Edited version of private advice

Authorisation Number: 1051702255673

Date of advice: 22 June 2020

Ruling

Subject: GST and entitlement for GST credits

Question 1

Can the non-resident company (non-resident) claim the GST paid on the accommodation expenses listed in the tax invoice issued by the Australian Hotel to the overseas travel agent (Travel Agent) under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Currently the non-resident is not registered for GST. In this instance it is not entitled to claim GST credits for the accommodation listed in the tax invoice issued by the Australian Hotel to the Travel Agent as the requirements for a creditable acquisition are not satisfied.

Further if the non-resident chooses to register for GST, it will not be entitled to claim GST credits for the accommodation with buffet breakfast listed in the Australian hotel's tax invoice issued to the Travel Agent and supplied to its employees who are trainers despite the fact that its acquisition of the accommodation is a creditable acquisition under subsection 111-5(2) of the GST Act. This is because the non-resident does not hold a valid tax invoice to make the claim for GST credits. From the facts given the non-resident has not provided authority to the Travel Agent to act as its agent for the acquisition of these expenses and therefore cannot use the tax invoice issued to the Travel Agent to make the claim for GST credits.

The acquisitions of accommodation with buffet breakfast for employees/individuals who are not trainers are not creditable acquisitions under subsection 111-5(3) of the GST Act by virtue of section 69-5 of the GST Act. These expenses are entertainment expenses under section 32-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore not deductible under Division 8 of the ITAA 1997. The non-resident is not entitled to claim GST credits for these expenses.

Relevant facts

You are a non-resident company and currently are not registered for GST. You supply health consulting. You focus on the mental health of people, use speeches, stories, training to make people think positive.

You do not carry on any business activity through a subsidiary or agent in Australia and do not make any supplies to customers located in Australia.

You held a conference at An Australian Hotel. The purpose of the conference was to motivate and inspire your staff and the training was for 10 days. The aim of the conference is to educate the trainers how to train their students.

All participants for the conference were your employees. Most of them were trainers of your company and some do administration stuff and organise the event.

You are focusing on the courses for your trainers to train their students how to keep optimism, mental health. The main work of the trainers are to teach, deliver the happiness, optimism and positive attitude to students to keep them living a happy life, to overcome fears, anxiety.

You paid for all expenses relating to the organising of the conference including costs incurred for the employees to attend the conference which were their accommodation, lunches and dinner for the conference.

The employees did not have to pay anything for attending the conference. They were not allowed to bring their partners and children to the conference.

You contracted an overseas travel agent (Travel Agent) to organise the transfer of the attendees from overseas to Australia to attend the Australian business conference, including visa application, accommodations, venue reservation, dining and so on.

The Travel Agent booked the hotel, meeting rooms and air tickets for you. You paid the airfares of these attendees to the Travel Agent. All invoices issued by the Australian providers are under the name of the Travel Agent such as accommodation, conference room hire and they included GST.

We have received a copy of the contract you have with the Travel Agent and an Authorisation Form issued to the Travel to substantiate that you have assigned the Travel Agent to act as your agent for the purchases the Travel Agent has made. The name of the company who did the assignment in the Authorisation Form was not yours.

You would like to claim GST credits for the accommodation that the Travel Agent has acquired from the Australian hotel as per tax invoice issued to the Travel Agent. The accommodation listed in the tax invoice included buffet breakfast.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 29-19

A New Tax System (Goods and Services Tax) Act 1999 Division 69

A New Tax System (Goods and Services Tax) Act 1999 Division 111

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 32-10

Income Tax Assessment Act 1997 section 32-20

Income Tax Assessment Act 1997 section 32-35

Income Tax Assessment Act 1997 section 32-65

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

Under section 11-20 of the GST Act you are entitled to a GST credit for any creditable acquisition that you make.

Under section 11-5 of the GST Act you make a creditable acquisition if:

a)    you acquire anything solely or partly for a creditable purpose; and

b)    the supply of the thing to you is a taxable supply; and

c)    you provide or are liable to provide consideration for the supply; and

d)    you are registered or required to be registered for GST.

Further you must hold valid tax invoices at the time you claim a GST credit in your BASunder section 29-10 of the GST Act.

Paragraph 11-5(a)

Under this paragraph the acquisition should be solely or partly for a creditable purpose.

Under subsection 11-5(1) of the GST Act you acquire something for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

Under subsection 11-5(2) you do not acquire the thing for a creditable purpose to the extent that that:

a)    the thing relates to making supplies that would be input taxed; or

b)    the acquisition is of a private or domestic nature.

You acquire the accommodation with buffet breakfast listed in the Australian Hotel's tax invoice through your agent the Travel Agent and you acquire these expenses in order to provide a benefit to your staff in respect of their employment with you. In this instance the accommodation with buffet breakfast you have acquired is for a creditable purpose.

Paragraph 11-5)(a) of the GST Act is satisfied.

Paragraph 11-5(b)

The requirement of this paragraph is you are the recipient of a taxable supply.

According to paragraph 15 in Goods and Services Tax Ruling GSTR 2006/9 you make an acquisition if you are the recipient of a supply, that is the supply is made to you. In most transactions concerning GST the recipient of a supply is the entity that is also provided with that supply. In contrast, some supplies are made to the recipient, but provided to another entity. Arguably, such provisions are also supplies. However, these are not relevant because there is no contractual or reciprocal relationship between the supplier and the entity being provided with the supply. An entity must have made an acquisition of a thing to satisfy the requirements of section 11-10. It is not sufficient that an entity has merely been provided with the supply. Also, an entity does not make an acquisition merely by paying for a supply.

Under section 195-1 of the GST Act, a recipient in relation to a supply means the entity to which the supply was made. We consider for GST purposes that a recipient in relation to a supply is the entity who enters into an Agreement with a supplier for the supplies to be made and provided by the supplier under the contract.

According to paragraph 180 in GSTR 2006/9, in determining whether a payment is consideration under section 9-15 of the GST Act and whether there is a 'supply for consideration' we take the view that:

·         the test is whether there is a sufficient nexus between the supply and the payment made; this test is objective;

·         regard needs to be had to the true character of the transaction; and

·         an arrangement between parties will be characterised not merely by the description that the parties give to the arrangement, but by looking at all of the transactions entered into and the circumstances in which the transactions are made

The objective test discussed in paragraph 180 of GSTR 2006/9 may determine that a payment an entity makes is:

·         consideration for a supply made to the payer and the payer is the recipient of that supply;

·         not consideration for a supply; or

·         consideration for a supply but the paying entity is not the recipient of that supply.

According to paragraph 183 in GSTR 2006/9, if you provide or are liable to provide consideration for a supply, but you are not the recipient of the supply, you are referred to as a 'third party payer'. As a third party payer you do not make a creditable acquisition in relation to your payment because the supply is not made to you as required by section 11-5. Making a payment for a supply that is made to another entity is not sufficient to make you the recipient of that supply.

In your case though you paid for the accommodation with buffet breakfast listed in the Australian Hotel's tax invoice, the supplies were provided to the individuals staying in that hotel as they were the one who enjoyed the accommodation and buffet breakfast provided by the Australian hotel. In this instance you were a third party payer for these expenses and therefore not the recipient of the taxable supplies made by the Australian Hotel.

Paragraph 11-5(b) of the GST Act is not satisfied.

Paragraph 11-5(c) of the GST Act

The requirement of this paragraph is you provide or are liable to provide consideration for the supply.

You stated that you have paid the travel agent for the expenses incurred in the tax invoice issued by the Australian hotel. In this instance we accept that when the travel agent acquired the accommodation with buffet breakfast in the Australian hotel's tax invoice, these acquisitions were provided to you and you were liable to pay for these expenses.

Paragraph 11-5(c) of the GST Act is satisfied.

Paragraph 11-5 (d) of the GST Act

Currently you are not registered for GST and you are not required to be registered for GST as you do not carry on any enterprise in Australia and did not receive any payments when holding the conference in Australia. In this instance you do not satisfy paragraph 11-5 (d) of the GST Act.

Summary

You have not made a creditable acquisition when paying the accommodations with buffet breakfast listed in the Australian Hotel's tax invoice since paragraphs (b) and (d) in section 11-5 of the GST Act are not satisfied.

However if you choose to register for GST then it would be relevant to consider Division 111 of the GST Act.

Division 111 of the GST Act

Section 111-25 of the GST Act is about employers paying expenses of employees. This section states the following:

111-25 Employers paying expenses of employees etc

If you make or are liable to make:

a)    a payment on behalf of your employee for an expense that he or she incurs that is related directly to his or her activities as your employee; or

b)    a payment:

                                      i.        on behalf of an employee (whether or not you are the employee's employer) for an expense that the employee or the employee's* associate incurs; or

                                     ii.        on behalf of an associate of an employee (whether or not you are the employee's employer) for an expense that the associate or employee incurs;

that constitutes an *expense payment benefit;

this Division applies to you as if you reimbursed your employee, or you reimbursed the employee or associate for the expense.

(* denotes a defined term in section 195-1 of the GST Act)

The accommodations with buffet breakfast are incurred by your employees when staying at the hotel when attending the conference you have organised for them in Australia. The purpose of the conference is to provide training to these staff as part of their employment with you. In this instance the payments you made on behalf of the employees are treated as a reimbursement by you to your employees under section 111-25 of the GST Act.

Under section 111-5 Act a reimbursement by an employer to an employee is treated as consideration for an acquisition that you make from the employee, associate, agent, officer or partner.

Subsection 115-5(2) of the GST Act further states that the fact to you is not a taxable supply does not stop the acquisition being a creditable acquisition.

However, under subsection 115-1(3) of the GST Act, the acquisition is not a creditable acquisition:

a)    to the extent If any) that:

                      i.        the employee, associate agent, officer or partner is entitled to an input tax credit for acquiring the thing acquired in incurring the expense; or

                     ii.        the acquisition would not because of Division 69, be a creditable acquisition if you made it or

b)    unless the supply of the thing acquired, by the employee, associate, agent, officer or partner in incurring the expense, was a taxable supply; or

c)    if you would, because of Division 71, not have been entitled to an input tax credit if you had made the acquisition that the employee, associate, agent, officer or partner made.

In your case the reimbursement you made to your employees for the accommodation with buffet breakfast would be a creditable acquisition under subsection 115-5(2) of the GST Act to the extent that Division 69 of the GST does not preclude these acquisitions to be creditable acquisitions.

We will now consider if Division 69 of the GST Act applies to your acquisition of accommodation with buffet breakfast.

Division 69 of the GST Act

Division 69 of the GST Act provides that some acquisitions that are not deductible for income tax purposes under the Income Tax Assessment Act 1997 (ITAA 1997) are not creditable acquisitions.

It should be noted that Division 69 of the GST Act applies to an entity irrespective of the income tax status of that entity. In other words, an acquisition will still be a non-deductible expense notwithstanding that the entity making the acquisition may be exempt from Australian income tax.

Subsection 69-5(1) of the GST Act provides that an acquisition is not a creditable acquisition to the extent that it is a 'non-deductible expense'. Of relevance to this case is paragraph 69-5(3)(f) of the GST Act which provides that entertainment expenses that are not deductible under Division 8 of ITAA 1997 because of Division 32 of the ITAA 1997 (which deals with entertainment expenses), are non-deductible expenses.

Entertainment Expenses

Section 32-5 of the ITAA 1997 denies an income tax deduction to the extent that an entity incurs expenditure on entertainment unless that expenditure is related to any of the exceptions outlined in Subdivision 32-B of the ITAA 1997.

The term 'entertainment' is defined in subsection 32-10(1) of the ITAA 1997 to mean:

·         entertainment by way of food, drink or recreation, or

·         accommodation or travel to do with providing entertainment by way of food, drink or recreation.

Following on from this, subsection 32-10(2) of the ITAA 1997 provides that you are taken to provide entertainment even if business discussions or transactions occur. This means that entertainment expenses are not deductible no matter who the recipients of the entertainment are and irrespective of whether there is a genuine connection with business activities.

The types of things caught as entertainment expenses are:

·         business lunches, dinners, cocktail parties and social functions.

·         tickets to sporting or theatrical events, sightseeing tours and holidays

·         accommodation and travel in connection with entertaining employees and non-employees (for example clients) over a weekend at a tourist resort or providing them with a holiday.

Recreation includes amusement, sport and similar leisure time activities or pursuits, for example a game of golf, theatre or movie tickets, a joy flight or a harbour cruise.

From the information received, your acquisition of accommodations includes buffet breakfasts that were consumed by your staff when staying at the hotel.

Factors to consider when making a determination when an expense is an entertainment expense are explained at paragraphs 23(a) to (d) of Taxation Ruling 97/17: Income tax and fringe benefits tax: entertainment by way of food or drink, (TR 97/17).

Paragraph 23 of TR 97/17 provides:

23. It can be seen that the determination of whether or not the provision of food or drink constitutes entertainment requires an objective analysis of all the circumstances surrounding that provision. We are of the view that the following are relevant factors that should be considered in undertaking any objective analysis:

(a) Why is the food or drink being provided. This test is a 'purpose test'. For example, food or drink provided for the purposes of refreshment does not generally have the character of entertainment, whereas food or drink provided in a social situation where the purpose of the function is for employees to enjoy themselves has the character of entertainment.

(b) What food or drink is being provided. As noted above, morning and afternoon teas and light meals are generally not considered to constitute entertainment. However, as light meals become more elaborate, they take on more of the characteristics of entertainment. The reason for this is that the more elaborate a meal, the greater the likelihood that entertainment arises from the consumption of the meal.

For example, when an employer provides morning or afternoon teas or light meals, that food or drink does not usually confer entertainment on the employee.

By contrast, a three course meal provided to an employee during a working lunch has the characteristics of entertainment. The nature of the food itself confers entertainment on the employee.

(c) When is the food or drink being provided. Food or drink provided during work time, during overtime or while an employee is travelling is less likely to have the character of entertainment. This is because in the majority of these cases food provided is for a work-related purpose rather than an entertainment purpose. This, however, depends upon whether the entertainment of the recipient is the expected outcome of the provision of the food or drink. For example, a staff social function held during work time still has the character of entertainment.

(d) Where is the food or drink being provided. Food or drink provided on the employer's business premises or at the usual place of work of the employee is less likely to have the character of entertainment; refer to the reasons in (b) and (c) above. However, food or drink provided in a function room, hotel, restaurant, cafe, coffee shop or consumed with other forms of entertainment is more likely to have the character of entertainment. This is because the provision of the food or drink is less likely to have a work-related purpose.

In your case the buffet breakfast provided with the accommodation at the Australian Hotel have the characteristic of entertainment as the meals and drinks provided for the buffet were more elaborate and less likely to have a work related purpose when consumed at the hotel as they were provided in a social situation where the purpose of the function is for employees to enjoy themselves. In addition entertainment also covers accommodation or travel expenses associated with the provision of that food and drink.

However, subdivision 32-B of the ITAA 1997 contains the exceptions to the general rules concerning non-deductibility of entertainment. Of relevance to this case are sections 32-20 (expenses incurred in providing entertainment by way of fringe benefits to employees) and 32-35 (seminar expenses).

Fringe Benefits

Under section 32-20 of the ITAA 1997, a deduction is allowable for entertainment expenses where the entertainment expenses are incurred in providing a fringe benefit to an employee or an associate of the employee.

In order to determine if there is a fringe benefit it is necessary to consider the definitions contained in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). In particular, a fringe benefit is defined as a benefit which is provided by an employer, an associate of the employer or by a third party under an arrangement with the employer, to an employee or an associate of the employee (such as a family member) in respect of the employee's employment.

Following on from this, an employer includes a current employer and a current employer means a person who pays, or is liable to pay, salary or wages. Salary or wages means a payment from which an amount must be withheld under a provision in Schedule 1 to the Taxation Administration Act 1953.

On the basis of the definitions in subsection 136(1) of the FBTAA, it can be concluded that a benefit provided by a non-resident employer in relation to its employee's employment outside Australia is not a fringe benefit under the FBTAA. In other words, the non-resident employer is not paying salary and wages from which withholding must take place under Australian tax laws.

Therefore, you as a non-resident employer, any supply of entertainment expenses in respect of your employees are not incurred in providing an Australian fringe benefit and as such, are not excluded from being entertainment expenses under section 32-20 of the ITAA 1997.

Seminar Expenses

Section 32-35 of the ITAA 1997 provides that a deduction is allowable for entertainment expenses where the provision of food, drink, accommodation or travel, to an individual (including yourself) that is reasonably incidental to the individual attending a seminar that goes for at least 4 hours.

Paragraph 1(b) in Taxation Determination TD93/195 explains when food and drink is reasonably incidental to a seminar and states the following:

b)    if the food and drink does amount to entertainment but the CPD seminar is a seminar as defined in section 32-65 and the seminar expenses exception in section 32-35 applies, the registration fee is deductible in full. Section 32-35 includes the requirement that the food and drink provided is 'reasonably incidental' to a participant's attendance at the seminar. 'Reasonably incidental' is not defined. Food and drink is reasonably incidental to a CPD seminar if it:

                      i.        is provided for sustenance because of the duration, time of day or location of the seminar;

                     ii.        is provided immediately before, during or immediately following sessions of the seminar; and

                    iii.        is available to all seminar participants.

The term 'seminar' is defined in subsection 32-65(1) of the ITAA 1997 as including:

... a conference, convention, lecture, meeting (including a meeting for the presentation of awards), speech, "question and answer session", training session or educational course.

Subsection 32.65(2) of the ITAA 1997 provides guidance in working out when a seminar goes for at least for 4 hours. That subsection states:

2)    In working our whether a seminar goes for at least 4 hours the following are taken not to affect the seminar's continuity, nor to form part of it:

a)    Any part of the seminar that occurs during a meal;

b)    Any break during the seminar for the purpose of a meal, rest or recreation.

However, under item 2.1 of section 32-35 of the ITAA 1997, the exception in relation to a seminar will not apply where the seminar is a business meeting, or has as its main purposes the promotion and/or advertising of the business or is to provide entertainment.

Subsection 32-65(3) of the ITAA 1997 provides that a seminar is a business meeting if its main purpose is for individuals who are (or will be) associated with a particular business to give or receive information, or to discuss matters, relating to that business.

However, a seminar is not a business meeting if it

a)    is organised by (or on behalf of) an employer solely for either or both of these purposes:

                      i.        training the employer and the employer's employees (or just those employees) in matters relevant to the employer's business (or prospective business);

                     ii.        enabling the employer and the employer's employees (or just those employees) to discuss general policy issues relevant to the internal management of the employer's business; and

b)    is conducted on property that is occupied by a person (other than the employer) whose business includes organising seminars or making property available for conducting seminars).

You advised you were focusing on the courses for your trainers to train their students how to keep optimism, mental health. The purpose of the conference is to provide training to your staff in order to motivate and inspire your staff and the training was for 10 days. The aim of the conference was to educate the trainers how to train their students since the main work of the trainers are to teach, deliver the happiness, optimism and positive attitude to students to keep them living a happy life, to overcome fears, anxiety. You had employees attending the conference and most of them were trainers. Some employees were in Australia to organise the conference and doing administrative work.

In this instance we accept the conference you held for the 10 days meets the definition of 'Seminar' under subsection 32-65(1) of the ITAA 1997 and satisfy the requirements in subsection 32-65(2) of the ITAA 1997 as the training was more than 4 hours daily. It is also excluded from being a business meeting as its purpose was to train your employees in matters relevant to your business activity.

In the instance the accommodation with buffet breakfast for your employees (excluding the individuals/employees who are not trainers) are excluded from being entertainment expenses under item 2.1 in section 32.35 of the ITAA 1997.

Claiming GST credit

Under section 29-10 of the GST Act you are required to hold valid tax invoice when claiming GST credits in your BAS.

You stated that the Travel Agent was acting as your agent when you acquired the expenses incurred in the tax invoice issued by the Australian hotel and you have provided us an Authorisation Form to substantiate this statement. You also stated that you paid these expenses.

Goods and Services Tax ruling GSTR 2003/7: agency relationships and the application of the law describes what is meant by principal/agent relationships and explains a principal's entitlement to GST credits for expenses incurred by an agent in connection with the carrying on of the principal's enterprise.

Under the agency law you will be the one claiming GST credits for any creditable acquisitions you have made through your overseas agent and be liable for any taxable supplies made through your overseas agent.

However, the Authorisation Form you have given to us showed you were not the entity that provided the authority to act as Agent to the Travel Agent. Further the Agreement you have with the Travel Agent did not provide any agency arrangement regarding these acquisitions.

In this instance we do not consider there was an agency arrangement in place between you and the Travel Agent and therefore you cannot use the tax invoice issued to the Travel Agent to claim the GST paid on these expenses in the event you choose to register for GST.

Summary

Currently you are not registered for GST. in this instance you are not entitled to claim GST credits for any creditable acquisitions you have made under subsection 115-5(2) of the GST Act.

Further if you choose to register for GST, you will not be entitled to claim GST credits for the accommodation with buffet breakfast listed in the Australian Hotel's tax invoice issued to the Travel Agent and supplied to your employees who are trainers despite the fact that your acquisition of the accommodation would be a creditable acquisition under subsection 111-5(2) of the GST Act. This is because you do not hold a valid tax invoice to make the claim for GST credits. Based on the facts you have not provided authority to the Travel Agent to act as your agent for the acquisition of these expenses and therefore cannot use the tax invoice issued to the Travel Agent.

The acquisitions of accommodation with buffet breakfast for employees/individuals who are not trainers are not creditable acquisitions under subsection 111-5(3) of the GST Act by virtue of section 69-5 of the GST Act. These expenses are entertainment expenses under section 32-5 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore not deductible under Division 8 of the ITAA 1997. You are not entitled to claim GST credits for these expenses.