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Ruling

Subject: GST and supplies to a non-resident

Question 1

Are you making taxable supplies?

Answer

No.

Question 2

Have you correctly completed your activity statements?

Answer

No.

Relevant facts and circumstances

You are an agent for a number of international goods companies.

Your Principals are generally listed on the stock exchanges of the countries in which they site their operations. None are located in Australia and none have indicated any willingness to set up any operations in Australia, be it through you or on their own. None therefore fall within Australia's tax jurisdiction, to be it legislative or otherwise. Your area of responsibility as their agent (with the exception of one company), is in Australia and overseas.

All your Principals manufacture their products outside Australia and are not registered in Australia.

The nature of the business in Australia is that all products are sold directly to Australian customers from your Principals' offshore sales operations. The Australian customers are the importers of the products into Australia and they pay any GST which may be applicable to their import.

Using your technical and industry experience, academic background and knowledge of this market and that of the global product industry, your role as the Agent is to primarily stimulate the market interest in your Principal's products, arrange and monitor any sample testing and approvals and then put the two parties together so that they can conclude the final sale agreement.

Your role as the Agent of the Principal is not that of an intermediary. You do not hold any stock or become involved in any way as a conduit for taxable supply. The sale agreement is concluded directly between your Principal and the importer (the Australian customer). The purchase order is prepared by the Australian customer and sent to your Principal for their final acceptance. If the purchase order is accepted by your Principal, products are then shipped directly to their Australian customer.

The shipping documents are sent by your Principal directly to its Australian customer, who uses those documents for the purposes of clearing those goods through Customs.

All sales to Australian customers by your Principal are made on a CIF (Cost Insurance and Freight) or FOB (Free On Board) (lncoterm 2010) basis.

The Australian customer attends to and pays for their own clearing and forwarding charges from the port of entry in Australia. That is, they pay any duties, GST and charges to get the product from the ship to their own sites. You do not play any role in that activity.

You do not attend to any administration on behalf of your Principal. They set the initial sales pricing, approve the customer for any credit limits, agree to the final selling price, authorise the conclusion of the sale to the customer, invoice the customer, ship the product and courier the import documentation directly to the importer.

Your Principal collects their own revenues from Australian customers by way of the activities of their own Accounts Receivable departments.

You share in your Principal's sales revenue on the basis that for your effort, which is mainly technical and market intelligence related, you receive an X% commission on the FOB value (value at the selling port) of the goods sold to the Australian customers. Those proceeds are paid directly into your Australian bank account from their offshore treasury departments in foreign currency.

Your business started in overseas some years ago and you ran it from a legal entity overseas until deciding some months ago, to centralise all your business in Australia. Your overseas business is now operated from Australia.

As regards to Country X, the sale agreements, as in Australia, are concluded directly between your Principals and the Country X customers, on a similar basis to what it is done in Australia. All revenue earned for your Country X activities is paid into Australia and whilst your view is this revenue is not subject to GST in Australia, it is subject to the Income Tax laws of Australia and you pay your taxes accordingly.

The Agency Agreement (Agreement) between you (named in the agreement as the Agent) and Principal contains the following clauses:

The Principal entrusts the Agent with exclusive agency of the contractual Products referred to in the appendix, in the contractual territory (namely Australia and Country Y) and you accept this agency.

The Agent will obtain purchase orders for contractual Products from customers in the contractual territory and pass these on to the Principal.

The Agent is not entitled to represent the Principal in legal transactions with third parties or to place the Principal under any obligation.

The Agent undertakes to take account of the Principal's interests in every respect and to do its utmost to promote the agency of the contract Products in the contractual territory.

The Agent will conduct appropriate advertising for the contractual Products. The nature, scope and content of the advertising, in particular statements about the characteristics and use of the contractual Products, will be agreed between the Agent and the Principal in advance…

For the negotiation of the Principal's contractual Products to customers in the contractual territory by the Agent, the Agent will be entitled to the amount of commission specified in the Appendix as soon as customer's payment has been received by the Principal.

Commission will be calculated on the basis of the invoice value. The invoice value will - unless otherwise agreed in an individual case - be the final invoice total less rebates, price reductions, separately invoiced costs (sales or turnover tax, Customs duty etc.) and credits for contractual Products which were subject of complaint, but including the cost of packaging, freight and insurance.

The Appendix lists the commission as X% of the invoice value.

Your Principals are not in Australia, either through their employees, representatives or agents, when you provide your services.

Your main method of communicating with your Principals is through electronic means.

You registered for GST effective 1 Month 20XX and chose quarterly tax periods.

You have lodged all outstanding activity statements and have not included any amounts in G1, G2 and G3.

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 9-10.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-15.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-25.

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

Question 1

Summary

The supplies you make from your Australian and overseas operations are GST-free. Hence, GST is not payable on these supplies.

Detailed reasoning

GST is payable on any taxable supply that you make.

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) sets out the requirements of a taxable supply and it 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 for GST.

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.)

Where the above requirements of section 9-5 of the GST Act are satisfied, the supply you make is a taxable supply.

It is necessary to consider all of the circumstances of a transaction to ascertain the essential character of the supply or supplies.

'Supply' is defined in subsection 9-10(1) as 'any form of supply whatsoever'. Without limiting these general meanings, subsection 9-10(2) of the GST Act provides a non-exhaustive list of activities or occurrences that are included within the meaning of supply:

· a supply of goods and

· a supply of services.

You have advised that you are an agent for a number of international goods companies. You use your technical and industry experience, academic background and knowledge of the goods market and global goods industry to primarily stimulate the market interest in your Principal's products. You arrange and monitor any sample testing and approvals and then put the two parties (the Principal and the customer) together so that they can conclude the final sale agreement. You are not involved in the sale transaction.

Based on this information, we consider that you are supplying your services to your Principals. This is the supply that must satisfy the requirements of section 9-5 of the GST Act to be a taxable supply.

The information provided indicates that you satisfy the requirements in paragraphs 9-5(b) and 9-5(d) of the GST Act because the supply is made in the course or furtherance of your enterprise (business) and you are registered for GST.

What remains to be considered are paragraphs 9-5(a) and 9-5(c) of the GST Act, and whether the supply is GST-free or input taxed.

Supply for consideration

To satisfy the requirements of paragraph 9-5(a) of the GST Act, three fundamental criteria must be met:

· there must be a supply

· there must be a payment and

· there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration.

As outlined above the supply you are making is one of services.

Paragraph 9-15(1)(a) of the GST Act states that consideration includes any payment or any act or forbearance in connection with a supply of anything.

From the information provided, in return for supplying your services to the Principal you receive a commission which is calculated as a percentage of the sale of the Principal's products. The commission is consideration for the supply of your services. Hence, paragraph 9-5(a) of the GST Act is satisfied.

Connected with Australia

As you are providing your services to a non-resident entity, we need to determine if you are making supplies that are connected with Australia.

Subsection 9-25(5) of the GST Act provides that a supply of anything other than goods or real property is connected with Australia if, among others:

(a) the thing is done in Australia or

(b) the supplier makes the supply through an enterprise that the supplier carries on in Australia.

Goods and Services Tax Ruling GSTR 2000/31 explains when a supply is connected with Australia.

Paragraph 65 of GSTR 2000/31 provides that if the thing being supplied is a service, the supply of that service is typically done where the service is performed. If the service is performed in Australia, the service is done in Australia and the supply of that service is connected with Australia. This is the case even if the recipient of the supply is outside Australia.

From the information provided, some of your services are done in Australia. Hence, the supply of these services is connected with Australia under paragraph 9-25(5)(a) of the GST Act.

However, some of your services are done in Country X and Country Y. The supply of these services is not connected with Australia under paragraph 9-25(5)(a) of the GST Act. Nonetheless, the supply is connected with Australia under paragraph 9-25(5)(b) of the GST Act if the supply is made through the enterprise that you carry on in Australia.

The concept of carrying on an enterprise in Australia is defined in terms of the definition of 'permanent establishment' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Specifically under paragraph 9-25(6)(a) of the GST Act the supplier carries on an enterprise in Australia if the enterprise is carried on through a permanent establishment.

However, for a supply to be connected with Australia under paragraph 9-25(5)(b), a connection must be established between the Australian permanent establishment and the supply.

A permanent establishment is widely defined in subsection 6(1) of the ITAA 1936. Generally, it can be described as a place through, or at which, an entity conducts its business in Australia.

On the information provided, you have a permanent establishment in Australia, having established your business operations in Australia. Your agreements with your overseas Principals are made through your permanent establishment in Australia. Hence, there is a connection between your Australian permanent establishment and the supply.

As you are making the supply through the enterprise that you carry on in Australia, the supply of your services which are done in Country X or Country Y is connected with Australia under paragraph 9-25(5)(b) of the GST Act.

Therefore, as you are making supplies that are connected with Australia, paragraph 9-5(c) of the GST Act is satisfied.

The supply of your services 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.

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:

(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.

A non-resident for GST purposes is an entity that is not an Australian resident for the purposes of ITAA 1936.

On the information provided, your Principals are entities existing under the laws of a foreign country and whose principal office is in that country, and that they are not residents 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:

(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.

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.

On the information provided, your Principals do not have any businesses of their own in Australia nor carry on business through an agent in Australia.

Your Principals, either through their employees, representatives or agents, are not in Australia when you provide your services. Further, all communications in relation to your supply are made directly the Principals in their overseas offices.

Based on the information provided, we consider that your Principals are not in Australia in relation to your supply when such supplies are made.

The supply under your agreement with your Principals 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

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.

Paragraph 23 of GSTR 2003/7 provides that the goods or real property must be particular goods or real property for this very close connection to exist. A supply that is connected with goods or real property in general, rather than with particular goods or real property, does not have a sufficiently close connection with goods or real property for that connection to be a direct one.

Paragraph 33 of GSTR 2003/7 provides examples of situations where the Commissioner considers that a close link or association between the supply and particular goods or real property exists. An example given is where the direct object of the supply is the goods or real property in the sense that the supply changes or affects the goods or real property in a physical way. Examples of supplies that fall in this category are listed in paragraphs 37 and 38 of GSTR 2003/7. A common example of a supply of this kind is a supply of a service that is physically performed on particular goods or real property such as the repair of goods or building. Other examples of supplies of this kind include the installation, alteration, repair, cleaning, restoration or modification of goods.

On the information provided, the services that you carry out are 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. As such, the supply of your services 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 your Principals as you are not required under your agreement to provide the supply to another entity in Australia. Hence, the contractual and actual flow of the supply is to your Principal overseas.

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 your Principals as you described is GST-free. Hence, GST is not payable on this supply.

In summary, the supplies you make through your Australian and Country X operations are GST-free.

Question 2

Summary

As the supplies you make are GST-free, you record them in G1 and G3 of your activity statements. This results in nil GST payable.

Detailed reasoning

When completing your activity statement you first complete sales on the front of the form. This information is listed in

· G1 - total sales

· G2 - export sales

· G3 - other GST-free sales.

For GST purposes, a sale or supply includes a sale of goods or services.

When completing your activity statement, you report at G1 total sales, which includes, all of the following:

· your GST-free sales

· your input taxed sales

· your taxable sales.

You report at G2 your GST-free export sales:

· the free on-board value of exported goods that meet the GST-free export rules

· payments for the repairs of goods from overseas that are to be exported

· payments for goods used in the repair of goods from overseas that are to be exported.

Do not report at G2 amounts for GST-free services, unless they relate to the repair, renovation, modification or treatment of goods from overseas whose destination is outside Australia.

You report at G3 all other GST-free sales (other than export amounts shown at G2) that you have made.

All amounts reported at G2 and G3 should also have been reported at G1.

As you are making GST-free supplies of your services to your Principals, the amounts of your fees for these services should be reported in the relevant activity statements.

You are required to report on your activity statement the GST-free services as both total sales (at G1) and other GST-free sales (at G3). This will ensure that when you go through the relevant calculation, that is, the other GST-free sales should be deducted from the total sales, the correct GST payable will be ascertained for the relevant tax period.

For example, if your total GST-free sales, being the commissions you receive from your Principals, are $10,000 and given that this is the only supply that you have made for the tax period, you will report:

· G1 = $10,000

· G3 = $10,000 and

· 1A = $0

For more information, please refer to our booklet GST - completing your activity statement.

All GST rulings and publications referred to above are available at the ATO website www.ato.gov.au