Edited version of your private ruling

Authorisation Number: 1012443930961

Ruling

Subject: GST and international services

Question 1

Are you making a taxable supply when you supply your services to X Co?

Answer

No.

Question 2

Are you entitled to claim an input tax credit on the repair work done by Repair Co?

Answer

Yes.

Relevant facts and circumstances

You are a subsidiary of X Co.

You provide the following explanation of the relationship between the parties:

· X Co sells machines to ABC Co, the Australian company customer of X Co.

· Before delivery to ABC Co, the machines have to pass commissioning. This takes place after the machines have been imported into Australia.

· The commissioning job is done by Repair Co.

· If the commissioning is failed, the machines are either returned to X Co overseas or repaired immediately by Repair Co.

Until the machines are delivered to ABC Co, X Co is the owner of the goods.

You organise the commissioning and repair jobs. Once the machines arrive into Australia, your staff supervises the commissioning and/or repair until the machines are delivered to ABC Co. Your staff does not lay hand on any machines or machines but are present to contact X Co if there are any problems and to coordinate with Repair Co and ABC Co.

You charge X Co in one of two ways:

· a fixed amount based on the number of machines or

· itemised amount which includes the following:

· travel cost incurred including allowance for staff (reimbursed for actual expenses)

· labour cost for commissioning or repair (based on billings from Repair Co and reimbursed for actual expenses only)

· admin charge of X% of above costs

· man hour of your supervisor onsite.

The formal agreement between you and X Co contains the following:

I. To use our supervision service provided by your project superintendent.

II. The hourly charge of supervision service provided by your project superintendent is $A Australian Dollars.

III. All travel expenses incurred during the project are to be paid by X Co plus a X% administrative charge.

IV. If the project requires more than Y month finishing, all charges will be billed to X Co on a weekly basis.

V. You should provide all source documents copies against all correspondence travel expenses incurred.

You have additional agreements with X Co which are made on a job by job basis. You provided copies of agreements.

Repair Co has a proposal with X Co for the provision of maintenance support for commissioning of machines prior to deliver to ABC Co. The general terms of the proposal include that Repair Co agrees to hold their price for X years where you and/or X Co provide a written contract to carry out works as per the proposal.

You have agreements with Repair Co that contain the same scope of work as your agreements with X Co. Similar to your agreements with X Co, your agreements with Repair Co are made on a job by job basis. You provided copies of agreements.

X Co is a company based outside of Australia and is not a resident of Australia for income tax purposes. X Co is not in Australia, either through its employees, representatives or agents, when you provide your services. Your main method of communicating with X Co is through electronic means.

You are registered for GST.

You have lodged all outstanding activity statements and have included amounts for the supply of your services to X Co in G1 and G2.

You received tax invoices from Repair Co for the supply of their services.

In your earlier activity statements, you claimed input tax credits on the supplies made by Repair Co to you. However, you subsequently revised these activities to exclude the input tax credits previously claimed.

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 11-5.

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

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.

Reasons for decision

Question 1

Summary

The supply of your services to X Co is GST-free. Hence, GST is not payable.

Detailed reasoning

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.)

The supply of your services in the circumstances described satisfies the requirements of paragraphs 9-5(a), 9-5(b) 9-5(c) and 9-5(d) of the GST Act as:

· the supply is made for consideration

· the supply is made in the course of the enterprise you carry on

· the supply is connected with Australia as it is done in Australia or through an enterprise you carry on in Australia and

· you are registered for GST.

Furthermore, the supply of your services is not input taxed under the GST Act or under any other Act. Therefore, what is left to determine is whether 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:

(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, X Co is an entity existing under the laws of a foreign country whose principal office is in that foreign country, and 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:

(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, X Co does not have any business of its own in Australia nor do they carry on business through an agent in Australia.

X Co, 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 with X Co in its offices overseas.

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

The supply under your agreement with X Co 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 and 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 X Co 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 X Co overseas.

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

Accordingly, the supply of your services to X Co, as you described, is GST-free. Hence, GST is not payable on this supply.

Fees for services

Under section 9-15 of the GST Act, consideration includes any payment, act or forbearance, in connection with, in response to or for the inducement of a supply of anything.

In accordance with the agreement with X Co you are paid a fee calculated either based on a fixed amount or an itemised account.

As the fixed amount you charge is consideration for a GST-free supply, GST is not payable.

The itemised way of calculating your fees includes reimbursement of costs necessarily expended in fulfilling your obligations under the agreements. Therefore, it needs to be considered whether the payment is consideration for the supply of your services.

Paragraphs 48 to 54 of GSTR 2000/37 describe the effects of an agency relationship on disbursements by lawyers. Although GSTR 2000/37 uses the example of lawyers the GST treatment stated in GSTR 2000/37 is applicable to any situation involving service providers and their clients.

Paragraphs 48 and 49 of GSTR 2000/37 state:

48. Agents may incur expenses on a client matter both as an agent of the client and as a principal in the ordinary course of providing their services to the client. For example, in most cases, even though agreements between solicitors and clients may not use the term agent or agency, it is clear that the clients have authorised the solicitors to act on their behalf in the particular matter. When the solicitor acts as an agent for the client, the general law of agency applies so that the solicitor is 'standing in the shoes' of the client.

49. If a disbursement is made by a solicitor and incurred in the solicitor's capacity as a paying agent for a particular client, then no GST is payable by the solicitor on the subsequent reimbursement by the client. This is because the goods or services to which the disbursement relates are supplied to the client, not to the solicitor, by a third party. Also, the reimbursement forms no part of the consideration payable by the client for the supply of services by the solicitor. However, if goods or services are supplied to the solicitor to enable the solicitor to perform services supplied to the client, GST is payable by the solicitor on any reimbursement by the client of expenses incurred on those goods or services, whether the reimbursement is separately itemised or included as part of the solicitor's overall fee. This is because the reimbursement is part of the consideration payable by the client for services supplied by the solicitor.

From the information available and applying the principle in paragraph 49 of GSTR 2000/37, we consider that you are not a paying agent for X Co in respect of the costs outlined in the agreement. You incurred these costs in the ordinary course of providing your services to X Co. They are similar to other acquisitions that you make in the ordinary course of carrying on your enterprise. The subsequent payment by X Co for these costs forms part of the consideration payable by X Co for your services.

As this payment is consideration for a GST-free supply, GST is not payable.

Activity statement

As you are making GST-free supplies of your services to X Co, the amount 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). You report at 1A the total amount of GST you are liable to pay us for the reporting period.

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

Where you have incorrectly completed your activity statement, you have to correct this mistake. Refer to the fact sheet Correcting GST mistakes for further information.

Question 2

Summary

You are entitled to claim an input tax credit on the repair work done by Repair Co.

Detailed reasoning

Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make.

You make a creditable acquisition if all of the requirements of section 11-5 of the GST Act are met and it states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

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

Your acquisition of services from Repair Co, in the circumstances described, satisfies the requirements of paragraphs 11-5(a), 11-5(b) 11-5(c) and 11-5(d) of the GST Act as:

· you acquire the repair work from Repair Co in the course of providing your services to X Co

· the supply of the repair work to you is a taxable supply

· you provide or are liable to provide consideration for the supply and

· you are registered for GST.

Therefore, as all the other requirements of section 11-5 of the GST Act are satisfied, you are making a creditable acquisition. Hence, you are entitled to claim input tax credits on the repair work done by Repair Co.

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