Edited version of your written advice

Authorisation Number: 1013061548728

Date of advice: 15 February 2017

Ruling

Subject: GST and supplies of services made to a non-resident but provided to another entity

Question 1

Is the supply of marketing and support services made by Entity B to Entity A GST-free, pursuant to item 2 or 3 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Due to an amendment to the GST Act that takes effect from 1 October 2016 the arrangement will need to be addressed in how the GST Act applies before and after the amendment.

Pre 1 Oct 2016

The supply of marketing and support services made by Entity B to Entity A will be partly taxable and partly GST-free.

The marketing services will be GST-free supplies under items 2 and 3 in the table in subsection 38-190 of the GST Act.

The support services will be taxable supplies under section 9-5 of the GST Act.

Post 1 Oct 2016

The supply of marketing services will be GST-free under item 2 and item 3 in the table in subsection 38-190(1) of the GST Act.

The supply of support services will be GST-free under item 2 in subsection 38-190(1) of the GST Act where the nominated individual is provided with the supply in their capacity as an employee or officer of the Australian member (company or partnership) and the Australian member is registered for GST.

Where Entity B provides the support services to Entity A's member that is an Australian consumer, the supply of support services will be taxable under section 9-5 of the GST Act.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Entity B is a non-resident entity. Entity B is a wholly owned company of Entity C, a company based outside of the indirect tax zone.

Entity B carries on business in Australia and is registered for GST.

Since 1 October 2015 Entity B's marketing and support services have been provided to a non-resident, Entity A, another wholly owned company of Entity C.

Prior to Entity B provided marketing and support services to Entity A they provided their services to Entity C.

Entity A and Entity C provide membership services to organisations worldwide, including Australia, with Entity A providing memberships to Australian clients.

Entity B provides annual membership subscription to corporations and not for profit institutions worldwide including Australia. The membership subscription entitles members with access to best practices research, decision support tools and executive education. Members are mainly companies, although some members are partnerships. Many companies have multiple memberships based on the individuals nominated by the company to take up membership.

Entity B is in the role of an advisory company that advisers its clients in what is best practice in a variety of sectors such as Compliance/Legal, HR, Finance, Government, IT, Procurement, Sales, Marketing, Risk and Audit, Innovation and Strategy. This is delivered via a subscription business model. The membership subscription is for a fixed fee where clients are able to access research and analysis tools online.

Entity B and Entity C entered into an Agreement as a subcontractor for the provision of marketing and membership services for a fee.

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 subsection 9-26(2),

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

GST is payable on a taxable supply. Section 9-5 of the GST Act 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 indirect tax zone; 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.

From the information received, Entity B will satisfy paragraphs (a) to (d) of section 9-5 of the GST Act as Entity B makes its supplies for consideration, the supplies are made in the course or furtherance of an enterprise that Entity B carries on, Entity B's supplies are connected with the indirect tax zone as they are done in the indirect zone, and Entity B is registered for GST.

Therefore, Entity B's supplies will be taxable to the extent they are not GST-free or input taxed.

There are no provisions that would result in Entity B's supplies being input taxed but they may be GST-free under Division 38 of the GST Act. This Division covers supplies of things, other than goods or real property, for consumption outside of Australia.

Relevant to the supplies are items 2 and 3 in the table in subsection 38-190(1) of the GST Act.

Item 2 in the table in subsection 38-190(1) (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 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-resident's enterprise, but is not registered or required to be registered for GST.

Only one of the paragraphs in item 2 needs to be satisfied.

In this circumstance, Entity B will satisfy paragraph (a) of item 2 as:

● Entity B makes supplies of marketing and services to Entity A, a non-resident, who is not in the indirect tax zone when the supplies are done and;

● 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 indirect tax zone.

The supply will be GST-free under paragraph (a) of item 2 to the extent it is not negated by subsection 38-190(3) of the GST Act.

Pre 1 October 2016 amendment of subsection 38-190(3) of the GST Act

Where a supply is covered by item 2 subsection 38-190(3) of the GST Act will need to be considered. This subsection provides that a supply covered by item 2 in the 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 the indirect tax zone.

Goods and Services Tax Ruling GSTR 2005/6 provides guidance on the application of paragraph (b) in subsection 38-190(3) of the GST Act. Paragraphs 59, 61 and 62 in GSTR 2005/6 state:

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.

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. The supply is made to the non-resident company (the employer) and provided to another entity (each employee).

Thus the focal point in working out whether a supply is provided to another entity is the facts and circumstances of the doing of the thing supplied. By the supplier examining what it is required to do and in what circumstances, the supplier is able to objectively determine to whom the supply is provided.

The supplies that Entity B makes to Entity A under the Agreement are routine sales and marketing services and ancillary IT research and product development services.

Under the routine sales and marketing services we consider that the following services are support services that are being provided to the Australian members:

● Providing ongoing day to day customer services to members located in the indirect tax zone,

● Assisting members locate in the indirect tax zone with accessing and understanding Entity A's products, and

● Providing member retention activities to ensure member retention among Australian members.

In regard to the above support services the requirements in subsection 38-190(3) of the GST Act are satisfied as:

(a) Entity B has entered into an agreement with Entity A to supply the support services; and

(b) Entity A provides annual membership subscription to corporations and not for profit institutions worldwide including Australia. Members are mainly companies, although some members are partnerships. Many companies have multiple memberships based on the individuals nominated by the company to take up membership.

In this instance, when the support services are performed, it is the nominated individuals of these Australian members who are in receipt of the support services. The support services are therefore being provided to entities located in the indirect tax zone.

The supply of support services will therefore no longer be GST-free under paragraph (a) of item 2 due to subsection 38-190(3) of the GST. The supply is a taxable supply under section 9-5 of the GST Act.

In regard to the other supplies under the agreement, subsection 38-190(3) is not applicable to them as the Australian members are not in receipt of the supply when the services are performed. The supply of these services is GST-free under paragraph (a) of item 2.

Post 1 October 2016 amendment of subsection 38-190(3) of the GST Act

An amendment has been made to subsection 38-190(3) of the GST Act.

From 1 October 2016, the amended 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 the indirect tax zone, and

(c) for a supply other than an input taxed supply - none of the following applies:

(i) The other entity would be an Australian-based business recipient of the supply, if the supply had been made to it;

(ii) The other entity is an individual who is provided with the supply as an employee or officer of an entity that would be an Australian based business recipient of the supply, if the supply had been made to it; or

(iii) The other entity is an individual who is provided with the supply as an employee or officer of the recipient and the recipient's acquisition of the thing is solely for a creditable purpose and is not a non-deductible expense.

These changes require a supplier to determine that the recipient satisfies the requirement that is relevant to them. Although it is expected that in many cases the supplier would obtain the information required to make this determination through negotiating the terms of the supply (for example, in the agreement specifying that particular services be provided to an employee of the recipient or another entity), the supplier may need to obtain additional information to determine that a particular supply is GST-free.

As discussed above, paragraphs (a) and (b) of subsection 38-190(3) of the GST Act are satisfied when Entity A supplies the support services to the individuals nominated by the Australian companies or partnerships.

Paragraph (c) of subsection 38-190(3) of the GST Act

Under subsection 9-26(2) of the GST Act an entity is an Australian based business recipient of a supply made to an entity if:

(a) the entity is registered; and

(b) an enterprise of the entity is carried on in the indirect tax zone; and

(c) the entity's acquisition of the thing supplied is not solely of a private or domestic nature.

Where Entity B will make its supply of support services to Entity A and will be providing the support services to the individuals who are either employees or officers of the Australian companies or partnership, subparagraph 38-190(3)(c)(ii) of the GST Act will apply where the company or partnership is registered for GST.

In this instance the amended subsection 38-190(3) of the GST Act will not be applicable to the supply of support services. The supply of support services will be GST-free under item 2.

However, if the Australian company or partnership is not registered for GST, subparagraph 38-190(3)(c)(ii) will not apply and the amended subsection 38-190(3) of the GST Act will be applicable to the supply. The supply will be a taxable supply under section 9-5 of the GST Act.

Summary

From 1 October 2016 the supply of marketing services made by Entity B to Entity A will be GST-free under paragraph (a) of item 2 and the supply of support services will be GST-free under paragraph (a) of item 2 where the individual is provided with the supply in their capacity as an employee or officer of the Australian member (company or partnership) and the Australian member is registered for GST.

Item 3 in the table in subsection 38-190(1) (item 3)

Under Item 3 a supply, other than a supply of work physically performed on goods situated in the indirect tax zone where the thing supplied is done, or a supply directly connected with real property situated in the indirect tax zone, is GST-free where it is:

(a) a supply that is made to a recipient who is not in the indirect tax zone when the thing supplied is done; and

(b) the effective use or enjoyment of which takes place outside the indirect tax zone.

In this circumstance, Entity B will make a supply to a recipient who is not in the indirect tax zone when the supply is done and satisfy paragraph (a) of item 3 in the table in subsection 38-190(1) of the GST Act. Furthermore, the requirement that 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 indirect tax zone is also satisfied.

However, it remains to determine if paragraph (b) of item 3 in the table in subsection 38-190(1) of the GST Act is satisfied. The paragraph requires that the effective use and enjoyment takes place outside of the indirect tax zone.

The ATO view on this issue is found in Goods and Services Tax Ruling GSTR 2007/2.

Paragraph 40 of GSTR 2007/2 provides;

The requirement in paragraph (a) of item 3 refers to the recipient of the supply. The recipient of the supply is the entity to which the supply is made. A supply that is made to a recipient entity may be provided to another entity. If a supply is made to a recipient and provided to another entity, the entity that actually uses or enjoys the supply is that other entity. For example, if a supply of travel services is made to a company (recipient) and the travel is undertaken by an employee of the recipient, the supply is provided to the employee and it is the employee that actually uses or enjoys the supply.

For further discussion of the ATO view on effective use and enjoyment of which takes place outside of the indirect tax zone and how it applies to a subcontracting arrangement please refer to the enclosed copy of GSTR 2007/2 and in particular paragraphs 146 to and including 154.

The consequence of this is that, where Entity B is required to make a supply to Entity B but provide it to a member of Entity A's in the indirect tax zone, that supply will not be GST-free under item 3 in the table in subsection 38-190(1) of the GST Act.

From the facts given we consider the following supplies of services will not be used and enjoyed outside of the indirect tax zone and item 3 in the table in subsection 38-190(1) of the GST Act will not be satisfied:

● Providing ongoing day to day customer services to members located in the indirect tax zone,

● Assisting members locate in the indirect tax zone with accessing and understanding Entity A's products, and

● Providing member retention activities to ensure member retention among members,

These supplies will be taxable supplies under section 9-5 of the GST Act.

The supplies of marketing and product development will satisfy item 3 in the table in subsection 38-190(1) of the GST Act and will be GST-free:

To summarise CEB International will be making a mix of taxable supplies under section 9-5 of the GST Act and GST-free supplies under item 3.