Edited version of your private ruling

Authorisation Number: 1012532507589

Ruling

Subject: GST and supply made to a non-resident individual

Questions

1. What is the goods and services tax (GST) status of the supply you made to the Employee's mother under the Agreement you have with her?

2. What is the GST status of the reimbursement of the various expenses received from the Employee's mother and which were incurred by you when making your supply under the Agreement?

Advice

1. The supply you made to the Employee's mother under the Agreement is GST-free under paragraph (a) of item 2 in the table in subsection 38-190(1) of the GST Act.

2. From the facts received, the reimbursement of the various expenses received from the Employee's mother and which were incurred by you forms part of the consideration payable by the employee's mother for the supply you made under the Agreement.

As discussed in question 1 your supply to the Employee's mother is GST-free under paragraph (a) of item 2 in the table in subsection 38-190(1) of the GST Act. The reimbursements are therefore consideration for a GST-free supply under paragraph (a) of item 2 in the table in subsection 38-190(1) of the GST Act. Accordingly, you are not liable to pay any GST for the reimbursements received from the Employee's mother.

Relevant facts

You carry a business in Australia and are registered for GST.

You previously employed Mr X (Employee) on a part time basis. In July 2xxx you had an oral agreement with the Employee's mother to employ the Employee on a full time basis and in return you would receive various payments from the Employee's mother. The Employee's mother is a non-resident of Australia and was not in Australia when the oral agreement was made.

To record the terms of the oral agreement made in July 2xxx the Employee's mother has entered into a Memorandum of Agreement with you on September 2xxx where you agreed to employ the Employee on a full time basis from July 2xxx and you will receive various payments from the Employee's mother as consideration. The Employee's mother came to Australia to sign the Agreement in September 2xxx

The Employee's mother will pay you an annual fee and will also reimburse you for various expenses you incurred in providing the supply under the Agreement.

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 38-190

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

Reasons for decisions

Question 1

What is the supply?

The term supply under subsection 9-10(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) includes an entry into an obligation:

(i) to do anything; or

(ii) to refrain from an act; or

(iii) to tolerate an act or situation.

For a financial assistance payment to be consideration for a supply there must be a sufficient nexus between the financial assistance payment made by the payer and a supply made by the payee. A financial assistance payment is consideration for a supply if the payment is 'in connection with', in response to' or 'for the inducement of' a supply. The test is an objective one.

Under the oral and written agreement with the Employee's mother you have entered into an obligation to engage the Employee on a full time basis in return for payments. In this instance the entry into an obligation to engage the Employee on a full time basis is a supply for GST purposes and since the payments are made to secure that obligation we consider the payments are consideration for the entry into the obligation.

The next step is to determine the GST status of your supply (entry into the obligation to engage the Employee on a full time basis) to the Employee's mother.

GST status of supply

GST is payable on a taxable supply. To be a taxable supply, the supply must meet the conditions under section 9-5 of the GST Act. This section provides that 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.

Your entry into an obligation to engage the Employee on a full time basis satisfies paragraphs 9-5(a) to 9-5(d) of the GST Act as:

(a) you make the supply for consideration since you receive payments from the Employee's mother when you enter into the obligation to engage the Employee on a full time basis; and

(b) the supply is made in the course of the business that you carry on; and

(c) the supply is connected with Australia since it is made through a business that you carry on in Australia; and

(d) you are registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. There is no provision under the GST Act that will make your supply input taxed.

The next step is to consider whether your supply is GST-free as it is made to a non-resident of Australia.

GST-free

Under section 38-190 of the GST Act certain supplies other than supplies of goods or real property for consumption outside Australia are 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 appears as follows:

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

Goods and Services Tax Ruling GSTR 2004/7 (available at www.ato.gov.au) provides guidance on Item 2.

For a supply to be within the scope of Item 2, the supply must be made to a non-resident who is not in Australia when the thing supplied is done. The expression 'not in Australia' requires that the non-resident is not in Australia in relation to the supply.

When the thing is done

If the supply is the entry into, or release from, an obligation to do anything, or refrain from an act, or tolerate an act or situation, when the thing supplied is done is the time at which the obligation is entered into or the release is effected (paragraph 199 of GSTR 2004/7).

In relation to the supply

A non-resident individual must be physically in Australia to be in Australia. A non-resident individual is in Australia in relation to the supply if the non-resident is involved with the supply while in Australia. A non-resident individual is involved with the supply where the non-resident individual is in contact with the supplier while in Australia and that contact is not minor.

Paragraph 218 of GSTR 2004/7 explains that 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 individual is not in Australia in relation to the supply.

From the facts received, the entry into the obligation to appoint the Employee on a full time basis was entered into an oral agreement in July 2xxx and the Employee's mother was not in Australia at that time. Accordingly, the Employee's mother was not in Australia in relation to the supply when the entry into the obligation was entered under the oral agreement in July 2xxx. The requirement for the non-resident not to be in Australia in relation to the supply is therefore satisfied.

The fact that the Employee's mother came to Australia in September 2xxx to sign the Agreement does not make her in Australia in relation to the supply. We consider her contact with you is integral to your supply of entry into the obligation which was done under the oral agreement in July 2xxx since the purpose of the contact is to record the terms of the earlier oral agreement in writing.

In this instance, paragraph (a) of Item 2 is satisfied when the entry into the obligation was made in July 2xxx as:

· the supply was made to a non-resident individual who was not in Australia when the supply was made; and

· the supply was neither a supply of work physically performed on goods situated in Australia when the work was done nor a supply directly connected with real property situated in Australia.

Accordingly, your supply to the Employee's mother is GST-free under paragraph (a) of Item 2 to the extent it is not negated by subsection 38-190(3) of the GST Act.

Subsection 38-190(3) of the GST Act

Subsection 38-190(3) of the GST Act 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.

Based on the information received, subsection 38-190(3) of the GST Act is not applicable as the supply is not provided to the Employee under the Agreement. The Employee has obtained a benefit from the arrangement

For more information on subsection 38-190(3) of the GST Act refer to Goods and Services Tax Ruling GSTR 2005/6 (available at www.ato.gov.au).

Summary

Your supply to the Employee's mother is GST-free under paragraph (a) of Item 2.

Question 2

Goods and Services Tax Ruling GSTR 2000/37 (available at www.ato.gov.au) provides guidance on reimbursement and paragraph 49 of GSTR 2000/37 states:

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 facts given, the reimbursements you receive from the Employee's mother are separately itemised and are for expenses that you incur in order to be able to make your supply to the Employee's mother under the oral and written Agreement you have in place. In this instance the reimbursements form part of the consideration payable by the Employee's mother for the supply you make to her.

As discussed in question 1 your supply to the Employee's mother is GST-free under paragraph (a) of Item 2. The reimbursements are therefore consideration for a GST-free supply under paragraph (a) of Item 2 as they are part of the consideration payable by the Employee's mother for the supply you make to her. Accordingly, you are not liable to pay any GST for the reimbursement received from the Employee's mother.