Edited version of private advice

Authorisation Number: 1012634979114

Ruling

Subject: GST and provision of training to employees of non-resident entities

Question

Are supplies of specified training (training) by entity X (X) to unregistered non-resident entities, which do not have a permanent establishment in Australia, GST-free under item 1 and/or item 2 and/or item 3 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Relevant facts and circumstances

X is engaged to provide training services to the employees of the non-resident entities as specified and customised by the non-resident employer and agreed between the parties.

The non-resident entity recipients:

• are not registered or required to be registered for GST

• do not make any supplies connected with Australia

• are not in Australia in relation to the supply of the training services supplied by X, and

• do not carry on enterprises through any permanent establishments (as defined in subsection 6(1) of the Income Tax Assessment Act 1936) in Australia.

X is required to train the employees of the non-resident entities on how to operate certain types of goods.

The training is provided to employees of the non-resident entities whilst those employees are in Australia.

The skills acquired by the employees will be used to operate certain types of goods outside Australia for their non-resident employers.

Relevant legislative provisions

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 subsection 38-190(4)

A New Tax System (Goods and Services Tax) Act 1999 subsection 184-1(1)

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 training services made to non-resident entities and provided to the employees of those entities in Australia is not GST-free under item 1 in the table in subsection 38-190(1) of the GST Act (item 1) as the supply is not directly connected with goods or real property situated outside of Australia.

The supply of training services made to non-resident entities and provided to the employees of those entities in Australia satisfies paragraphs (a) and (b) of item 2 in the table in subsection

38-190(1) of the GST Act (item 2) and therefore it is covered by item 2. However the supply is not GST-free as subsection 38-190(3) of the GST Act negates the GST-free status of this supply. The supply of training is made under an agreement with a non-resident (being the non-resident entity) and the supply is provided to another entity in Australia (being the employee of the non-resident entity).

The supply of training services made to non-resident entities and provided to the employees of those entities in Australia is not GST-free under item 3 in the table in subsection 38-190(1) of the GST Act (item 3) as the effective use or enjoyment of the supply is in Australia. It is the Australian Taxation Office (ATO) view that the effective use or enjoyment of the training is where the entity that is provided with the training is located when the training is provided. In this situation the employee is provided with the training whilst in Australia, therefore the effective use or enjoyment of the training is in Australia.

Detailed reasoning

Under section 38-190 of the GST Act, supplies of things other than goods or real property, for consumption outside of Australia, are GST-free.

Subsection 38-190(1) of the GST Act comprises five items which set out supplies of things, other than goods or real property, that are for consumption outside Australia and therefore GST-free.

The supply of the training services by X is neither a supply of goods nor a supply of real property. In this case, items 1, 2 and 3 are relevant for consideration.

Application of item 1

Item 1 states:

Item 1 requires the supply to be directly connected with goods or real property situated outside Australia.

The phrase 'directly connected' is not defined in the GST Act. Goods and Services Tax Ruling GSTR 2003/7 examines, among other things, the meaning of the expression 'directly connected with goods or real property' as used in subsection 38-190(1) of the GST Act.

As stated in paragraph 121 of GSTR 2003/7, in subsection 38-190(1), the expression 'directly connected with' appears in the context of a provision that prescribes in what circumstances a supply is GST-free. The policy intention, as evidenced by the heading to the table in that subsection, is to make supplies GST-free where consumption of that supply occurs outside Australia.

Paragraph 21 of GSTR 2003/7 provides that the term 'directly' requires a more emphatic nexus between the supply and goods or real property. It 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 31 of GSTR 2003/7 provides that in determining whether there is a direct connection between a supply and particular goods or real property, the location of the recipient of a supply is not relevant. Rather, the issue is one of determining whether the relationship between the supply and the goods or the real property is sufficiently close to be directly connected.

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. It states:

33. We consider that such a close link or association between the supply and particular goods or real property exists where, for example, 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; or

• there is a physical interaction with the goods or real property but without changing the goods or real property; or

• the supply establishes the quantity, size, other physical attributes or the value of the goods or real property; or

• the supply affects (or its purpose is to affect) or protects the nature or value (including indemnity against loss) of the goods or real property; or

• the supply affects, or is proposed to affect, the ownership of the goods or real property including any interest in, or right in or over goods or real property.

We do not consider that any of the above linkages apply to the training supplied by X. However, as stated in paragraph 34 of GSTR 2003/7, the list in paragraph 33 is not an exhaustive list of the situations where, in our view, a direct connection exists. There may be some supplies that are directly connected with goods or real property that do not readily fit into one of the categories listed in that paragraph.

Therefore, to establish whether there is a direct connection between the training services supplied by X and goods situated outside Australia, a close analysis of the supply is necessary to determine what, in substance, the supply is for, understand the exact nature of the supply and whether that supply is connected with goods or real property.

In this case, X is engaged to provide training services to the employees of the non-resident entities as specified and customised by the non-resident employer and agreed between the parties. X is required to train these employees on how to operate certain goods for the non-resident employer outside Australia.

Having regard to the nature of supply made by X, we consider that X is not making a supply that is directly connected with goods. This is the case even if the knowledge and skills acquired enables the employees to operate certain types of goods.

What X is supplying is training services which are provided to the employees of the non-resident entities in Australia. The training is aimed at providing the employees with the necessary skills to enable them to perform their duties.

GSTR 2003/7 explains that, in some cases, even though the subject matter of a particular supply is goods, this does not establish a direct connection with the underlying goods. Paragraphs 29 and 142 of GSTR 2003/7 state:

29. In other cases, you need to establish the exact nature of what the supplier is supplying to the recipient so that the transaction is analysed correctly. For example, a supply of advertising space in a newspaper to publicise the sale of goods is about conveying the advertising message. Even though the subject matter of the advertisement is goods, this does not establish a direct connection with the underlying goods. The advertising supply is directly connected with all the things necessary for the conveying of the message (see paragraphs 140 to 142 of the Explanations section of the Ruling). [Emphasis added]

142. … Although the advertising is caused by a need arising in relation to the goods or real property and would not occur but for the goods or real property, this does not make the supply of advertising directly connected with the goods or real property. This is because an advertising supply is directly connected with all the things necessary for the conveying of the message. Its immediate object is not to effect the sale of the goods or real property but the conveying of the message. [Emphasis added]

Similarly in X's case, even though:

• the subject of the training is goods

• the training is caused by a need arising in relation to the goods (acquiring necessary skills to operate certain types of goods), and

• would not occur but for the goods

this does not establish a direct connection between the supply of the training and the goods. The immediate object of X's supply is to train the individuals so they can acquire the skills, competencies and accreditations necessary to perform their duties. The supply of the training services by X is directly connected with the person that is being trained to operate the goods and not the actual goods that the person may end up operating once trained.

Further, it is not relevant that the skills acquired by the trainees/employees will be used to operate certain types of goods outside Australia or that the training is customised to meet the requirements of the non-resident employer or other relevant entities.

We consider Example 14 in paragraph 173 of GSTR 2003/7 to be relevant when considering the supplies provided by X. In that example a solicitor in Australia is engaged to prepare a will for an individual. The purpose of the will is to deal with the individual's personal and real property situated outside Australia. The ruling provides that in this situation the legal services are directly connected with preparation of the will and not with goods or real property. The legal services are only indirectly connected with the real property that is the subject of the will. It should be noted that in Example 14 the individual is a resident of Australia and located in Australia when the will is prepared. However, these factors do not affect the GST treatment of the supply for the purposes of item 1.

For the reasons outlined above, we consider that the supply of the training services by X that is provided to the employees of non-resident entities in Australia is not a supply that is directly connected with goods or real property situated outside Australia. As such item 1 is not satisfied.

Application of item 2

Item 2 states:

Non-resident

Item 2 requires that the supply is made to a non-resident.

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.

It was submitted that the non-resident entities are not residents of Australia for Australian income tax purposes.

Therefore, this requirement is met.

Not in Australia in relation to the supply

Item 2 requires that the non-resident is not in Australia in relation to the supply.

It was submitted that the non-resident entities (recipients) are not in Australia in relation to the supply of the training services supplied by X. The non-resident entities do not have a permanent establishment in Australia. Their employees are present in Australia to receive training and then return overseas.

Therefore, the requirement that the non-resident is not in Australia in relation to the supply is satisfied.

Paragraph (a) or paragraph (b) of item 2

The supply of the training services by X must also satisfy the requirements of either paragraph (a) or paragraph (b) of item 2 for the supply to be GST-free.

The supply of training services by X is not a supply of work physically performed on goods situated in Australia nor it is a supply directly connected with real property situated in Australia. If the training involves using goods in Australia, such as equipment, this will not change our view that the supply of training is the relevant supply made to the non-resident entity and not the use of the goods in Australia by the employees whilst they are being trained. As such, the supply of the training services to non-resident entities satisfies the requirements of paragraph (a) of item 2 and therefore is covered under item 2.

Paragraph (b) of item 2 is also satisfied. The non-resident entities would be acquiring the training in carrying on their specified enterprises. From the facts the non-resident entities are not registered for GST, do not make supplies connected with Australia and therefore would not be required to be registered.

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.

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

Based on the information provided, paragraph 38-190(3)(a) of the GST Act is satisfied as the supply of the training services is under an agreement entered into with a non-resident.

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

In most transactions concerning GST the recipient of a supply is also the entity who is provided with that supply. However, the GST Act also contemplates that a single supply can be made to one entity, but provided to another entity. That is, a supply made to an entity under an agreement may be provided to another entity. Examples include subsection 38-190(3) and subsection 38-190(4) of the GST Act.

Goods and Services Tax Ruling GSTR 2005/6 sets out the ATO view on the scope of subsection 38-190(3).

GSTR 2005/6 provides 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 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.

Paragraphs 54 to 58 of GSTR 2005/6 outline the ATO's view on the meaning of 'another entity'. As stated in paragraphs 54 and 55 our view is that 'another entity' is an entity other than the non-resident entity to which the supply is made. We consider that an employee is an individual and therefore an entity as defined in subsection 184-1(1) of the GST Act. If a supply is made to a non-resident employer and that supply is provided, or required to be provided, to an employee, that supply is provided to another entity.

Paragraphs 59 to 63 of GSTR 2005/6 explain the meaning of the phrase 'provided to another entity' and state:

The meaning of 'provided to another entity'

59. 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.

60. 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.

61. Thus the expression 'provided to another entity' means, in our view, that in the performance of a service (or in the doing of something), 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.

62. For example, if a supply of entertainment services is made to a non-resident company and in the performance of that service the employees are the entities that are entertained, the actual flow of that service is to another entity, each employee (see above where the meaning of 'another entity' is discussed). The supply is made to the non-resident company (the employer) and provided to another entity (each employee).

63. We discuss at paragraphs 66 to 82 how to determine whether a supply is provided to another entity.

Paragraph 69 of GSTR 2005/6 provides that it is necessary to establish the exact nature of the supply to determine to which entity that service or thing is provided. That is, it is necessary to establish what is really being supplied.

As stated in paragraph 74 of GSTR 2005/6, in some instances, it is inherent in the nature of the supply that the supply is provided to a particular entity. For example travel, training or entertainment services are, by their very nature, provided to the individual that travels, or is trained or entertained, respectively. In these instances, the presence of the individual at that location is integral to the performance, receipt or delivery of such supplies.

We consider that a strong indicator that the supply is provided to another entity is that the contracting entity has no further interaction with, or participation in, the provision of the supply beyond contracting and paying for the supply (paragraph 79 GSTR 2005/6).

Paragraphs 440 to 449 in Part IV of the Explanatory section of GSTR 2005/6 further discuss the ATO's view on when a supply is provided to employees and state:

440. To determine whether the supply is provided to an employee, it is essential to examine the nature of the supply closely. It is inherent in the nature of some supplies, for example, the training or entertainment of employees, or travel by employees, that those supplies can only be provided to the employee.

A supply of training services made to a non-resident employer and provided to employees in Australia

441. A supply of training services, the nature of which requires the physical attendance of the individual at that training in Australia is a supply provided to that individual in Australia. Consider the following example.

Example 15 - supply of flight training services made to a non-resident company and provided to another entity, a non-resident employee, in Australia

442. An Australian-based flight training school enters into an agreement with a non-resident airline company in China to train employee pilots at its flight training school in Australia.

443. The contractual arrangement is between the non-resident airline company and the flight school. The supply is made to the non-resident airline company which does not carry on business in Australia either through a place of business of its own or through an agent acting on its behalf. The employees, who are based in China, are required under the agreement to attend the training course in Australia.

Item 2

444. The supply of training services is made to a non-resident, the airline company, which is not in Australia when the training services are performed. The supply satisfies the requirements of item 2 and is, therefore, a supply covered by item 2.

Subsection 38-190(3)

445. The supply of training services by the Australian-based flight training school to the non-resident airline company in China is a supply under an agreement entered into with a non-resident. Paragraph 38-190(3)(a) is therefore satisfied.

(i) Provided to another entity

446. What is being supplied is the teaching and tutoring of the employees of the non-resident airline company. It is in the nature of such training services that it is the individuals that are trained, rather than the individuals' employer, and it is therefore the individual who is provided with the training. These services are of a kind that can only be provided to the employee. The flow of the actual services of teaching and tutoring is to the employee pilots and not to the non-resident airline company. The supply is provided to another entity, the employee.

(ii) Provided to that other entity in Australia

447. The employee pilots are required to physically attend training in Australia. As their presence in Australia is integral to the performance of the supply, the supply is provided to the employees in Australia.

448. As the supply is provided to another entity (that is, each employee) in Australia, subsection 38-190(3) negates the GST-free status otherwise applicable to the supply of training services covered by item 2.

449. While the services that effect provision of a supply to an entity might take place in Australia, that supply may nonetheless be provided to an entity that is not in Australia. If the supply of training in Example 15 was on-line (that is, via the internet to employees in China rather than physical attendance in a classroom in Australia), the supply is not provided to another entity in Australia. The non-resident individuals are not in Australia when the training services are performed.

In the current case, the ATO view is that the nature of the supply made by X is one that can only be delivered to the employee. That is the training services can only be provided to the individual that is trained. The role of non-resident entities is limited to contracting and paying for these services. The fact that the results or outcomes of the supply of training may later entitle the trained employee to perform their employment duties outside Australia or that the non-resident entities benefit from the supply of the training services provided to their employees does not change the outcome that the supply is provided/delivered to the trainee in Australia.

Accordingly, when X provides the training services to the employees of the non-resident entities in Australia, X is providing its training services to another entity (the employee) in Australia. Therefore, the requirement of paragraph 38-190(3)(b) of the GST Act is also satisfied. In this situation, subsection 38-190(3) of the GST Act excludes the supply of training services by X to non-resident entities from being GST-free under item 2.

Application of item 3

Item 3 states:

Paragraph (a) of item 3

Unlike item 2, item 3 applies to supplies made to entities irrespective of their residency status.

Paragraph (a) of item 3 also requires that the recipient of the supply is not in Australia in relation to the supply when the thing supplied is done.

As the non-resident entities are not in Australia in relation to the supply of the training services supplied by X, the requirement of paragraph (a) of item 3 is satisfied.

Paragraph (b) of item 3 - effective use or enjoyment

Goods and Services Tax Ruling GSTR 2007/2 explains when the effective use or enjoyment of a supply takes place outside Australia for the purposes of paragraph (b) of item 3.

Paragraphs 39 to 51 of GSTR 2007/2 explain the ATO's approach to determining the place of effective use or enjoyment of a supply. The important aspects of the ATO view are as follows:

• It is necessary to determine the entity that has actual use or enjoyment of the supply (paragraph 39).

• If the supply is made to one entity but provided to another entity the entity that effectively uses or enjoys the supply is the entity that is provided with the supply (the providee) (paragraphs 40 to 42).

• The effective use or enjoyment of a supply is the place where the providee is when the supply is provided (paragraphs 45 and 46).

The approach in GSTR 2007/2 to determining whether a supply is provided to an entity in Australia is consistent with the approach in GSTR 2005/6 which is similarly concerned, for the purposes of subsection 38-190(3) of the GST Act, with determining whether a supply is provided to an entity in Australia.

Paragraphs 56 to 76 of GSTR 2007/2 provide guidelines on how to determine whether a supply, which is made to one entity (recipient) is provided to another entity (providee). Paragraph 61 of GSTR 2007/2 states:

61. In some instances, it is inherent in the nature of the supply that the supply is to be provided to a particular entity. For example travel, training or entertainment services are, by their very nature, provided to the individual that travels, or is trained or entertained respectively.

Paragraphs 70 to 72 of GSTR 2007/2 provide guidelines on determining whether a supply made to an employer is provided to an employee and state:

• The nature of the supply needs to be examined closely (paragraph 70).

• Just because an employee of the recipient is involved with the supply does not mean the supply is provided to the employee (paragraph 71).

• Where an employer contracts with an entity to supply training to its employees the relevant entity for the purposes of determining where the effective use or enjoyment of a supply takes place is the employee (paragraph 72).

Example 8 (paragraphs 325 to 329 of GSTR 2007/2) also considers the application of item 3 to a supply of face to face training and entertainment provided to a non-resident employee of a non-resident company in Australia:

Example 8 - supply of face to face training and entertainment provided to a non-resident employee of a non-resident company

325. A non-resident US company contracts with an Australian firm to provide training to its employee, Kris (also a non-resident). Kris is required to attend the training in Melbourne. As Kris is in Australia over a weekend the company also purchases tickets for Kris to attend a football game and to take a bus tour of the Great Ocean road.

326. The non-resident company does not carry on business in Australia through a place of its own or through an agent.

Paragraph (a) of item 3

327. Each of the supplies mentioned (that is, the training, the football game and the bus tour) are made to the non-resident company that is not in Australia in relation to the supply when the thing supplied is done. Each supply therefore satisfies paragraph (a) of item 3.

Paragraph (b) of item 3

328. With respect to the training, what is being supplied is the teaching and tutoring of Kris. It is in the nature of such training services that it is Kris who is trained, not her employer, and it is therefore Kris who is provided with the training. Similarly with the supply of the football game and the bus tour, it is Kris that travels and is entertained, respectively. These services are of a kind that can only be provided to the individual, Kris. The flow of the actual services of training, travel and entertainment is to Kris and not to her non-resident employer. Each supply is therefore provided to Kris.

329. The contract with the supplier of the training course requires Kris to attend the training course in Melbourne. As Kris' presence in Australia is integral to her receiving the training, the supply is provided to Kris in Australia. Similarly Kris' presence in Australia is integral to partaking of the football game and undertaking the bus tour. Each supply is therefore provided to Kris in Australia and effective use or enjoyment of each supply does not take place outside Australia. Paragraph (b) of item 3 is not satisfied with respect to any supply and therefore the supplies of training, football game and bus tour are not GST-free under item 3.

Similarly in X's case, the presence of the employees of the non-resident entities in Australia is considered to be integral to them receiving the training. The supply is provided in Australia to the employees of the non-resident entities and therefore the effective use or enjoyment of the supply does not take place outside Australia. As such the requirement of paragraph (b) of item 3 is not met. Therefore, the supply of the training services made by X to non-resident entities but provided to the employees of those entities in Australia is not GST-free under item 3.

Conclusion

In summary, our view is that the effective use or enjoyment of the training services provided by X to the employees of the non-resident entities takes place in Australia. As per the explanation above, X is training the employees of the non-resident entities in Australia and the employees' presence in Australia is integral to receiving the training provided by X. Therefore, the effective use or enjoyment of the training does not take place outside Australia.

The supply of the training services by X to non-resident entities, where the training is provided to the non-resident entities' employees in Australia, is not GST-free under items 1, 2 or 3.