Edited version of your private ruling

Authorisation Number: 1012374763705

Ruling

Subject: GST and reverse charging

Question 1

Can the amount of GST paid to a supplier by M for an Australian supply be deducted from the amount of GST payable by A under the reverse charge agreement that it proposes to set up with M?

Answer

No.

Relevant facts and circumstances

M is the parent company of A. M is a foreign registered company; it owns 100% of A.

A was set up to handle Australian domestic business. M is now at a point where in order to continue making Australian supplies in Australia they need to either:

· register to do business in Australia; or

· use the existing Australian subsidiary A and a Reverse Charge arrangement.

Your strong preference would be that the already registered A invoices customers and submits all of the GST that will be incurred by the whole group (under a Reverse Charge arrangement), rather than registering M to do business in Australia. The same amount of GST will be paid under your proposed structure as A would pay all of the GST as if M became registered and paid the required amounts. Additionally the proposed structure will reduce the amount of administration for both the group and for the ATO.

Under the proposed arrangement A and M would enter into a reverse charge agreement. M would legally purchase the supplies from Australian suppliers and then sell it at cost price or appropriate arms length value to A who would sell it to the customers and raise the required tax invoice.

With regards to GST flow, under the Reverse Charge structure, M will be purchasing the supples including GST from Australian suppliers. As such they will be paying GST to these suppliers. M would then be on-charging this purchase price, including GST to A who will then sell to customers and collect GST. Under Reverse Charge provisions A could pay the GST that M should collect from A directly to the ATO.

The salient issue is whether A can pay this GST net of the amount of GST that M has already paid to the suppliers.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 7-5

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

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 section 31-5

A New Tax System (Goods and Services Tax) Act 1999 Division 83

A New Tax System (Goods and Services Tax) Act 1999 section 48-10

Taxation Administration Act 1953 section 356-5 of Schedule

Reasons for decision

Summary

The amount of GST paid to a supplier by M for an Australian supply cannot be deducted from the amount of GST payable by A under the reverse charge agreement that it proposes to set up with M.

Detailed reasoning

For the proposal you outline there is no provision in the GST law that allows for one entity to assume and pay/claim another entity's GST liability and input tax credit. Division 83 of the GST Act (which deals with reverse charging) will only encompass M's supplies to A.

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) places GST liability solely with the relevant supplier:

9-40 Liability for GST on taxable supplies

You must pay the GST payable on any taxable supply that you make.

Similarly section 11-20 of the GST Act places entitlement to input tax credits solely with the relevant recipient:

11-20 Who is entitled to input tax credits for creditable acquisitions?

You are entitled to the input tax credit for any creditable acquisition that you make.

As you are aware, Division 83 of the GST Act can moderate the application of section 9-40 of the GST Act to ensure that the recipient, rather than the supplier takes on the GST liability on a particular supply. Division 83 however, cannot moderate the effect of section 11-20 of the GST Act for acquisitions made from a third party.

In reporting GST, an entity's liabilities and credits are set off against each other to produce a net amount under section 7-5 of the GST Act. If a reverse charge agreement is in place and M was registered for GST, its notional net amount would consist of any input tax credits arising from its acquisition of supplies. Note that if M did not register for GST, it would not have an entitlement to input tax credits in the first instance.

Net amounts are reported in the GST Return (Business Activity Statement). With respect to your proposal, there is no provision in the GST law for one entity to report another entity's net amount. Section 31-5 of the GST Act ensures that an entity with a particular net amount is the only entity which can report that net amount:

31-5 Who must give GST returns

(1) If you are registered or required to be registered, you must give to the Commissioner a GST return for each tax period.

(2) You must give the return whether or not:

(a) your net amount for the tax period is zero; or

(b) you are liable for the GST on any taxable supplies that are attributable to the tax period.

Section 356-5 of Schedule 1 to the Taxation Administration Act 1953 does grant the Commissioner general administration powers for the indirect tax laws, including GST. This may seem to indicate that the Commissioner can rule to overcome individual taxpayer's difficulties in complying with the law in all cases. However, the powers of general administration assist the Commissioner to administer the taxation laws in accordance with Parliament's legislative intent.

The Commissioner's powers of general administration are narrow in scope in that they can only be exercised in relation to management and administrative decisions. They do not authorise the Commissioner to administer the taxation laws inconsistently with their purpose or object, whether express or implied, or their plain meaning.

While Division 83 of the GST Act will allow A report and pay M's GST on supplies made to A if a reverse charge agreement is in place, the law does not extend to allow A to set off M's earlier notional input tax credits against its own GST liability as requested. Furthermore, the Commissioner has no administrative device available to assist in achieving your desired outcome.

Further issues for you to consider

GST Groups

If you enter into a GST group, transactions you conduct with other members of the same GST group are not treated as taxable sales or purchases. This means you are not liable to pay GST to us on sales you make to members of your GST group and you cannot claim GST credits for purchases you make from members of your GST group.

If you form a GST group, only the representative member completes the activity statement on behalf of all the group members. The representative member does not include the intra-group transactions in their activity statement.

It is important to note that the representative member is responsible for the GST that each group member is liable to pay to us and can also claim all the GST credits to which each group member is entitled.

The GST grouping provisions are contained in Division 48 of the GST Act, the membership requirements for GST groups are set out in section 48-10 of the GST Act:

48-10 Membership requirements of a GST group

(1) An entity satisfies the membership requirements of a GST group, or a proposed GST group, if the entity:

(a) is:

(i) a company; or

(ii) a partnership, trust or individual that satisfies the requirements specified in the regulations; and

(b) is, if the entity is a company, a company of the same 90% owned group as all the other members of the GST group or proposed GST group that are also companies; and

(c) is registered; and

(d) has the same tax periods applying to it as the tax periods applying to all the other members of the GST group or proposed GST group; and

(e) accounts on the same basis as all the other members of the GST group or proposed GST group; and

(f) is not a member of any other GST group; and

(g) does not have any branch that is registered under Division 54.

(2) Paragraph (1)(b) does not apply if:

(a) the entity is a non-profit body; and

(b) all the other members of the GST group or proposed GST group are non-profit bodies; and

(c) the entity and all those other members are members of the same non-profit association.

Note 1: For the membership requirements of non-profit sub-entities, see section 63-50.

Note 2: For the membership requirements of a GST group of government related entities, see section 149-25.

(2A) Paragraph (1)(d) does not apply in relation to a tax period that the Commissioner has determined under section 27-30 if the tax period:

(a) ends at the same time as a tax period (a corresponding tax period) of each of the other members of the GST group; and

(b) is not longer than any corresponding tax period (other than a tax period that the Commissioner has determined under section 27-30).

(3) A company does not satisfy the membership requirements of a GST group, or a proposed GST group, if:

(a) one or more other members of the GST group or proposed GST group are not companies; and

(b) none of the members of the GST group or proposed GST group that are companies satisfy section 48-15.