Edited version of private advice

Authorisation Number: 1051657547111

Date of advice: 07 April 2020

Ruling

Subject: GST and supply of arbitration services

Question

Are the fees for services as an arbitrator paid to you by the non-resident company consideration for a GST-free supply made by you under the A New Tax System (Goods and Service Tax) Act 1999 (GST Act)?

Answer

Yes, the arbitration fees you receive from the non-resident company are consideration for a GST-free supply made by you to the non-resident company under item 2 in the table in subsection 38-190(1) of the GST Act when provided to the representatives of the companies in dispute.

Relevant facts

You carry on your business activity in Australia and are registered for GST.

A sub-contract was entered on the one hand between three businesses that carry on their business activity in Australia (Company A Company B, company C) and a non-resident company that carries on its business activity outside Australia (Company D) and on the other hand Company X, an Australian company).

Company X has engaged the parties (Companies A, B, C and D) to perform some work in Australia (suppliers).

The entities carrying on their business activities in Australia are registered for GST.

Company X and the suppliers had a dispute regarding the work to be done and a request for arbitration of the dispute was made to a non-resident company

The suppliers nominated you as one of the arbitrators and the non-resident confirmed your appointment as arbitrator for the dispute pursuant to its Rules.

The place of arbitration is outside Australia.

Interlocutory hearings in the Arbitration have taken place in and outside Australia.

The non-resident company has paid some fees to your bank account for your arbitration services.

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 38-190

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

Reasons for decision

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

Detailed reasoning

To whom are you making your supply of arbitration services?

You were appointed to be the arbitrator of the dispute by the non-resident company pursuant to its Rules and received payments of your services from the non-resident company. When performing your arbitration services, you have interactions with the representatives of the companies in dispute.

In this instance we need to determine the recipient of your supply of arbitration services.

'Recipient' in relation to a supply is defined under section 195-1 of the GST Act to mean the entity to which the supply was made.

Goods and Services Tax Ruling GSTR 2005/6 (GSTR 2005/6) provides guidance on the word 'made and 'provided' for GST purposes. The following paragraphs in GSTR 2005/6 provide the following:

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 some thing) 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.

69. It is also 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.

70. A clear understanding of the exact nature of the supply is essential to determining whether that supply is provided to another entity. It is only by having regard to what is in substance and reality being supplied that it is possible to identify to which entity that supply is provided.

71. The exact nature of a supply in any given situation depends on the facts and circumstances of the supply and the agreement made between the parties. In this regard, it is necessary to look at the whole arrangement for the supply (including the contractual arrangements) and the way in which the supply is carried out.

72. If there is no written contract, other documents such as correspondence between the parties may be useful in establishing the nature of the supply.

73. 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.

79. In situations where the contractual flow of a supply is to an entity (other than an individual), and it is necessary to determine whether the actual flow of the supply is to another entity (other than an individual), 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. However, the application of subsection 38-190(3) is still dependent upon on all the facts and circumstances of the supply.

After considering all the information given to us, we consider that your supply of arbitration services is made to the non-resident company since the non-resident company has engaged you for your service pursuant to its Rules and you are providing the arbitration services to the representatives of the companies in dispute.

We will now consider the GST status of your supply of arbitration services made to the non-resident company and provided to the representatives of the companies in dispute.

Taxable supply

GST is payable on a taxable supply. A supply is a taxable supply under section 9-5 of the GST Act if:

1. the supplier makes the supply for consideration; and
2. the supply is made in the course or furtherance of an enterprise that the supplier carries on; and
3. the supply is connected with Australia; and
4. the supplier is 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.

All of the above must be satisfied for your supply of arbitration services to be a taxable supply.

Your supply of arbitration services satisfies paragraphs 9-5(a) to 9-5(d) of the GST Act as:

1. you make the supply for consideration; and
2. the supply is made in the course or furtherance of a business that you carry on; and
3. the supply is connected with Australia as you make the supply through a business that you carry on in Australia; and
4. you are registered for GST.

However, your supply of arbitration 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 arbitration services input taxed.

GST-free supply

Relevant to your supply of arbitration services made to the non-resident company 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 made to a non-resident that 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.

Only one of the paragraphs in item 2 needs to be satisfied for the supply to be GST-free.

From the information received, your supply of arbitration services made to the non-resident company satisfy paragraph (a) of Item 2 as:

·         your supply of arbitration services is made to a non-resident that is located outside Australia and it is not in Australia in relation to your supply when the arbitration services are done, and

·         the supply of arbitration 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.

Your supply of arbitration services is GST- free under paragraph (a) in item 2 to the extent that it is not negated by subsection 38-190(3) of the GST Act.

There is no need to consider paragraph (b) of item 2 as paragraph (a) is satisfied.

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; 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 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.

Supply provided to representatives of a non-resident company

Representatives located outside Australia

Where the arbitration services is provided to the representatives of the non-resident company (Company D) that is not in Australia in relation to your supply, subsection 38-190(3) of the GST Act does not apply to your supply of arbitration services.

Your supply of arbitration services made to the non-resident company and provided to the representatives of the non-resident company (company D) outside Australia in this instance is GST-free under item 2.

Representatives located in Australia

When you supply your services to the representatives of the non-resident company (in this case Company D) that are located in Australia, paragraphs (a) and (b) in subsection 38-190(3) of the GST Act are satisfied.

It is therefore relevant to consider requirement (iii) in paragraph 38-190(3)(c) of the GST Act. Requirements (i) and (ii) relate to supplies provided to GST registered Australian businesses and do not apply to your supply in this case.

When the representative of the non-resident company acquires your services in Australia, we consider that it is the non-resident company that is being provided with the services since the representative is acting on behalf of the company when acquiring your services and the acquisition of the services is for the business purposes of the non-resident company.

In this instance requirement (iii) does not apply to your supply of services made to the non-resident company and provided to the representatives of the non-resident (company D) in Australia.

Since the requirements in paragraph 38-190(3)(c) do not apply to your supply of arbitration services your supply of arbitration services made to the non-resident company and provided to the representatives of the non-resident company (company D) in Australia is GST-free under item 2.

Supply provided to Australian companies

Where the arbitration services are provided to the Australian companies, paragraphs (a) and (b) in subsection 38-190(3) of the GST Act are satisfied. In this instance we need to consider requirements (i) and (ii) in paragraph (c) of subsection 38-190(3) of the GST Act. Requirement (iii) is not relevant in this case.

Requirement (i) and (ii)

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

·         the entity is registered for GST and carries on a business in Australia; and

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

Companies A, B and C meet the definition of Australian-based business recipients as they carry on their business in Australia and are registered for GST. The acquisition of the arbitration services are for their business purposes. In this instance requirements (i) and (ii) applies to your supplies of arbitration services that are provided to the representatives of these Australian companies.

Accordingly, subsection 38-190(3) of the GST Act does not negate the GST-free status of your supply of arbitration services made to the non-resident company and provided to the representatives of the GST registered Australian entities under item 2. Your supply is therefore GST-free under item 2.

Summary

The supply of arbitration services you make to the non-resident company and provided to the representatives of the companies in dispute is a GST-free supply under item 2 in the table in subsection 38-190(1) of the GST Act.