Edited version of your private ruling

Authorisation Number: 1012330363065

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Ruling

Subject: GST and international services

Question

Is GST payable on the supply outlined in the Agreement?

Answer

No. The supply is GST-free.

Facts

You operate a service business. You have researched, designed and developed technology for specialised equipment, undertaken trials and performed basic demonstration of the technology.

You signed an Agreement with Entity Y whereby you would share your testing data and analysis to Entity Y. You and Entity Y would jointly develop designs and engineering plans and Entity Y would contribute a portion of the expenses you incur for the development of the specialised equipment in Australia. The Agreement contains the following:

You and Entity Y will form a research and development cooperation relationship.

Provided you receive from Entity Y the funds referred to in the Agreement, you commit to complete the demonstration of the equipment, measure and report its performance.

Your work and payments from Entity Y are to be made in following steps:

· You will define and provide Entity Y with the stage 1 test plan

· On receipt from you of results of tests undertaken according to the stage 1 test plan, Entity Y will determine if those results are satisfactory to Entity Y. If Entity Y determines that the stage 1 test plan results are satisfactory, Entity Y will pay you the amount of $YY. Testing of performance may be witnessed by Entity Y.

· On receipt of the payment of $YY, you will use those funds for the purchase of items and performance of works required for completion of demonstration stage.

· Within 30 days after receipt of the $YY, you must deliver to Entity Y an update of progress with orders for supply of items and progress with works for the completion of the demonstration stage.

· Within 30 days after receipt of the $YY, you must provide to Entity Y test plan/report including expected outputs from the demonstration stage.

· Entity Y will pay you the further amount of $XX

· You must use the whole of the $ZZ provided by Entity Y towards your costs of preparing the demonstration stage and pursuing the objectives of the Agreement i.e. testing of the equipment's performance

· On completion of the demonstration stage, you must undertake the tests defined in the stage 2 test plan and must provide the results of those tests to Entity Y. You will provide on request such additional information as may be reasonably requested by Entity Y to assist Entity Y to interpret and analyse the stage 2 test results.

· Based on the stage 2 test plan results Entity Y and you will collaboratively prepare techno-economic evaluation and preliminary project plants for stage 3 (which will be the priority), and Stage 4 (to provide a view of the potential expansion program timing, costs and funding).

· The Agreement sets out conditions under which you must repay all payments from Entity Y with interest.

· You provided Entity with the proposal for undertaking stage 1 test plan and stated that the fee for this service was $XX.

· Entity Y created a purchase order for $XX in relation to the Agreement.

· You received $XX from Entity Y.

Entity Y is a qualified equipment specialist and has gained experience in the design of specialised equipment. Entity Y is a company existing under the laws of a foreign country and whose principal office is in that country. Entity Y does not have its central management or control in Australia nor does it have its voting power controlled by shareholders who are residents of Australia. Entity Y is not registered with the Australian Securities & Investments Commission (ASIC) and does not have a permanent establishment in Australia. Entity Y does not carry on its business in Australia at or through a fixed and definite place of its own or through an agent. Entity Y is not registered for GST in Australia.

You do not have the authority to enter into legal relations with other entities in Australia on behalf of Entity Y.

You provide the test data to Entity Y electronically and this is discussed by telephone and email.

Entity Y representatives have visited Australia for discussions and planning purposes relating to your research and development cooperation. However, Entity Y, either through its employees, representatives or agents, is not in Australia when you provide your services.

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).

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

Income Tax Assessment Act 1936 Section 6-1.

Reasons for decision

Summary

The supply to Entity Y as outlined in the Agreement is GST-free. Hence, GST is not payable on this 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 on any taxable supply that you make.

Section 9-5 of the GST Act states:

You make a taxable supply if:

· you make the supply for *consideration; and

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

· the supply is *connected with Australia; and

· 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 testing the performance of the specialised equipment and providing results of those tests satisfies the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. This is because:

· the supply is made for consideration

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

· the supply is connected with Australia as the services are done in Australia and

· you are registered for GST.

The supply as outlined in the Agreement is not input taxed under any provision of the GST Act or any other Act. It remains to be determined if the supply is GST-free.

Subsection 38-190(1) of the GST Act specifies the circumstances where the supply of things other than goods or real property, for consumption outside Australia, is GST-free.

Of particular relevance to your supply is item 2 in the table in subsection 38-190(1) of the GST Act (item 2).

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 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

· 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.

You advised that Entity Y is a company existing under the laws of a foreign country and whose principal office is in that country and that Entity Y is not a resident of Australia for income tax purposes.

The meaning of 'not in 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.

At paragraph 37 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.

Further, 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, or

· the presence of the company is involved in the supply, unless the only involvement is minor.

You advised that Entity Y does not have any business of its own in Australia nor carry on business through an agent in Australia. Although Entity Y representatives have visited Australia for discussions and planning purposes, Entity Y either through its employees, representatives or agents is not in Australia when you provide your services. Further, all communications in relation to your supply are made directly to Entity Y outside Australia.

Based on the information provided, we consider that Entity Y is not in Australia in relation to your supply when such supply is made.

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

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

The requirement in paragraph (a) of item 2 is met if the thing supplied is neither work physically performed on goods situated in Australia when the work is done, nor directly connected with real property situated in Australia.

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.

Paragraphs 68 and 69 of GSTR 2003/7state:

68. If the supply includes work physically performed on goods but that work is ancillary to some other dominant part of the supply that is not work physically performed on goods, then that supply is not characterised as a supply of work physically performed on goods. This depends on the particular facts of each supply.

69. For example, a supply of a report on the results of testing and analysing samples of goods is characterised as a supply of information or advice if the dominant part of the supply is the analysis of data to enable a professional opinion to be provided. The supply is not characterised as a supply of work physically performed on goods. The testing and analysis of samples of goods enables the information to be compiled and is ancillary to the supply of that information.

From the information provided, we consider that the requirements in paragraph (a) of item 2 are satisfied because the dominant part of the supply of testing the performance of the specialised equipment and analysis of data is a supply of information or advice. This supply is neither a supply of work physically performed on goods nor a supply directly connected with real property in Australia.

Accordingly, the supply 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 ATO view on the operation of subsection 38-190(3) of the GST Act. The ruling explains that 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 is to one entity (the non-resident entity) and the actual flow of the supply is to another entity.

From the information provided, subsection 38-190(3) of the GST Act is not applicable to your supply to Entity Y as you are not required under the Agreement to provide the supply to another entity in Australia. Hence, the contractual and actual flow of the supply is to Entity Y.

Therefore, subsection 38-190(3) of the GST Act does not exclude your supply from being GST-free under item 2.

Accordingly, your supply to Entity Y as outlined in the Agreement is GST-free. Hence, GST is not payable on this supply.