Edited version of your private ruling

Authorisation Number: 1012538452514

Ruling

Subject: GST and supply of services to a non-resident

Question

Are the services that you supply to an offshore company (the offshore entity) under the circumstances described GST-free?

Answer

The supply of your services to the offshore entity is partly GST-free and partly taxable.

Relevant facts and circumstances

You are registered for GST and have been providing services to the offshore entity for the past few years.

The offshore entity is a supplier of specified goods and is based in an overseas country.

You and the offshore entity are not related entities.

The offshore entity is not a resident of Australia for income tax purposes and does not have any branches or subsidiaries in Australia and is not registered with the Australian Securities and Investments Commission (ASIC).

You provided a copy of the Agreement between you and the offshore entity.

According to the Agreement you supply the following services to the offshore entity:

· Sales

· Repairs

· Logistics

· Financial and administration such as accounting

· Advertising and marketing

· Computer and network administration and development

You are not involved in selling products/goods to customers in Australia or the importation of the goods into Australia.

You provide sales support but are not the first point of contact. Your involvement is limited to providing high level technical support and complaint resolution to the customers in Australia.

You are involved in wholesales and corporate sales. You handle these sales over the phone. These sales are diverted to you to negotiate a better price with these clients as these clients are buying a higher quantity of goods and expect better prices than the ones advertised on the website.

In relation to repairs, you are just a point of contact for repairs. The majority of repairs are dealt with directly by the offshore entity, however, you do play a role in doing the first-line assessment of early life failures on the goods. This means any goods that fail within X days of delivery are sent to your office for testing and review. Once a fault or failure is verified this is then sent to the offshore entity to arrange repair or replacement. You are not involved in the repair process. The offshore entity has separate agreements with repairers in Australia.

You receive the post office box orders and forward them on to the customers in Australia on behalf of the offshore entity.

'Logistics' include the process of collation and monitoring of all the information and ensuring that all the orders are processed and sent where they need to go, goods are paid for, repairs and warranties are organised and warranty claims that are sent to you are sent to the offshore entity.

You also supply financial and administration services, advertising and marketing services and computer and network services to the offshore entity. You do not provide these services to another entity in Australia.

You sometimes source products from local suppliers for the offshore entity and ship them overseas to the offshore entity. You acquire those goods in your own right and on sell them to the offshore entity. You do not require any advice on your supply of goods to the offshore entity.

You provide your services only to the offshore entity and have a specified number of employees.

You on charge your business expenses to the offshore entity and add a mark up. You consider yourself to be a mercantile agent.

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 9-40

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 subsection 6(1)

Reasons for decision

Summary

The supply of your services to the offshore entity is party GST-free and partly taxable.

Detailed reasoning

Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply that you make.

You make a taxable supply if the supply meets all of the requirements of section 9-5 of the GST Act. Section 9-5 of the GST Act 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.

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)

You supply services to the offshore entity pursuant to the terms of the Agreement. The supply of these services meets the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:

· you supply the services for consideration

· you supply the services in the course or furtherance of an enterprise that you carry on

· the supply is connected with Australia, and

· you are registered for GST.

The services that you supply to the offshore entity are not input taxed under a provision of the GST Act or a provision of another Act. Therefore, what is left to determine is whether the supplies are GST-free.

GST-free

Section 38-190 of the GST Act provides that certain supplies of things other than goods or real property, for consumption outside of Australia are GST-free.

Item 2 in the table in subsection 38-190(1) of the GST Act (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.

Non-resident

Section 195-1 of the GST Act provides that for GST purposes a 'non-resident' means an entity that is not an Australian resident and an 'Australian resident' means a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

Accordingly, a supply that is made to an entity is a supply to a non-resident for GST purposes if the entity is not a resident of Australia for income tax purposes.

Subsection 6(1) of the ITAA 1936 provides that a company is a resident of Australia for income tax purposes if:

· the company is incorporated in Australia, or

· if not incorporated in Australia, it carries on business in Australia and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

You advised that the offshore entity is not a resident of Australia for income tax purposes. Therefore, the offshore entity is a non-resident for GST purposes.

Not in Australia

Goods and Services Tax Ruling GSTR 2004/7 discusses when an entity is not in Australia when the thing supplied is done.

Paragraph 37 of GSTR 2004/7 explains when a non-resident company is considered to be in Australia. It states:

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.

Based on the information provided, the offshore entity does not have any branches or subsidiaries in Australia and is not registered with ASIC. Further, the offshore entity does not carry on a business in Australia through an agent at a fixed and definite place for a sufficiently substantial period of time.

Therefore, the offshore entity is not in Australia in relation to the services that you supply to it for the purposes of item 2.

Paragraphs (a) and/or (b) of item 2

Where a non-resident entity is not in Australia in relation to the supply when the thing supplied is done, it is then necessary to determine if the requirements of either paragraph (a) or (b) of item 2 are satisfied.

For the purposes of paragraph (a) of item 2, the supply must be analysed to determine whether it is properly characterised as a supply of work physically performed on goods or is directly connected with real property situated in Australia. This is examined in Goods and Services Tax Ruling GSTR 2003/7.

The supply of your services is neither a supply of work physically performed on goods situated in Australia nor a supply directly connected with real property situated in Australia. Therefore, the supply of your services to the offshore entity is a supply covered under paragraph (a) of item 2.

However, the scope of item 2 is limited by subsection 38-190(3) of the GST Act.

Subsection 38-190(3)

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

Goods and Services Tax Ruling GSTR 2005/6 explains the operation of subsection 38-190(3) of the GST Act. This ruling provides that subsection 38-190(3) of the GST Act only applies if there is a supply of something, being a supply that is made to a non-resident and is 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 of the supply is to one entity (the non-resident) and the actual flow of the supply is to another entity in Australia.

The intent of this provision is to impose a further location test when a supply is provided, or required to be provided, to another entity. If that other entity is in Australia, subsection 38-190(3) of the GST Act operates to negate the GST-free status that would otherwise apply under item 2.

In your case, paragraph 38-190(3)(a) of the GST Act is satisfied as the supply of your services is under an agreement entered into with a non-resident.

In order to determine whether the requirement of paragraph 38-190(3)(b) of the GST Act is met, the entity to which the supply is 'provided' must be established.

Some of the services that you supply to the offshore entity are provided to the customers in Australia. For example your supply of technical support services and complaint resolutions are supplies that are provided to the customers in Australia. Further the supply of delivery of goods to post office boxes in Australia is also a service that you provide to the customers in Australia. These supplies meet the requirements of paragraph 38-190(3)(b) of the GST Act. Accordingly, subsection 38-190(3) of the GST Act excludes the supply of these services from being GST-free under item 2. The supply of these services therefore is a taxable supply as it meets all the requirements of section 9-5 of the GST Act.

Other services that you supply to the offshore entity which are not 'provided' to another entity in Australia do not meet the requirement of paragraph 38-190(3)(b) of the GST Act and therefore are not excluded from being GST-free under item 2. These include services such as financial and administrative services, advertising and marketing services and computer and network services. Also based on the information provided, we consider that the assessment of early life failures on goods is also not excluded from being GST-free by subsection 38-190(3) of the GST Act. The supply of these services therefore is GST-free.

Apportionment

As outlined above, where a supply made to a non-resident meets the requirements of item 2 and part of the supply covered by item 2 is provided to another entity in Australia, subsection 38-190(3) negates the GST-free status accorded to that part. That is the supply is GST-free under item 2 to the extent that it is not provided to another entity in Australia (unless another provision of the GST Act negates that GST-free status).

If you receive a payment from the offshore entity that is for a supply that is partly taxable and partly GST-free you need to apportion the payment between the taxable and GST-free component of the supply.

For further information on apportionment please refer to Part VII - apportionment in GSTR 2005/6 paragraphs 631 to 709 and Goods and Services Tax Ruling GSTR 2001/8.

All publications mentioned in this ruling are available on our website at ato.gov.au