Edited version of private advice

Authorisation Number: 1051788797894

Date of advice: 10 December 2020

Ruling

Subject: GST and supply of Australian workers and payroll services

Question 1

When under the Service Agreement, you supply payroll services to a non-resident company for the three Australian contractors engaged by the non-resident company, is the supply of payroll services a GST-free supply under Item 2 in the table of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Where the Australian contractor is not registered for GST, your supply of payroll services to the non-resident company under the Service Agreement is a taxable supply under section 9-5 of the GST Act.

Where the Australian contractor is registered for GST, your supply of payroll services to the non-resident company under the Service Agreement is GST-free under item 2 in the table in subsection 38-190(1) of the GST Act.

You must ensure you hold evidence that the Australian contractor is registered for GST.

Question 2

Is your supply of Australian workers in Australia to the non-resident company under the Service Agreement a GST-free supply under Item 2 in the table of subsection 38-190(1) of the GST Act?

Answer

Yes, your supply of Australian workers in Australia to the non-resident company under the Service Agreement is a GST-free supply under Item 2 in the table of subsection 38-190(1) of the GST Act

Relevant facts

You provide payroll services in Australia and are registered for GST.

You entered into a Service Agreement (Agreement) with a company located outside Australia (non-resident company) to supply the services outlined in Appendix 1 of the Agreement. You have provided us with a copy of the Agreement.

The non-resident is working on a project with the outcome of the project to be consumed outside Australia and used to grow business(es) located outside Australia.

The non-resident company could not find the appropriate persons in its country that have the necessary skills and resources to perform the work required for the project. It decided to outsource Australian workers to do the project.

Under the Agreement:

•         The non-resident contracts three Australians workers (specialists) who will work on the project in Australia. You have the responsibility to manage the payroll process of these three specialists (that is superannuation, payroll tax and workers compensation) from the date these specialists were contracted.

•         You contract five Australian workers (specialists) who are allocated to work on the project in Australia. You charge a recruitment fee (superannuation, payroll tax and workers compensation for the five specialists and a small processing fee) to the non-resident company for the sourcing of these specialists to its project.

•         The five specialists you have contracted are supervised by the non-resident company when working for the project.

•         The specialists can only work for the non-resident company and your contract for payroll services is to the non-resident company only.

You have engaged a specialised payroll processing company in Australia to perform the payroll processing of the eight specialists who works on the project for the non-resident company. You receive an invoice from this payroll company regarding the daily rate of the contractor.

You are not involved in the project and do not engage directly with the specialists. Your role is to ensure payments are made to the recruited specialists and you do not know if they are registered for GST.

The eight specialists are based in Sydney and Canberra at this stage. The specialists take instructions directly from the management of the non-resident company for the project. The non-resident company will check the progress of the project and ensure it is running on time. The CEO and managers of the non-resident company would liaise and provide instructions to the Sydney team on what they need and how to design according to their business objectives and needs.

All specialists currently work from home due to the Covid-19 pandemic. The intention of the non-resident company is to provide an office space next year when the risk is lowered, and it will be responsible for all costs associated with this intention.

The non-resident company does not operate in Australia and has no branch offices. The non-resident company is using the knowledge and skill of Australian Workers to build its project that will be consumed by customers in its country.

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

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.

Questions 1 and 2

Summary

Supply of payroll services

Where the Australian contractor is not registered for GST, the supply of payroll services you make to the non-resident company under the Agreement is a taxable supply under section 9-5 of the GST Act.

Where the Australian contractor is registered for GST, the supply of payroll services you make to the non-resident company under the Agreement is GST-free under item 2 in the table in subsection 38-190(1) of the GST Act.

You must ensure you hold evidence that the Australian contractor is registered for GST.

Supply of Australian workers

Your supply of Australian workers to the non-resident company is GST-free under item 2 in the table in subsection 38-190(1) of the GST Act.

Detailed reasoning

A supply is a taxable supply under section 9-5 of the GST Act where:

a)    the supply is for consideration; and

b)    the supply is made through a business that the supplier carries on; and

c)    the supply is connected with Australia; and

d)    The supplier is registered for GST.

However, the supply is not a taxable supply to the extent that the supply is GST-free or input taxed.

When you supply Australian workers and payroll services to the non-resident company paragraphs (a) to (d) in section 9-5 of the GST Act are satisfied as:

a)    you make the supply for consideration; and

b)    the supply is made through a business that you carry on; and

c)    the supply is connected with Australia as it is made through a business that you carry on in Australia; and

d)    you are registered for GST.

Therefore, your supply of Australian workers and payroll services to the non-resident company is a taxable supply unless it is GST-free or input taxed.

Your supply of Australian workers and payroll services to the non-resident company is not an input taxed supply.

GST-free supply

Relevant to your supply of Australian workers and payroll services to the non-resident company is item 2 in the table in subsection 38-190(1) of the GST Act (item 2).

Under item 2 a supply of anything other than goods or real property to a non-resident who is not in Australia in relation to the supply when the supply is done is GST-free if:

a)    the supply of the thing is neither a supply of work performed on goods located in Australia nor a supply that is directly connected with real property in Australia; or

b)    the non-resident acquires the thing while carrying on its business overseas and the non-resident is not registered and is not required to be registered for GST.

Precondition of item 2

The precondition of item 2 is that the non-resident is not in Australia in relation to the supply.

Goods and Services Tax Ruling GSTR 2004/7 provides guidance on 'when a non-resident is in Australia in relation to a supply' and is available at https://www.ato.gov.au/Forms/Private-ruling-application-form/

The following information is from GSTR 2004/7

230. A company is an artificial legal entity that is separate and distinct from its members. Unlike an individual, it does not have a precise physical location and its presence can only be established through the presence of its representatives.

231. The representative of a company may take on a variety of forms and capacities. For example, a company may be represented by anyone from a single employee to a branch of the company. It is, therefore, necessary to identify the type of presence by a representative of a non-resident company in Australia that makes a company in Australia.

232. The presence of a non-resident company in Australia is the means by which consumption of the supply in Australia is identified.

241. We consider, therefore, that a non-resident company is in Australia for the purposes of item 2 and paragraph (b) of item 4 if that company carries on business (or in the case of a company that does not carry on business, carries on its activities) in Australia:

a)    at or through a fixed and definite place of its own for a sufficiently substantial period of time; or

b)    through an agent at a fixed and definite place for a sufficiently substantial period of time.

246. A company incorporated outside Australia is required to register as a foreign company with the Australian Securities and Investments Commission ('ASIC') if it wishes to carry on business in Australia. A supplier can check whether a company is registered by conducting a search of the National Names Index on the ASIC website.

247. We consider that it would be reasonable for a supplier to conclude that a non-resident company is in Australia if:

•         the company is registered with ASIC; or

•         the company has a permanent establishment in Australia for income tax purposes.

248. However, a non-resident company to which the supplier makes a supply may be able to demonstrate to the supplier that, even though it is registered with ASIC or has a permanent establishment, on application of the test set out in this Ruling (at paragraph 241) to its particular circumstances, the non-resident company is not in Australia.

249. Suppliers should be aware that even if a company is not registered with ASIC, it may still be in Australia on an application of the test set out in this Ruling (at paragraph 241). Similarly, even if a company does not have a permanent establishment in Australia for income tax purposes, it may still be in Australia on an application of the test to its particular circumstances.

250. We consider that if a non-resident company carries on business at or through a fixed and definite place of its own in Australia and it has carried on, or intends to carry on, its business from such premises by its servants or agents for a sufficiently substantial period of time, that company is in Australia.

252. A non-resident company is considered to be carrying on business in Australia even though the activities carried on in Australia are not a substantial part of, or are no more than incidental to, the main objects of the company.

253. A non-resident company clearly has a place of business of its own if it leases or owns a place at which it conducts business through its servants or agents. However, a place of its own is not limited to such a place. A non-resident company occupies a place as a place of its own if it has a right to be there. Evidence of that right is generally to be found in the fact that the company's employees or agents occupy that place for the purposes of its business.

263. The non-resident company owning, leasing or licensing premises in Australia typically evidences such a fixed and definite place. However, it is immaterial whether the fixed place of business is owned or rented by, or is otherwise at the disposal of, the non-resident company. A place of business may be situated in the business premises of another entity. This may be the case, for instance, if the non-resident company has at its constant disposal premises or part of premises owned by another entity.

266. If a non-resident company were to announce its intention to carry on its own business in Australia, and were to carry it on, at a certain place in this country for a limited period, the mere fact that it carried on the business for only a limited period of time would not prevent the company from being considered to be in Australia.

350. If the supply is not for the purposes of the Australian presence, but that Australian presence is involved in the supply, the company is 'in Australia in relation to the supply', unless the only involvement is minor.

351. If the involvement of the Australian presence is limited to the carrying out of simple administrative tasks on behalf of the company, as a matter of administrative convenience, that involvement is minor. The connection between the supply and the presence is so minor in nature that it is reasonable to conclude that the presence of the company in Australia is not in relation to the supply.

352. Tasks of a simple administrative nature include:

•         payment of, or arranging for payment of, the supplier's invoice on behalf of the company;

•         passing on an e-mail to the company;

•         being a point of telephone contact to pass on messages to the company;

•         being a mailing address or delivery contact on behalf of the company;

•         being a point of contact for a visiting representative of the company; and

•         on-forwarding information to the company.

From the information given, the non-resident company does not have any place of its own in Australia and does not have any presence in Australia. In this instance the precondition of item 2 is satisfied as the non-resident company is not in Australia in relation to your supply of Australian workers and payroll services when the supply is done.

The next step is to consider the paragraphs in item 2.

Paragraph (a) of item 2

Paragraph (a) of item 2 requires that the supply is neither a supply of work performed on goods located in Australia nor a supply that is directly connected with property in Australia.

Your supply of Australian workers and payroll services to the non-resident company is neither a supply of work performed on goods located in Australia nor a supply that is directly connected with property in Australia. Paragraph (a) of item 2 is satisfied in this instance.

However, your supply Australian workers and payroll services to the non-resident company is GST-free under paragraph (a) to the extent that subsection 38-190(3) of the GST Act does not apply to the GST-free supply.

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 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.

Supply of payroll services

Paragraph 38-190(3)(a) of the GST Act

Under the agreement you agreed to provide payroll services to the three contractors that the non-resident company has engaged for its project in Australia. Paragraph 38-190(3)(a) of the GST Act is satisfied.

Paragraph 38-190(3)(b)) of the GST Act

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 and 61 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.

When you supply the payroll services with the assistance of the specialised payroll company under the Agreement, your supply is made to the non-resident company and provided to the three contractors since the purpose of the payroll is to ensure the contractors get paid for their work.

Your subcontracting of the payroll services to the specialised payroll company does not stop you from being accountable of the provision of the payroll services to the three contractors under your agreement with the non-resident company.

In this instance paragraph 38-190(3)(b) of the GST Act is satisfied.

Paragraph 38-190(c) of the GST Act

Requirements (i) and (ii)

An entity is an 'Australian-based business recipient' of a supply that is made to it if:

•         the entity is registered; and

•         the enterprise of the entity is carried on in Australia; and

•         the acquisition of the thing supplied to the entity is not solely of a private or domestic nature.

You have no information on whether the Australian contractors referred to you by the Non-resident company are registered for GST or not.

Contractors not registered for GST

Where any of the three Australian contractors is not registered for GST, requirements (i) and (ii) do not apply to the supply of payroll services that is provided to the Australian contractor at the request of the non-resident company where the contractor is either an individual or employee of an Australian company.

In this instance subsection 38-190(3) of the GST Act will negate the GST-free status of the supply. The supply of payroll services made to the non-resident company and provided to the contractor that is not registered for GST is a taxable supply under section 9-5 of the GST Act.

Australian contractor registered for GST

Where the Australian contractor is registered for GST, the Australian contractor would be an Australian based business recipient. In this instance requirements (i) and (ii) apply to the supply of payroll services that is provided to the Australian contractor at the request of the non-resident company where the contractor is either an individual or employee of an Australian company.

Subsection 38-190(3) of the GST Act will not negate the GST-free status of the supply. The supply of payroll services made to the non-resident company and provided to the contractor is GST-free under item 2.

You will need to obtain evidence that the Australian contractor is registered for GST before treating your supply of payroll services that is provided to the Australian contractor GST-free under item 2. For example, you can obtain the ABN and a statement from the Australian contractor that it is registered for GST.

Supply of Australian workers

Subsection 38-190(3) of the GST Act does not apply when you supply Australian workers since your supply is made and provided to the non-resident company.

Your supply of Australian workers to the non-resident company is therefore GST-free under paragraph (a) of item 2.