to the offshore company is not GST-free under Item 3.

For further information refer to GSTR 2007/2, in particular, Example 8 (paragraphs 325 to 329) which considers the application of Item 3 to a supply of face to face training and entertainment provided to a non-resident employee of a non-resident company in Australia.

Conclusion

In summary, the supply of your training services to the offshore company, where the training is provided to the offshore company's employees in Australia, is not GST-free under Item 2 or Item 3.

Further, the supply of your training services to the offshore company is not GST-free under any other provision of the GST Act or a provision of another Act. The supply of your training services made to the offshore company and provided to the offshore company's employees in Australia is a taxable supply as it meets all the requirements of section 9-5 of the GST Act. You are liable to pay GST equal to 1/11 of the training fees. It is irrelevant whether you use your machinery or the offshore company's machinery to provide the training services.

When you supply your machinery you are making a separate supply. The supply is a taxable as it meets all the requirements of section 9-5 of the GST Act. You are liable to pay GST equal to 1/11 of the hiring fees.

Question 3

Summary

Where the training services are provided to the offshore company's employees outside Australia, the supply is GST-free.

Detailed reasoning

When you provide your training services to the offshore company's employees in the overseas country, the supply meets the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:

· you supply your services to the offshore company for consideration

· the supply of your services is in the course or furtherance of your enterprise

· the supply of your services is connected with Australia as you supply your services through an enterprise that you carry on in Australia, and

· you are registered for GST.

The supply of your training services to the offshore company is not input taxed under the GST Act or under a provision of another Act. Therefore, it remains to be determined whether the supply is GST-free.

For the reasons explained above, the supply of your training services to the offshore company will satisfy the requirements of Item 2.

In this situation, subsection 38-190(3) of the GST Act does not negate the GST-free status of the supply. This is because the requirements of paragraph 38-190(3)(b) of the GST Act is not met as the supply is not provided to an entity in Australia (the employees receive the training outside Australia). Therefore, the supply of the training services to the offshore company, where the training is provided to the offshore company's employees outside Australia, is GST-free under Item 2.

Where you provide the training services outside Australia, the supply is also GST-free under Item 3 as it also meets the requirement of paragraph (b) of Item 3. That is, as the training is provided to the offshore company's employees outside Australia, the effective use or enjoyment of the supply takes place outside Australia.

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