Edited version of your written advice

Authorisation Number: 1013024886787

Date of advice: 30 May 2016

Ruling

Subject: GST and marketing services

Question

Will the supply of marketing services by a subsidiary to its parent company (a non-resident) be GST-free under section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The supply of marketing services in the circumstances you have described is GST-free under item 2 in the table in subsection 38-190(1) of the GST Act (Item 2).

Relevant facts and circumstances

• The entity is an Australian resident entity, and is registered for GST.

• The entity is the Australian subsidiary of a non-resident and is not registered for Australian GST purposes.

• The non-resident entity does not have a permanent establishment in Australia for tax purposes, or any other Australian presence. In this regard, the non-resident entity does not carry on business in Australia through an agent.

• The marketing activities undertaken by the entity are to fulfil the non-resident entity's obligations under a marketing agreement.

• Following execution of the marketing plan, the entity submits proof of execution to the non-resident company, and claims a reimbursement for costs incurred in undertaking the agreed marketing activities.

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(2) and

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-190(3).

Reasons for decision

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

The entity makes a taxable supply if the supply meets all of the requirements of section 9-5 of the GST Act, which 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 defined term under section 195-1 of the GST Act.)

The supply of the marketing services, in the circumstances described, satisfies the requirements of paragraphs 9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act as:

• The entity supplies the marketing services for consideration

• the supply is made in the course or furtherance of an enterprise that they carry on

• the supply is connected with the indirect tax zone because the supply is either done in the indirect tax zone or made through the enterprise that they carry on in the indirect tax zone, and

• The entity is registered for GST.

The supply of the marketing services is not input taxed under any provision of the GST Act or any other Act.

Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free if it is GST-free under Division 38 of the GST Act or under a provision of another Act.

GST-free supply

Section 38-190 of the GST Act provides that certain supplies of things other than goods or real property, for consumption outside the indirect tax zone are GST-free. Of particular relevance to this case is Item 2.

Under Item 2, a supply is GST-free where it is:

a supply that is made to a *non-resident who is not in the indirect tax zone when the thing supplied is done; and

(a) the supply is neither a supply of work physically performed on goods situated in the indirect tax zone when the work is done nor a supply directly connected with *real property situated in the indirect tax zone; or

(b) the *non-resident acquires the thing in *carrying on the non-residents *enterprise, but is not *registered or *required to be registered.

For the supply to be GST-free under Item 2 there is a precondition that the recipient must not be in the indirect tax zone in relation to the supply when it is done. In determining this factor, the entity type of the overseas client must be considered.

This ruling application relates to the entity's supply to a non-resident company that is not a resident of Australia for income tax purposes.

The meaning of 'not in the indirect tax zone'

Goods and Services Tax Ruling GSTR 2004/7 provides guidance on when a non-resident is 'not in the indirect tax zone' for the purposes of Item 2.

The requirement that the non-resident in Item 2 is not in the indirect tax zone when the thing supplied is done is a requirement that the non-resident is not in the indirect tax zone in relation to the supply when the thing supplied is done.

319. If a non-resident company has a subsidiary in Australia, the mere presence of that subsidiary does not mean that the non-resident company is carrying on a business in Australia. The fact that the non-resident company owns or controls a majority shareholding in a subsidiary does not make that company present in Australia.

The information provided indicates that the non-resident company does not have any business of its own in the indirect tax zone nor carry on business through an agent in the indirect tax zone. Based on this information, the requirement that the recipient is not in the indirect tax zone when the thing supplied is done, is satisfied.

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

Paragraph (a) of Item 2

Under paragraph (a) of Item 2, a supply of a thing that is made to a non-resident who is not in the indirect tax zone when the thing supplied is done, is GST-free, if the supply is neither a supply of work physically performed on goods situated in the indirect tax zone nor directly connected with real property situated in the indirect tax zone when the work is done.

The supply of the marketing services is neither a supply of work physically performed on goods situated in the indirect tax zone nor a supply directly connected with real property situated in the indirect tax zone. This is explained further in GSTR 2003/7. At paragraph 44 at the third dot point it mentions marketing, advertising or auctioneering services as examples of supplies of things not directly connected with goods or real property. Therefore, the supply satisfies paragraph (a) of Item 2.

Hence, where the non-resident company acquires the entity's marketing services in carrying on their enterprise, and they are neither registered nor required to be registered for GST in the indirect tax zone, the supply satisfies paragraph (b) of Item 2.

Limitations

Having met the requirements of Item 2, it is necessary to consider subsections 38-190(2), 38-190(2A) and 38-190(3) of the GST Act.

Subsection 38-190(3) operates to negate the GST-free treatment, of supplies covered by Item 2, in certain circumstances. Subsection 38-190 (3) states:

… a supply covered by Item 2 in that table is not GST 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 the indirect tax zone.

There is no written agreement between the entities; however it is considered that there is an implied agreement. You have advised that the Australian entity does not and is not required to provide their services to another entity in the indirect tax zone.

From the information provided, the supply of marketing services does not involve a supply of a right or option to acquire another thing; does not relate to making input taxed supplies of real property; and, as explained above, there is no agreement with the non-resident company to provide the supply to another entity in the indirect tax zone.

Accordingly, subsections 38-190(2), 38-190(2A) and 38-190(3) of the GST Act do not exclude the supply of the marketing services from being GST-free under Item 2.