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Ruling

Subject: GST and the supply of managed portfolio administration services to a non-resident entity which is not in Australia

Question: 1

Is the supply of managed portfolio administration services by an Australian company (you) to non-resident clients outside of Australia GST-free under section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer:

Yes, the supply of managed portfolio administration services by you to non-resident clients outside of Australia is GST-free under section 38-190 of the GST Act.

Question: 2

Will the Commissioner exercise the discretion available under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA) to allow a refund of any overpaid GST in relation to the supply of managed portfolio administration services by you to the non-resident clients?

Answer:

As we have not been provided with sufficient facts to provide definitive advice on the exercise of the Commissioner's discretion under section 105-65 of Schedule 1 to the TAA we have provided written guidance on that issue in response to Question 2.

Relevant facts and circumstances:

You are a company incorporated in Australia which is registered for GST.

You offer your clients a managed portfolio administration service called 'XYZ'. XYZ is an individually managed account (IMA) service where you provide each XYZ client with advice and manages an investment portfolio tailored to the client's individual requirements. All investments are held in the client's name.

Your charge fees to each XYZ client on a monthly or quarterly basis at rates stated in a Fee Schedule attached to the XYZ Client Agreement (see below) based on the close of business balance of the investments in the client's investment portfolio.

You supply the managed portfolio administration services to both Australian resident and non-resident XYZ clients. The majority of your non-resident XYZ clients are individuals. Only one non-resident XYZ client is a non-individual. However you have a variety of clients and in future it is possible that you could have a non-resident company as a XYZ client.

XYZ Client Agreement

Your XYZ clients are required to enter into a XYZ Client Agreement (Agreement) with you.

Pursuant to the Agreement, the client (through the client's adviser) appoints you to undertake the services set out in clause x.x of the Agreement (clause x.x) and in clause x.x of the Agreement (clause x.x) subject to the terms and conditions of the Agreement.

Clause xx of the Agreement states:

Through our adviser, we offer the following services:

a) Where requested, review your known personal circumstances and provide recommendations on appropriate Authorised Investments;

b) At your direction, establish an Investment Portfolio containing the Authorised Investments directed by you;

c) Unless you hold a Managed Discretionary Account with us, obtain your directions before making any changes or amendments to your Investment Portfolio;

d) At your direction and on your behalf, execute transactions in relation to your Investment Portfolio as appropriate;

e) Supervise, monitor and maintain your Investment Portfolio; and

f) Provide ongoing financial product advice on all investment matters and your Investment Portfolio.

These advisory services will be provided to you on your terms and conditions of business.

Clause yy of the Agreement states:

Through XYZ we offer the following services:

(a) provide a portfolio recording platform, known as XYZ, to support the management of your investment Portfolio

(b) establish an initial record of your Authorised Investments;

(c) open and maintain a Cash Management Facility and credit it with all monies received by us on your behalf;

(d) at your direction and on your behalf, settle any transactions relating to Authorised Investments within, or approved by you to be additions to, your Investment Portfolio,

(e) provide you with access to a wholesale managed fund provider;

(f) oversee and record changes to your Investment Portfolio as settled or notified to XYZ

(g) undertake payments to third parties from your Cash Management Facility at your direction and on your behalf;

(h) provide administrative support by acting as a "mailbox" and managing your investment correspondence as you direct us;

(i) manage the administration of your entitlements and participate as you direct in corporate activity relating to Securities in your Investment Portfolio;

(j) reconcile the balances or any activity within your Investment Portfolio and Cash Management Facility; and

(k) provide reporting, through the internet and periodically through the mail, on the structure, transactions and performance of your Investment Portfolio Including:

(l) …

For clarity, you through XYZ will not be providing you with any financial advice in respect of any transaction involving your Investment Portfolio or otherwise or, any transaction or other matter contemplated by this Agreement.

Clause zz of the Agreement defines 'Authorised Investment' to include any securities listed on any recognised exchange or securities in any other public company, debentures, stocks or bonds issued by a government or by a body corporate or unincorporated, interests in managed investment funds etc, and defines 'Investment Portfolio' as all of the Authorised Investments held by or on behalf of the client as recorded in the XYZ system.

Clause zz of the Agreement also defines 'Services' as the services outlined in clause xx of the Agreement.

Clause aa of the Agreement obliges you to provide the Services with due care and skill, in a timely manner and in accordance with the client's instructions. Pursuant to clause bb of the Agreement the client grants you a limited power of attorney to do everything necessary to maintain the client's Investment Portfolio.

Clause cc provides details of fees payable by the clients to you as below:

Fees payable by you to us

In consideration of the Services to be provided by us in accordance will this Agreement you agree to pay us the following fees:

(a) an Administration Fee charged in accordance with the rates, as stated in the Fee Schedule calculated on the daily close of business balance of the Authorised Investments;

(b) an Advisory fee charged in accordance with the agreed rates detailed in the Fee Schedule, calculated on the daily close of business balance of such of the included Authorised Investments as agreed with our adviser;

(c) such other fees as may be set out in a Schedule;

(d) such Brokerage Fees as may apply on either the buy or sell aspects of Securities transaction;

(e) GST, stamp duty and other applicable government or statutory charges; and

(f) ad hoc fees for specific additional services such as deceased estates, off-market transfers or others in accordance with the amount advised to you by our adviser at the time of requesting the service.

All fees are calculated and payable in arrears in accordance with the Fee Schedule and must be paid on the due date.

You authorise us to deduct from your Cash Management Facility such amounts as shall be necessary to meet our Fees.

If there are insufficient funds in the Cash Management Facility to pay the Fees, and this situation continues for three consecutive months, we have the right to close your XYZ account and move the Securities within your Investment Portfolio onto a standard CHESS arrangement, to be held in accordance with the terms of the relevant Sponsorship Agreement.

Trailing Commissions generated on any investment (excluding shares) are payable to us.

Commission, brokerage or fees generated from the placement of any investment (excluding shares) made on your behalf by us in accordance with this Agreement may, at our discretion, be either:

rebated to you;

deposited into your Cash Management Facility within two (2) clear business days of receipt by us; or

paid to us.

All Fees are:

GST exclusive, unless otherwise stated, and

subject to increases in line with annual CPI increases effective July each year.

Nothing in this clause affects our ability to increase Fees in accordance with the notice provisions in clause 13.

…

Clause zz of the Agreement defines 'Administration Fee' as the fee charged for the provision of the XYZ services in accordance with the rate stated in the Fee Schedule as amended from time to time and defines 'Advisory fee' as the fee charged for the provision of the advisory services by your adviser in accordance with the rate stated in the Fee Schedule as amended from time to time.

Entitlement to refund of overpaid GST

On the assumption that supplies of managed portfolio administration services were GST-free, you requested guidance on your entitlement to a refund of GST overpaid by you as a result of incorrectly classifying those supplies as taxable.

You advised that approximately four non-resident XYZ clients were incorrectly classified as Australian residents by your XYZ billing team and charged GST on supplies of managed portfolio administration services for a period until the misclassification was discovered and corrected.

You acknowledged that there was a four year time limit for a refund of overpaid GST, that you must first reimburse the clients for the GST charged, and that the relevant clients must be neither registered for GST nor liable to so register. You referred to the requirements set out in Miscellaneous Taxation Ruling 2010/1 and confirmed that you will be able to satisfy the ATO that:

each relevant client can be specifically identified;

the amount of the reimbursement to each client corresponds exactly to the amount of GST overcharged to that client;

the reimbursement is in money; and

the reimbursement has been made.

Further information

In response to a request for further information from the ATO you confirmed that you sought a ruling as to whether services supplied by you to XYZ clients who are not resident in Australia are GST-free under Item 2(a) or Item 2(b) in subsection 38-190(1) of the GST Act.

You also confirmed that the non-resident XYZ clients are not in Australia when the managed portfolio services are provided and that you do not have any agreements in place which require you to provide those services to another entity in Australia.

Assumptions

By letter dated xx xxxxxxxx xxxx the ATO informed you that the ATO would have to make the assumptions set out below in order to issue a private ruling in relation to Question 1 and gave you an opportunity to respond.

In a telephone call on xx xxxxxxxx xxxx you confirmed that you agreed to a private ruling being issued subject to those assumptions.

Assumptions

This ruling is subject to the following assumptions:

That any decision made by you to treat a XYZ client as a 'non-resident' within the meaning of the GST Act in relation to a supply by you of managed portfolio administration services is correct; and

That any decision made by you to treat a XYZ client as a 'in Australia when the thing supplied is done' within the meaning of item 2 in subsection 38-190(1) of the GST Act in relation to a supply by you of managed portfolio administration services is correct; and

That any decision made by you to treat a XYZ client as a in Australia 'in relation to the supply' as that term is explained in Goods and Services Tax Ruling GSTR 2004/7 in relation to a supply by you of managed portfolio administration services is correct; and

That, before making a decision to treat a XYZ client as not GST registered in Australia and not liable to be so registered within the meaning of paragraph (b) in item 2 in subsection 38-190(1) of the GST Act, you confirm that the client is not recorded as being GST registered on the Australian Business Register (www.abr.gov.au) and has obtained a written statement from that client which confirms that that client is not liable to be GST registered.

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 9-25

A New Tax System (Goods and Services Tax) Act 1999 Section 38-190

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 40-5

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

Question 1 - reasons for decision

Summary of decision:

The supply of managed portfolio administration services by you to non-resident clients which are not in Australia is GST-free under section 38-190 of the GST Act.

Detailed reasoning:

GST is payable on a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

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.

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

The facts indicate that you satisfy the requirements of paragraph 9-5(a) to 9-5(d) of the GST Act because:

· you supply the managed portfolio administration services for consideration; and

· in the course or furtherance of an enterprise carried on by you; and

· the supply is connected with Australia; and

· you are registered for GST.

We do not consider that the services provided by you pursuant to the Agreement are input taxed. Clause x of the Agreement appears to divide those services between advisory services and investment portfolio administration services.

Subsection 40-5(1) of the GST Act states that a financial supply is input taxed and subsection 40-5(2) states that 'financial supply' has the meaning given by the A New Tax System (Goods and Services Tax) Regulations 1999 (GST regulations). Regulation 40-5.12 of the GST regulations states that, for the purposes of section 40-5.02 of the GST Act, the supply of something that is mentioned in the table in regulation 40-5.12 is not a financial supply. In relation to the advisory services listed in clause 2.1 of the Agreement, regulation 40-5.12 includes:

3. Professional services, including information and advice, in relation to a financial supply.

Schedule 2 to Goods and Services Tax Ruling GSTR 2002/2 states that all of the following advisory services fall within item 3 in regulation 40-5.12 and are taxable supplies:

J8 Advice about financial investment alternatives.

J9 General financial advice.

J20 Advising on investment strategies and portfolio planning.

J22 Portfolio analysis and review.

In our view the services described in clauses x.x(x) and (x) of the Agreement fall within item 3 in regulation 40-5.12 and are taxable supplies.

The table in regulation 40-5.12 of the GST regulations also states that the following are not financial supplies:

11 Broking services

12 Management of the assets or liabilities of another entity, including investment portfolio management and administration services for trusts or superannuation, pension or annuity funds.

and the examples for item 12 set out in Schedule 8 to the GST regulations include:

3. Investment portfolio administration, including:

(a) Maintaining account holder records and associated accounting; and

(b) Processing of contributions and returns; and

(c) Storage and retrieval of archives; and

(d) Statement processing and bulk mailing

Schedule 2 to GSTR 2002/2 states that the following investment portfolio administration services fall within item 12 in the table in regulation 50-5.12 and are taxable:

M5 Maintaining account holder records and associated accounting.

M6 Processing contributions and returns.

M11 Settling and undertaking securities transactions at direction of custodian client.

M12 Collecting income and other payments with respect to the securities in the fund.

M14 Portfolio reporting.

In our view the services described in clauses x.x(x), (x), (x) and (x) and clause x.x of the Agreement fall within item 11 or item 12 in regulation 40-5.12 of the GST regulations and are taxable supplies.

As the managed portfolio administration services supplied by you are not input taxed, it remains to be determined whether the supply of those services by you to non-resident clients is GST-free.

GST-free supplies

Section 38-190 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 relevance to the facts provided is item 2 in the table in subsection 38-190(1) of the GST Act (item 2).

Under item 2, a supply is GST-free where it is:

a supply that is made to a ^*non-resident who 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.

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

Goods and Services Tax Ruling GSTR 2000/31, Goods and Services Tax Ruling GSTR 2003/7, Goods and Services Tax Ruling GSTR 2004/7, and Goods and Services Tax Ruling GSTR 2005/6 address this matter.

A supply that is made to a non-resident:

'Non-resident' is defined in section 195-1 of the GST Act as an entity that is not an 'Australian resident' and section 195-1 defines 'Australian resident' as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA).

You advised that the majority of the non-resident XYZ clients are individuals, that one is a trust, and that in future it is possible that such clients will include companies.

In the case of an individual, paragraph (a) of the 'resident' definition in subsection 6(1) of the ITAA states that 'resident' means:

(a) A person, other than a company, who resides in Australia and includes a person:

(i) Whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside Australia;

(ii) Who has actually been in Australia, continuously or intermittently, during more than one half of the year of income, unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence in Australia; or

(iii) who is:

A a member of a superannuation scheme established by deed under the Superannuation Act 1990; or

B an eligible employee for the purposes of the Superannuation Act 1976; or

C the spouse, or a child under 16, of a person covered by sub-paragraph (A) or (B);

Taxation Ruling TR98/17 states that this sets out four tests for determining whether an individual is a resident for tax purposes:

residence according to ordinary concepts;

the domicile and permanent place of abode test;

the 183 day test; and

the Commonwealth superannuation fund test.

and that if an individual resides in Australia according to ordinary concepts, residency status is established and the other three tests in the subsection 6(1) definition need not be considered, and that the other three tests extend the meaning of 'resident' to individuals who may not reside in Australia (Para 33). We note that the Agreement requires the XYZ client to provide an address and we consider that if an individual XYZ client provides an address that is outside Australia that would indicate that the client is non-resident according to ordinary concepts.

In the case of a company, subsection 6(1) of the ITAA states that 'resident' means a company that is incorporated in Australia, or which, not being incorporated in Australia, has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

In the case of a trust, www.ato.gov.au states that generally a trust will be regarded as Australian resident if either:

any of the trustees were Australian residents at any time during an income year; or

the central management and control of the trust estate was in Australia at any time during the income year.

As noted above, you advised that the majority of XYZ clients who were non-resident were individuals, although one is a trust. Practice Statement Law Administration PSLA 2008/3 states that one of the basic requirements of an application for a private ruling is for the applicant to provide a full and disclosure of the material facts. However you may not reasonably be expected to have knowledge of some of the facts material to whether each XYZ client is a 'non-resident'. In those circumstances PSLA 2008/3 states (Para 97):

An assumption should not be made if the applicant could reasonably be expected to have knowledge of the relevant fact. If making a private ruling would depend on a fact that may not occur, for instance about a future event, the Commissioner may either decline to make the ruling or make the ruling on the basis of an assumption. If the Commissioner proposes to make an assumption in making the ruling, the applicant must be informed of the assumption proposed to be made and given a reasonable opportunity (ordinarily 28 days) to respond

Paragraph 97 of PSLA 2008/3 refers to subsection 357-110(1) in Schedule 1 to the Taxation Administration Act 1953 (TAA) which states that if the Commissioner considers that the correctness of a private ruling would depend on which assumptions were made about a future event or other matter the Commissioner may either decline to make the ruling or make such of the assumptions as the Commissioner considers to be most appropriate. In the present case we have made this ruling subject to an assumption that any decision made by you to treat a XYZ client as a 'non-resident' within the meaning of the GST Act is correct.

Non-resident who is not in Australia

GSTR 2004/7 states that the requirement that a supply is made to a non-resident who is 'not in Australia' is in effect a proxy test for determining where the supply to that entity is consumed (Para 181).

In relation to a non-resident individual, Goods and Services Tax Ruling GSTR 2004/7 states (Paras 202 - 203)

In the case of supplies made to an individual, we consider that the physical location of the individual establishes whether that individual is in Australia when the thing supplied is done.

If a supply is made to a non-resident individual who is physically in Australia when the thing supplied is done, the individual is in Australia. However, the individual must be in Australia in relation to the supply. This is discussed at paragraphs 214 to 220.

In relation to a non-resident company, GSTR 2004/7 states (Para 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.

GSTR 2004/7 also provides guidance on when a non-resident trust 'in Australia' (Para 49)

We consider that a non-resident trust is in Australia if a trustee of that trust, acting in its capacity as trustee, carries on business (or in the case of a trustee that does not carry on business, carries on the trust's 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.

In the present case you advised that all the non-resident XYZ clients are living at an overseas address and are not in Australia when the managed portfolio administration services are provided. As is the case with the 'non-resident' requirement, we consider that the correctness of this ruling would depend on what assumptions were made about whether each XYZ client was 'in Australia' when the thing supplied is done. Consequently we have made this ruling subject to an assumption that any decision made by you to treat a XYZ client as a 'in Australia when the thing supplied is done' within the meaning of item 2 in subsection 38-190(1) of the GST Act in relation to a supply by you of managed portfolio administration services is correct.

Not in Australia in relation to the supply:

GSTR 2004/7 states that the requirement in item 2 that the non-resident is not in Australia when the thing supplied is done is a requirement that the non-resident or recipient is not in Australia in relation to the supply when the thing supplied is done (Para 31) and provides the following explanation (Paras 182 and 184):

A strict literal interpretation of the 'not in Australia' requirement merely requires a presence of that entity in Australia when the thing supplied is done for that requirement not to be satisfied. A literal approach would mean, for example, that a supply made to a non-resident individual who happens to be in Australia on holidays when the thing supplied is done fails the not in Australia requirement even though his or her presence in Australia is completely unrelated to the supply.

As the Australian location of the entity to which the supply is made at the relevant time is a proxy test for identifying when consumption occurs in Australia, we consider that the expression 'not in Australia' should be interpreted in the context of the supply in question. The expression 'not in Australia' requires, in our view, that the non-resident or other recipient is not in Australia in relation to the supply . This means that a non-resident or other recipient of a supply may satisfy the 'not in Australia' requirement if that entity is in Australia but not in relation to the supply.

In relation to whether an individual is in Australia 'in relation to the supply', GSTR 2004/7 states (Paras 216 - 218):

Thus, if a non-resident individual is, for example, in Australia on holidays and has no contact with the supplier, we consider that the presence of the non-resident individual in Australia when the thing supplied is done is not in relation to the supply.

If a non-resident individual recipient of a supply is physically in Australia and in contact with the supplier (other than contact which is only of a minor nature), we consider that presence is in relation to the supply. The extent to which an individual's presence in Australia is in relation to the supply must be determined on a reasonable basis having regard to the period of the individual's involvement with the supply while in Australia. This is discussed further in 'Part IV - apportionment'.

Contact is minor if it is limited to contact of a simple administrative nature, such as checking on the progress of the supply or a courtesy call on the supplier. If this is the only contact between the non-resident individual and the supplier we consider that the individual is not in Australia in relation to the supply.

In relation to whether a company is in Australia 'in relation to the supply', GSTR 2004/7 states (Paras 358 - 351):

To work out whether a company is in Australia in relation to the supply, it is necessary to examine the role the presence of the company in Australia plays in relation to the supply.

Clearly if the supply to a company is solely or partly for the purposes of the Australian presence, for example its Australian branch, representative office or agent if it is a non-resident company, or the Australian head office if it is an Australian incorporated company, the company is in Australia in relation to the supply. There is a connection between the supply and the presence in Australia that is not a minor connection.

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', unless the only involvement is minor.

If the involvement of the Australian presence is limited to the carrying out of simple administrative tasks on behalf of the company, as a matter of administrative convenience, that involvement is minor. The connection between the supply and the presence is so minor in nature that it is reasonable to conclude that the presence of the company in Australia is not in relation to the supply.

GSTR 2004/7 states that tasks of a simple administrative nature include paying suppliers' invoices on behalf of the company or being mailing address or a point of contact for the company (Para 352). GSTR 2004/7 contains the following example of a non-resident company which has an Australian presence but is not in Australia 'in relation to' the supply being made because the Australian presence's involvement in that supply is limited to carrying out an administrative task (Paras 356 - 358):

Example 12 - branch in Australia but not in Australia in relation to the supply

A Singapore company ('Sing Co') is not a resident of Australia. It has a branch in Australia. Sing Co is considering setting up a joint venture in Australia with a Malaysian company. Sing Co's head office engages an Australian legal firm, Aus Legal, to provide written legal advice .

Sing Co requests Aus Legal to deliver the advice to the Australian branch so that it can translate it before forwarding it on. Sing Co is in Australia but not in relation to the supply of legal services.

The fact that the advice is received and on-forwarded by the Australian branch to Sing Co does not make Sing Co in Australia in relation to the supply. The involvement of the Australian branch is limited to carrying out an administrative task on behalf of Sing Co, as a matter of administrative convenience. If the Australian branch translates the advice into Malay before on-forwarding it to Sing Co, that does not alter this outcome. Therefore, Sing Co is not in Australia for the purposes of item 2 or item 3. The supply is GST-free if the other requirements of the item are met.

In relation to whether a trust is in Australia 'in relation to the supply', GSTR 2004/7 states (Paras 431 - 433):

To work out whether a trust is in Australia in relation to the supply, it is necessary to examine the role the presence of the trust in Australia plays in relation to the supply…

For example, a trust through its trustee(s) may carry on business in Australia as well as in another country such as the United Kingdom. If a supply is made for the purposes of the business carried on by the trustee of the trust in Australia the trust is in Australia in relation to the supply. There is a connection between the supply and the presence of the trust in Australia that is not a minor connection.

If a supply is not solely or partly for the purposes of the Australian presence of the trust (for example it is solely for the purposes of the presence of the trust in the United Kingdom), but that Australian presence is involved in the supply, the trust is in Australia in relation to the supply, except where the only involvement is minor..

GSTR 2004/7 uses the tests referred to above in relation to a company to determine whether the involvement of the Australian presence of a trust in a supply is only minor.

As is the case with the 'non-resident' and 'not in Australia' requirements, we consider that the correctness of this ruling would depend on what assumptions were made about whether each XYZ client was in Australia 'in relation to the supply'.

Consequently we have made this ruling subject to an assumption that any decision made by you to treat a XYZ client as a in Australia 'in relation to the supply' as that term is explained in GSTR 2004/7 in relation to a supply by you of managed portfolio administration services is correct.

Paragraph (a) of item 2

Goods and Services Tax Ruling GSTR 2003/7 states that 'a supply of work physically performed on goods' in paragraph (a) replaced the words 'a supply directly connected with goods' with the intention of allowing a wider range of services to be GST-free (Para 56), and (Paras 57-8):

A supply of work physically performed on goods requires a much closer connection with the goods: it requires physical intervention with the goods. For example, a supply of legal services in preparing an agreement for the lease of goods is directly connected with goods but it is not a supply of work physically performed on goods as there is no physical intervention with the goods.

A supply is a supply of work physically performed on goods where something is done deliberately to the goods to change them or affect them in some physical way. The repair of goods is an example of work that is physically performed on goods.

In our view the supply of managed portfolio administration services by you pursuant to the Agreement does not involve a physical intervention with goods situated in Australia and is not 'a supply of work physically performed on goods situated in Australia when the work is done' within the meaning of item 2(a) in subsection 38-190(1) of the GST Act.

In the alternative, paragraph (a) in Item 2 requires that the supply made by you is not 'a supply directly connected with real property situated in Australia'. GSTR 2003/7 states that the addition of the adverb 'directly' to the phrase 'connected with' implies a more emphatic connection between the supply and real property and that the inference is that the supply is so closely aligned with the real property that it is appropriate to treat the location of the goods or real property as the place where consumption occurs (Para 21). GSTR 2003/7 also states that a direct connection does not exist in the case of the supply of advice or information about real property, the supply of marketing or similar intermediary service, or merely arranging supplies between two other parties (Para 44). We therefore consider that the supply of managed portfolio administration services by you are not 'directly connected with real property situated in Australia' within the meaning of item 2(a) in subsection 38-190(1).

Paragraph (b) of item 2

Paragraph (b) of item 2 in subsection 38-190(1) states that a supply is GST-free if the non-resident client acquires the thing in carrying on the non-resident's enterprise and the non-resident is neither registered for GST nor required to be so registered.

'Enterprise' is defined in section 9-20 of the GST Act as, inter alia, an activity or series of activities done in the form of a business and 'carrying on' an enterprise is defined in section 195-1 of the GST Act to include doing anything in the course of the commencement or termination of the enterprise.

In relation to the registration status of the recipient, Goods and Services Tax Ruling GSTR 2002/2 states (Paras 152 - 155):

A supplier is able to ensure that a recipient is not registered by checking the Australian Business Register.

The supplier must be satisfied, on reasonable grounds that the entity it supplies to is not required to be registered. Where a supplier has reason not to be so satisfied, enquiries should be made of the recipient.

We accept that the supplier has reasonable grounds for being satisfied, if the entity has provided a statement, declaring that the entity is not required to be registered. This is provided the supplier has no other reason to believe that the statement is not accurate.

Having a statement from the recipient is not the only way in which a supplier may be satisfied that the recipient is not required to be registered. 

You did not indicate that you had either checked the Australian Business Register to determine whether each XYZ client is GST registered in Australia and obtained a written statement from each XYZ client that that client was not required to be so registered (although we note that clause 3(d) of the Agreement obliges a XYZ client to promptly provide any information reasonably requested by you in connection with this Agreement).

As is the case with the 'non-resident,' 'not in Australia,' and not in Australia 'in relation to the supply' requirements, we consider that the correctness of this ruling would depend on what actions are taken by you to determine whether each XYZ client is not GST registered in Australia and not liable to be so registered.

Consequently we have made this ruling subject to an assumption that, before making a decision to treat a XYZ client as not GST registered in Australia and not liable to be so registered, you confirm that the client is not recorded as being GST registered on the Australian Business Register (www.abr.gov.au) and has obtained a written statement from that client which confirms that that client is not liable to be GST registered.

Subsection 38-190(3)

If the requirements of either item 2(a) or 2(b) are satisfied, it is also necessary to consider subsection 38-190 (3) of the GST Act which states:

Without limiting subsection (2), a supply covered by item 2 in that table 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 meaning of 'provided to another entity' in subsection 38-190(3) (Paras 59-61):

The word 'provided' is used in subsection 38-190(3) to contrast with the term 'made' in item 2. In the context of section 38-190, the contrasting words indicate that if a non-resident contracts for a supply to be provided to another entity, the place of consumption should be determined with regard to the entity to which the supply is provided, not the entity to which the supply is made.

The example in the Explanatory Memorandum accompanying the Bill that introduced subsection 38-190(3) illustrates this. In that example, non-resident parents contract for the supply of education services to be provided to their children in Australia. The contractual flow of the services is to the parents, while the actual flow of the services is to the children. The supply is made to the parents (non-residents) and provided to another entity, each child, in Australia.

Thus the expression 'provided to another entity' means, in our view, that in the performance of a service (or in the doing of some thing), the actual flow of that supply is, in whole or part, to an entity that is not the non-resident entity with which the supplier made the agreement for the supply. The contractual flow is to one entity (the non-resident recipient) and the actual flow of the supply is to another entity.

GSTR 2005/6 also sets out a process for determining whether a supply is provided to another entity (Paras 66 - 82). The first step is to characterise the supply. The next step is to determine the exact nature of the supply (by examining the relevant agreement) in order to determine the entity to which the supply is provided (Para 73).

In the present case the character of the supply is one of services. Clause 2 of the Agreement indicates that the exact nature of the supply made by you to the client comprises advisory and portfolio administration services.

Based on the facts provided, a supply of the managed portfolio administration services made by you to a non-resident client is not provided to another entity in Australia, nor does the Agreement require you to provide that supply to another entity in Australia. Therefore, subsection 38-190(3) of the GST Act does not cause such a supply which is GST-free pursuant to item 2 to cease to be GST-free.

Question 2 - general guidance on section 105-65 in Schedule 1 to the Taxation Administration Act 1953

Written guidance:

Although you submitted a Private Ruling Application form which included the following question:

Are [you] entitled to claim a refund from the ATO on overpayment of GST due to incorrectly classifying a supply as a taxable supply instead of a GST-free supply with regard to section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

the ruling request did not contain details of the specific circumstances of the XYZ clients incorrectly treated as Australian residents by you so as to enable the ATO to issue a private ruling on that issue and the submissions in the ruling request stated that you 'would like to request guidance on your entitlement to request a refund on overpayment of GST'.

In these circumstances we consider it appropriate to provide written guidance on the operation of section 105-65, as discussed in PSLA 2008/3:

210. Written guidance is issued to help taxpayers understand their obligations and entitlements under the laws administered by the Commissioner. It provides only general assistance and cannot cover all possibilities or the circumstances of every taxpayer.

PSLA 2008/3 also states:

211. Written guidance is usually provided if the taxpayer has enquired about the broad operation of the law and has not provided details of their specific circumstances. A taxpayer who receives written guidance must decide how the guidance applies to their circumstances.

and sets out the level of protection provided to by written guidance:

Protection level

212. A taxpayer who relies on written guidance, including a statement in an approved publication, will remain liable for the tax that would otherwise be payable under the law where the guidance is incorrect, or misleading and the taxpayer makes a mistake as a result (unless prevented by a relevant time limit in the law). However, they will be protected against the false or misleading statement penalty that might otherwise arise.

213. In addition, if a shortfall arises under a relevant provision, a taxpayer will be protected against any interest charges if they relied on the guidance reasonably and in good faith.

Refunds of GST

A refund or credit of GST may arise as a result of an entity miscalculating the entity's net amount for a tax period and either the entity or the ATO amending that net amount by, for example, reducing the GST payable or making a decreasing adjustment so that the entity either has a reduced net amount, becomes entitled to a refund under section 35-5 of the GST Act, or becomes entitled to an increased refund.

Where this occurs the ATO is required to give the refund or apply the credit in accordance with the running balance account (RBA) rules in section 8AAZLF of the Taxation Administration Act 1953 (TAA). Where the refund or credit is an amount to which section 105-65 in Schedule 1 to the TAA applies, however, the ATO need not give a refund or apply the credit. Section 105-65 in Schedule 1 to the TAA states:

105-65(1)  

The Commissioner need not give you a refund of an amount to which this section applies, or apply (under Division 3 or 3A of Part IIB) an amount to which this section applies, if:

(a) you overpaid the amount, or the amount was not refunded to you, because a supply was treated as a taxable supply, or an arrangement was treated as giving rise to a taxable supply, to any extent; and

(b) the supply is not a taxable supply, or the arrangement does not give rise to a taxable supply, to that extent (for example, because it is GST-free); and

(c) one of the following applies:

(i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient;

(ii) the recipient of the supply, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is registered or required to be registered.

105-65(2)

This section applies to the following amounts:

(a) in the case of a supply: (i) so much of any assessed net amount or amount of *GST as you have overpaid (as mentioned in paragraph (1)(a)); or (ii) so much of any assessed net amount that is payable to you under section 35-5 of the GST Act as the Commissioner has not refunded to you (as mentioned in paragraph (1)(a)), either by paying it to you or by applying it under Division 3 of Part IIB of this Act;

(b) in the case of an arrangement: (i) so much of any assessed net amount or amount of GST to which subparagraph (a)(i) would apply if the arrangement were a supply; or (ii) so much of any assessed net amount to which subparagraph (a)(ii) would apply if the arrangement were a supply.

Miscellaneous Taxation Ruling MT 2010/1 sets out the ATO's view on section 105-65.

MT 2010/1 states that 'overpaid' in section 105-65 means the amount that has been remitted must be in excess of what was legally payable on the particular supply in the relevant period (Para 20) and that 'treated' as a taxable supply means where the supplier has mischaracterised a supply as taxable because the supplier believed that the supply was taxable and remitted an amount as GST to the ATO on that supply in the calculation of the supplier's net amount (Para 21).

MT 2010/1 also states (Para 26):

Section 105-65 is not limited to situations where an actual refund is payable. The section can also apply in cases where a supplier revises a relevant activity statement and, after netting off all underpayments and overpayments, has a nil net amount or still has a liability to pay for the particular tax period. Section 105-65 can apply to any component of the revision that represents an overpayment arising from the incorrect treatment of a supply as taxable to any extent.

MT 2010/1 also sets out the extent of the ATO's discretion under section 105-65 (Para 27):

The operation of section 105-65 to deny the requirement to pay refunds that would otherwise be payable is not discretionary. Where the conditions in section 105-65 apply, the Commissioner has no obligation to pay a refund that would otherwise be payable under section 8AAZLF of the TAA. Where the section applies the Commissioner need not give you a refund of the amount or apply the amount under the relevant RBA provisions. However, the words 'need not' indicate the Commissioner may choose to pay a refund in appropriate circumstances, even though the conditions in paragraphs 105-65(1)(a), 105-65(1)(b) and 105-65(1)(c) are satisfied. It is to that limited extent that the Commissioner has a discretion.

The view expressed in paragraph 27 of MT 2010/1 is consistent with the approach taken in Luxottica Retail Australia Pty Ltd v FCT AATA 22 where counsel for the ATO submitted that as the requirements of paragraphs (a), (b) and (c)(i) in subsection 105-65(1) were satisfied an amount should not be refunded to Luxottica, although counsel agreed that the words 'need not give you a refund' in subsection 105-65(1) indicate that section 105-65 'provides for a residual discretion to pay the refund even if the criteria in subsection (1) are met' (Para 54). In Luxottica the Administrative Appeals Tribunal (AAT) exercised the residual discretion and allowed the refund of an amount of GST to Luxottica despite subparagraph 105-65(1)(c)(i) not being satisfied (because Luxottica had not refunded the overpaid GST to the recipients of the supplies) and despite subparagraph 105-65(1)(c)(ii) not applying (because the recipients of the supplies made by Luxottica were not GST registered). The AAT considered that it was not appropriate to require Luxottica to have reimbursed the overpaid GST to Luxottica's customers because the overpaid GST related to supplies to those customers which comprised both taxable and GST-free components, any refund by Luxottica would have to be allocated between those components and, to the extent that any refund was allocated to a taxable component, Luxottica would have to make an adjustment to the price, a consequent adjustment to the GST payable on the supply, and make a further reimbursement of GST. The AAT stated (Para 58):

Such a process of reiterating prices, values and GST payable has no place in a taxpayer's compliance with a 'practical business tax'.

The principles guiding the exercise of the discretion pursuant to section 105-65 of the TAA are set out in paragraphs 113 to 132 of MT2010/1.

114…The obligation imposed on the Commissioner by section 8AAZLF to refund a RBA surplus is qualified by the operation of section 105-65. In this regards section 105-565 places a restriction on the payment of a refund of overpaid GST.

115. However if the supplier satisfies the Commissioner that it has reimbursed the recipient of the supply and the recipient of the supply is not registered or required to be registered, the Commissioner has a prima facie obligation to pay the refund of overpaid GST under section 8AAZLF provided that the supplier satisfies any other legislative conditions (for instance, the time limits contained in section 105-55). In all other cases section 105-65 provides that the Commissioner 'need not' give a refund.

115A. In cases where the recipient is not registered or required to be registered, taxpayers can consider (that is self-assess) that the Commissioner will be satisfied that the recipient has been appropriately reimbursed (and that therefore section 105-65 will not apply) where:

the recipient can be specifically identified;

the amount of the reimbursement corresponds exactly to the amount of the GST overcharged to the recipient and the method of reimbursement ensures this is achieved;

the reimbursement is in money; and

the reimbursement has actually been made, and is not merely planned to be made.

115B. In all other cases, taxpayers should seek guidance from the Commissioner as to whether he is satisfied that the recipient of the supply has been reimbursed.

In the present case you confirmed that you will be able to satisfy the ATO that all but one of the requirements in paragraph 115A of MT 2010/1 are satisfied, i.e. the recipients of the supplies made by you and incorrectly treated as taxable can be specifically identified, the amount of reimbursement corresponds to the amount of GST overcharged, the reimbursement is in money, and the reimbursement has been made. However, paragraph 115A also requires that the recipients are neither registered for GST nor required to be so registered. Consequently it will be necessary for you to check the Australian Business Register and obtain statements from the relevant XYZ clients confirming that they were not liable to be registered in Australia during the relevant tax periods. If you do so then the principles stated in paragraph 127 of MT2010/1 will be satisfied, i.e. you will not receive a windfall gain from the refund of GST and the refund of GST will compensate the XYZ clients who ultimately bore the cost of the GST incorrectly charged:

127. It is clear from the scope and purpose of section 105-65 that the provision is designed to prevent windfall gains to suppliers and to require the supplier to ensure that any refund ultimately compensates the person or entity who ultimately bore the cost. In relation to a refund of overpaid GST, the potential or otherwise for a windfall gain, the requirement to ensure the refund compensates the person or entity that ultimately bore the cost and the potential to disturb the symmetry envisaged by the GST system, are factors that must be taken into account in relation to the exercise of the discretion

Provided that you take the steps outlined above and reimburse the relevant XYZ clients, all of the requirements in paragraph 115A of MT2010/1 will be satisfied and you will be able to claim the refund of GST via self-assessment and without first obtaining a ruling from the ATO.