Edited version of your written advice

Authorisation Number: 1012895981390

Date of advice: 20 October 2015

Ruling

Subject: GST and supply of marketing and business development services

Question 1

Are the services, excluding the 'Equipment Hire' that you supply to the non-resident company, Company A under the Agreement GST-free under item 2 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the services, excluding the 'Equipment Hire' that you supply to Company A under the Agreement are GST-free under paragraph (a) of item 2 in the table in subsection 38-190(1) of the GST Act.

Question 2

Are the services that you supply to the non-resident company, Company B under the Agreement GST-Free under item 2 in the table in subsection 38-190(1) of the GST Act?

Answer

Yes, the services that you supply to Company B under the Agreement are GST-Free under paragraph (a) of item 2 in the table in subsection 38-190(1) of the GST Act.

Question 3

As the supply you make to Company A is a mixed supply of services and goods that is charged via a single un-dissected invoice, is it appropriate to use the proposed methodology given in the ruling to determine the amount of GST payable in respect of the taxable supply for the purposes of section 9-70 of the GST Act ?

Answer

We consider the proposed methodology is reasonable in this circumstance.

Relevant fact

You are an Australian company and registered for GST. You have entered into agreements with two non-resident companies, company A and Company B in which you agreed to provide the prescribed services pursuant to the agreements.

Company A and Company B do not have an office or a branch in Australia. They are not registered to conduct business in Australia as indicated on the records maintained by ASIC.

In the agreement with Company A, you agree to provide marketing and business development services and to lease an equipment to Company A. In return you receive a service fee for your supplies. The equipment hire fee is not separately identified in the invoices you issue to Company A.

In the agreement with Company B, you agree to provide marketing and business development services to Company B. In return you receive a service fee for your supplies.

You do not contract with any of the clients of Company a and Company B when making your supplies to them as you have no express or implied authority to negotiate, enter into, or conclude contracts or accept orders, execute agreements or otherwise make binding commitments in the name of or on behalf of Company A and Company B. All contracts with the clients of Company A and Company B are concluded outside Australia by Company a and Company B

You do not provide implementation of systems or installation services or training to clients of Company A and company B. You do not provide 'help-desk' style support assistance and have no responsibility regarding billing, invoicing or debt collections aspects of the account with the clients of Company A and Company B.

Company A and Company B do not have a representative in Australia that is involved with your supplies.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-80

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

Reasons for decision

Questions 1 and 2

Summary

Your supply of services to Company A and Company B is GST-free under paragraph (a) of item 2.

Detailed reasoning

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.

GST is payable on a taxable supply. Under section 9-5 of the GST Act, an entity makes a taxable supply if:

a) the supply is made for consideration; and

b) the supply is made in the course or furtherance of an enterprise that the entity carries on; and

c) the supply is connected with Australia; and

d) the entity is registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Your supply of services to Company A and Company B satisfies paragraphs 9-5(a) to 9-5(d) of the GST Act as:

a) you make the supply for consideration; and

b) the supply is made in the course of an enterprise that you carry on in Australia; and

c) the supply of services is connected with Australia as the services are done through an enterprise that you carry on in Australia; and

d) you are registered for GST.

However, your supply of services 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 makes your supply of services input taxed.

GST-free supply

Relevant to the supply of services made to Company A and Company B 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 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.

Accordingly, where the provisions in either (a) or (b) above are met, the supply will be GST-free if the non-resident is not in Australia when the thing supplied is done (that is, when the services are performed).

Precondition of item 2 - non-resident is '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.

Under paragraph 37 of GSTR 2004/7, 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.

In addition, if a non-resident company is determined to be in Australia on the basis of the above test, it is necessary to determine if the company is in Australia in relation to the supply when the supply is done (that is, when the services are performed).

Company A and Company B are non-resident companies and they do not carry on any business through a representative in Australia and do not have any presence in Australia in relation to your supply of services. In this case Company A and Company B are 'not in Australia' in relation to your supply of services. The precondition of item 2 is therefore satisfied.

Paragraph (a) of item 2

From the information provided, when you supply your services to Company A and Company B the requirements in paragraph (a) of item 2 are satisfied as:

• the supply of services is made to non-residents who are not in Australia when the thing supplied is done; and

• the supply of services 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 the requirement of paragraph (a) of item 2 is satisfied, there is no need to consider if the requirement of paragraph (b) of item 2 is met. However, item 2 is limited by subsection 38-190(3) of the GST Act.

Limitations of item 2 - subsection 38-190(3) of the GST Act

Subsection 38-190(3) of the GST Act provides that, without limiting subsection 38-190(2) or (2A), a supply covered by item 2 in that table 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.

Subsection 38-190(3) of the GST Act is not applicable as you are not required to provide your services to another entity in Australia.

Yours supply of services to Company A and Company B is therefore GST-free under paragraph (a) of item 2.

Question 3

Pursuant to the Agreement with Company A, you make a mixed supply that consists of taxable supply of goods and GST-free supply of services. The equipment hire fee is not separately identified in the invoices you issue to Company A. Accordingly, an apportionment of the consideration is required for the mixed supply.

Apportionment of consideration for a mixed supply

Goods and Services Tax Ruling GSTR 2001/8 provides guidance in apportioning the consideration for a supply that includes taxable and non-taxable parts.

Paragraphs 25 to 27 of GSTR 2001/8 state:

Apportionment of the consideration for a mixed supply

25. GST is payable on a mixed supply that you make, but only to the extent that the supply is taxable. You need to apportion the consideration for a mixed supply between the taxable and non-taxable parts to find the consideration for the taxable part.

26. Apportionment must be undertaken as a matter of practical commonsense. You can use any reasonable basis to apportion the consideration. Depending on the facts and circumstances of the supply, a direct or indirect method may be an appropriate basis upon which to apportion the consideration and ascertain the value of the taxable part of the supply. The basis you choose must be supportable in the particular circumstances.

27. You should keep records that explain the basis used to apportion the consideration between the taxable and non-taxable parts of a supply.

Paragraphs 109 and 111 in GSTR 2001/8 refer to indirect methods for apportionment and state:

109. You may decide that it is appropriate that you use an indirect method to apportion the consideration for a mixed supply you make. For example, you may use a reasonable method that includes the addition of an appropriate mark-up to reflect your profit margin relative to the market you supply.

Example 18 - indirect method

111. Byron manufactures cosmetics including perfume, shampoo and SPF 30 + sunscreen. Perfume and shampoo are taxable, and the sunscreen is GST-free. Byron supplies one bottle of each item in a clear plastic package to wholesalers. He chooses to use an indirect method based on the cost and usual profit margin of each item to apportion the consideration for the supply. This method is reasonable in the circumstances.

GST payable on the taxable part of a mixed supply

Section 9-80 of the GST Act provides the method for working out the value of the taxable part of a mixed supply that consists only of taxable and GST-free or input taxed parts. The section refers to such a supply as the actual supply.

Subsection 9-80(1) of the GST Act defines the value of the taxable part of the supply upon which GST is payable. The value of the taxable part is defined as the proportion of the value of the actual supply that the taxable supply represents.

Subsection 9-80(2) of the GST Act sets out a formula for working out the value of the actual supply. That formula is as follows:

Price of actual supply x 10) / (10 + Taxable proportion

where:

taxable proportion is the proportion of the value of the actual supply that represents the value of the *taxable supply (expressed as a number between 0 and 1)

To determine the value of the taxable part it is necessary to calculate the taxable proportion, that is, the proportion of the value of the actual supply that the taxable part represents. That proportion is calculated by the decision maker drawing a conclusion on the facts as to the value of the taxable part and the relationship that value has with the price of the actual supply

According to paragraph 118 in GSTR 2001/8, to work out the taxable proportion a conclusion as to the value of the taxable part of the supply has to be made. Once that conclusion is made and you have established the value of the taxable part of the supply, you can simply calculate the GST payable as either:

• 10% of the GST-exclusive value of the taxable part; or

• 1/11 of the GST inclusive value for the taxable part.

In your case, we consider that the proposed methodology is reasonable in this circumstance.