Edited version of private advice

Authorisation Number: 1051650476100

Date of advice: 23 March 2020

Ruling

Subject: GST-free supplies to a non-resident

Question 1

Is the supply a GST-free supply under section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes, the supply is GST-free under item 4 of the table in section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999.

Question 2

Is the supply of processing services ancillary or incidental to the supply and therefore also a GST-free supply under section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

Yes, the supply of processing services is ancillary or incidental to the supply and is part of a GST-free supply under item 4 of the table in section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999.

This ruling applies for the following periods:

Tax periods ending on or after 31 December 2019.

The scheme commences on:

1 January 2020.

Relevant facts and circumstances

The entity is registered for GST.

The entity has entered into an agreement with a non-resident to provide insurance coverage and associated processing services for member of the non-resident.

Relevant legislative provisions

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

Reasons for decision

Question 1

Section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that certain specified supplies of things other than goods or real property are GST-free. The supply of health insurance is not a supply of goods or real property.

Item 4 of the table in subsection 38-190(1) of the GST Act states that a supply is GST-free if it is a supply that is made in relation to rights if:

(a)   the rights are for use outside the indirect tax zone; or

(b)   the supply is to an entity that is not an *Australian resident and is outside the indirect tax zone when the thing supplied is done.

The Goods and Services Tax Ruling, Goods and services tax: supply of rights for use outside Australia - subsection 38-190(1), item 4, paragraph (a) and subsection 38-190(2) (GSTR 2003/8) discusses the types of supplies that are being covered by Item 4 and, at paragraph 95 states:

95. The general law recognises that what an insured obtains under a contract of insurance is a chose in action. Where, under the contract of insurance, the insurer agrees to compensate the insured for a loss that the insured may sustain through the happening of an event, this chose in action is a right to be indemnified if the insured event occurs. There is a supply by way of a creation of a right when the contract of insurance is entered into.

Paragraph 120 of GSTR 2003/8 explains that a contract of insurance is for use where the insured event or coverage of the risk is located. As the supplies of insurance by the entity are to cover members of the non-resident when they are located in Australia, paragraph (a) of item 4 in the table in subsection 38-190(1) of the GST Act is not satisfied.

However, the supplies of insurance by the entity will be GST-free under paragraph (b) of Item 4 in the table in subsection 38-190(1) if the supply is to an entity that is not an Australian resident and is outside Australia when the thing supplied is done and none of the exclusions in section 38-190 are met.

The Goods and Services Tax Ruling (GSTR 2004/7), Goods and services tax: in the application of items 2 and 3 and paragraph (b) of item 4 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999:

·        when is a 'non-resident' or other 'recipient' of a supply 'not in Australia when the thing supplied is done'?

·        when is 'an entity that is not an Australian resident' 'outside Australia when the thing supplied is done'?

provides guidance on when an entity that is not an Australian resident is outside Australia when the thing supplied is done and, at paragraph 37 provides that a non-resident company is in Australia if that company carries on business in Australia at or through a fixed and definite place of its own for a sufficiently substantial period of time or carries on business through an agent at a fixed and definite place for a sufficiently substantial period of time.

As the non-resident is not a resident of Australia and has no presence in Australia in relation to the supply of the insurance, the supply by the entity meets the requirements of paragraph (b) of Item 4 as the non-resident is not an Australian resident and is outside Australia when the thing supplied is done.

However, a supply is not GST-free under section 38-190(1) of the GST Act if the criteria in either subsections 38-190(2) or 38-190(2A) of the GST Act are met.

Subsection 38-190(2) of the GST Act provides that a supply is not GST-free if it is the supply of a right or option to acquire something the supply of which would be connected with the indirect tax zone and would not be GST-free. The Goods and Services Tax Ruling, Goods and services tax: supply of rights for use outside Australia - subsection 38-190(1), item 4, paragraph (a) and subsection 38-190(2) (GSTR 2003/8) explains that subsection 38-190(2) is designed to ensure that the supply of a right or option is not GST-free if the right or option can be redeemed for the supply of something else which would not be GST-free. Paragraph 148 of GSTR 2003/8 states:

148. Where a transaction involves a supply of a right or option to acquire something, the supplier will usually enter into an obligation to supply the thing if the right or option is exercised. The fact that the transaction also involves an entry into an obligation does not in itself preclude the operation of subsection 38-190(2) if there is a relevant supply of a right or option to acquire something.

Under the Agreement, a supply of insurance is made by the entity to the non-resident but provided to the non-resident's members. The agreement provides the non-resident's members with a right to be indemnified in certain circumstances. However, the agreement does not provide the non-resident or the non-resident's members a right or option to acquire something else. Accordingly, the supply of the insurance under the arrangement with non-resident is not excluded by subsection 38-190(2) of the GST Act.

As subsection 38-190(2A) of the GST Act only apples in relation to a supply of real property, this exclusion also does not apply.

As the supply made by the entity to the non-resident satisfies item 4 of the table in subsection 38-190(1) of the GST Act and none of the exclusions apply, the supply is GST-free.

Question 2

As discussed above, section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that certain specified supplies of things other than goods or real property are GST-free and the main supply of insurance by the entity to the non-resident is GST-free. The processing functions undertaken by the entity will be GST-free if they are part of a single supply made to the non-resident.

The Goods and Services Tax Ruling, Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) explains how to identify whether a supply is a supply of a single thing or it includes separately identifiable parts and explains that a 'composite supply' contains a dominant part and includes something that is integral, ancillary or incidental to that part. It further explains that a composite supply is treated as a supply of a single thing.

Paragraph 55 of GSTR 2001/8 explains that a composite supply is essentially the provision of one thing even though other things which are integral, ancillary or incidental may also be supplied, Paragraph 59 of GSTR 2001/8 explains what may be considered in determining whether a supply is a composite supply is being made:

59. No single factor (by itself) will provide the sole test you use to determine whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply. Having regard to all the circumstances, and taking a commonsense and practical approach, indicators that a part may be integral, ancillary or incidental include where:

·        you would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

·        it represents a marginal proportion of the total value of the package compared to the dominant part; or

·        it is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

·        it contributes to the proper performance of the contract to supply the dominant part.

The provision of processing services by the entity is a necessary part of the supply of insurance to the non-resident and aids and assists the proper performance of that supply. The provision of processing is not a separate and distinct supply. Instead, the supply of the processing services is merely ancillary or incidental to the supply of the right to indemnify the non-resident's members if the insured event occurs.

Consequently, the processing services are not a separate supply and forms part of the GST-free supply of the insurance by the entity.