Edited version of your private ruling

Authorisation Number: 1012532507125

Ruling

Subject: GST and services agreement

Question 1

Are the supplies made by A in return for the rebate paid by B GST-free under section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Alternatively, are the supplies made by A in return for the rebate paid by B input taxed under section 40-5 of the GST Act or taxable supplies under section 9-5 of the GST Act?

Answer

See discussion below.

Relevant facts and circumstances

A proposes to hold a counterparty agreement with B whereby the underlying trading profit (loss) in respect of A's activities is effectively transferred to B via A entering into a transaction/contract with B that offsets in full the contracts A has entered into with its own clients. Dependant on the volume of trades/contracts between A and B, A will invoice and receive a volume based rebate from B under the counterparty agreement. The rebate is received by A as a direct result of the counterparty agreement with B and in respect of contracts entered into between A and B.

B owns 100% of the issued capital in A but it is outside Australia at the time the supply is made. B is not registered with ASIC. B does not itself operate or carry on business in Australia. As such, it does not have a fixed or definite place of business.

Relevant legislative provisions

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

Reasons for decision

Summary

The supplies made by A in return for the rebate paid by B are GST-free under section 38-190 of the GST Act. As these supplies are GST-free, it is not necessary to consider whether the requirements of section 40-5 of the GST Act are met. The requirements of section 9-5 of the GST Act are not met.

Detailed reasoning

GST is payable on any taxable supply that you make. For the purposing of assessing the counterparty transaction against the requirements of section 38-190 of the GST Act, we will refer to the supply that A makes to B in return for payment of the rebate as the supply of 'risk'.

Section 9-5 of the 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.)

Under the terms of the counterparty agreement, A's supply of risk to B satisfies the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:

(a) A receives consideration for the supply of the risk

(b) the supply is made in the course of an enterprise that A carries on

(c) the supply is connected with Australia as the risk is created in Australia as a result of A's business activities and is made through an enterprise that A carries on in Australia, and

(d) A is registered for GST.

While the supply may be input taxed, the GST-free status takes precedence (see below) so we will firstly determine whether the supply of risk is GST-free.

The supply of risk is not considered to be a supply of goods or real property. Hence, the GST status of this supply is appropriately considered under section 38-190 of the GST Act, which provides that certain supplies of things other than goods or real property, for consumption outside Australia, are GST-free.

Item 2 provides that a supply of a thing (other than goods or real property) made to a non-resident is GST-free if 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 for GST.

A non-resident for GST purposes is an entity that is not an Australian resident for the purposes of the Income Tax Assessment Act 1936.

A company is a resident of Australia if:

· the company is incorporated in Australia, or

· the company is not incorporated in Australia but has either its central management or control in Australia or its voting power is controlled by shareholders who are residents of Australia.

On the information provided, B is not a resident of Australia for income tax purposes.

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.

Paragraph 184 of GSTR 2004/7 states:

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…

Paragraphs 230 to 332 of GSTR 2004/7 discuss when a non-resident company is in Australia for the purposes of item 2 (and paragraph (b) of item 4).

A company being an artificial legal entity does not have a precise location and its presence can only be established through the presence of its representatives. The representatives of a company may take on a variety of forms and capacity and can include a branch of the company.

The presence of a non-resident company in Australia is the means by which consumption of the supply in Australia is identified.

We determine the presence of a foreign company in a jurisdiction according to jurisdictional law. At common law, a foreign company is amenable to the jurisdiction of an Australian court if the company carries on business within the court's jurisdiction through its own office or through an agent acting on behalf of the company and that office or agent has a fixed and definite place within the jurisdiction and the business has continued for a sufficiently substantial period of time. (paragraph 239 of GSTR 2004/7).

At paragraph 241 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.

Paragraph 247 of GSTR 2004/7 provides that a non-resident company is in Australia if:

· the company is registered with ASIC, or

· the company has a permanent establishment in Australia for income tax purposes.

A company that is incorporated outside Australia is required to register as a foreign company with ASIC if it wishes to carry on a business in Australia.

You advised that B is not registered with ASIC. You also advised that B does not have a fixed or definite place of business in Australia.

As outlined in paragraph 319 of GSTR 2004/7, the mere presence of a subsidiary does not mean that a non-resident company is carrying on a business in Australia.

The fact that A is a subsidiary of B does not make B present in Australia unless A is acting as B's agent and carrying on B's business in Australia at some fixed place of business for a sufficiently substantial period of time.

As outlined in the counterparty agreement, B has contracted to accept the risk arising from A's business in Australia. This is a 'business to business' transaction rather than one of agency. Therefore, we do not consider that B is carrying on its business in Australia through A as its agent.

Hence, B is not in Australia in relation to A's supply of risk when the supply is made.

The supply of risk 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

Paragraph (a) of item 2 excludes supplies that are 'directly connected with goods or real property' and 'of work physically performed on goods' from the GST-free coverage contemplated by this item.

The supply of risk that A makes to B 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. As such, the supply of risk 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.

While item 2 is limited by subsection 38-190(3) of the GST Act:

Without limiting subsection 38-190(2) or (2A), a supply covered by item 2 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.

We consider that subsection 38-190(3) does not apply in this case.

Section 40-5

In this instance there is no need to consider whether A's supply of risk meets the requirements of section 40-5 of the GST Act. Subsection 9-30(3) of the GST Act ensures that GST-free status overrides input taxed status in most circumstances:

(3) To the extent that a supply would, apart from this subsection, be both *GST-free and *input taxed:

(a) the supply is GST-free and not input taxed, unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed; or

(b) the supply is input taxed and not GST-free, if that provision requires the supplier to have so chosen.

There is no requirement for A to choose the relevant tax treatment (as per paragraphs (3)(a) and (3)(b) above) of its supplies of risk, therefore the supplies remain GST-free.