Edited version of private advice

Authorisation Number: 1052016378606

Date of advice: 10 August 2022

Ruling

Subject: GST - supply of services

Question

Are the services you supply under your consulting agreement with X GST-free under item 2 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. Therefore, GST is not payable on your supply of these services.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

X April 20XX

Relevant facts and circumstances

You are registered for GST

You are supplying consulting services to X, a non-resident (foreign country) company without a branch in Australia. You receive consulting fees for these services. The consulting services involve, amongst other things, helping to increase sales of X's products in Australia.

X manufactures goods. X sells these products to distributors located in Australia. These distributors on-sell the goods to retailers located in Australia. The distributors and retailers are registered for GST.

Your consulting agreement with X summarises the services that you supply to it, in a general way, as follows:

Consultant is hired through (date) to (date) (unless the term is otherwise extended in writing and signed by both parties), for their skills and their experience and expertise related to the business of X. Consultant will, among other services, focus on sales services, increase sales activities and develop potential marketing opportunities to further establish X's name among existing and future customers in Australia.

The individual tasks that you perform under the consulting agreement are as follows:

•         Collecting competitors' products/prices/sales and marketing activities/market share.

•         Proposing the sales and marketing activities.

•         Promoting the products; including by way of educating potential buyers and hunting for new business opportunities and bringing back to the customer and the customer's customers (distributors) to follow up or fulfill.

•         Monitoring the sales achievement rate and assisting to reach the sales goal with coordinating all the relevant parties for some kinds of supports provided by your customer and/or your customer's customers (the distributors).

•         Coordinating and assisting your customer and its customers (distributors) and retailers to resolve sales and post-sales problems if any.

•         You usually don't find direct business opportunities for retailers as they are facing end clients anyway; but you do propose some promotions or activities to the retailers to enhance your customer's brand and meanwhile enhance the sales made by the retailers.

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

Summary

You are making a GST-free supply as:

•         you are supplying intangibles; and

•         your customer is a non-resident who is not in Australia; and

•         your supply of services to X is not 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; and

•         although you are providing some of your services to third parties who are in Australia, they are GST-registered Australian business operators and your supplies are not input taxed; and

•         the exclusions in subsection 38-190(2) and 38-190(2A) of the GST Act do not apply to your case.

Detailed reasoning

A supply of an intangible (something other than goods or real property) to a non-resident who is not in the indirect tax zone (Australia) is GST-free under item 2 in the table in subsection 38-190(1) of the GST Act if:

(a)  the supply is not 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 recipient acquires the thing in carrying on their enterprise but is not registered or required to be registered for GST.

You are supplying services to a non-resident who is not in Australia. The supply is not a supply of work physically performed on goods situated in Australia when the work is done, nor is it a supply directly connected with real property situated in Australia. Therefore, the requirements of paragraph (a) in item 2 are met.

However, if a supply of a service is made to a non-resident but provided to a third party in Australia, the supply may be excluded from GST-free treatment under item 2 due to subsection 38-190(3) of the GST Act, which states:

(a)  Without limiting subsection (2) or (2A), a supply covered by item 2 in that table is not GST-free if:

(b)  it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident; and

(c)   the supply is provided, or the agreement requires it to be provided, to another entity in the indirect tax zone; and

(d)  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.

Subsection 9-26(2) of the GST Act defines 'Australian based business recipient'. It states:

An entity is an Australian-based business recipient of a supply made to the 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.

(Registered means registered for GST)

You are supplying consulting services under an agreement you have entered into with a non-resident. Therefore, the requirement of paragraph 38-190(3)(a) of the GST Act is met.

Goods and Services Tax Ruling GSTR 2005/6 provides guidance on determining whether a supply made to a non-resident is provided to a third party who is in Australia.

GSTR 2005/6 has not been updated to reflect an amendment to the GST Act, being the insertion of paragraph 38-190(3)(c). Prior to the amendment, if a supply of a service was made to a non-resident, but provided to a third party who was in Australia, the supply could not be GST-free under item 2.

Paragraphs 224 and 225 of GSTR 2005/6 state:

224. Therefore the expression a supply is 'provided to another entity' means that in the performance of a service (or in the doing of some other thing supplied), 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.

225. 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 entertained, the actual flow of that service is to another entity, each employee.

The example in paragraph 225 indicates that the provide of a service is the entity that the service is rendered to, in other words, the entity who avails themself of the service.

In accordance with paragraph 79 of GSTR 2005/6, the application of subsection 38-190(3) of the GST Act is dependent upon on all the facts and circumstances of the supply.

In accordance with GSTR 2005/6, the fact that a supplier of a service interacts with a party in Australia is an indicator that the supplier may be providing the supply of the services to that party in Australia, but it is not conclusive.

The scenarios in paragraphs 122 to 124 involve situations where a service is supplied to a non-resident, but the supplier interacts with third parties who are in Australia in the course of performing that service. They state:

Determining whether a supply made to a non-resident employer is provided to an employee in Australia

122. To determine whether a supply is provided to an employee, it is essential to examine the nature of the supply closely. By examining what is really being supplied and how that supply is carried out, it is possible to establish to whom the service or other thing is provided, that is, the employer or another entity, the employee. If the supply is provided to the employee it is then necessary to consider if the employee's presence at a particular location is integral to the provision of that supply.

123. For example, a non-resident sole trader engages an Australian accounting firm to prepare Australian tax returns for non-resident employees working in Australia. The service involves the accounting firm meeting with the employees in Australia and preparing their individual tax returns. The tax return services are about the tax obligations of each individual. The tax return preparation services in these circumstances are provided to the individual employee. The employee is in Australia when the service is performed and that employee's presence in Australia is integral to, as distinct from being merely coincidental with, the provision of the supply. The supply otherwise covered by item 2 is not GST-free.

124. Where an employee is involved with the provision of a supply, the weight to be given to that fact differs according to the circumstances of the supply in question. In the above example, the fact that the employee has contact with the supplier strongly indicates, in the circumstances of the supply, that the supply is provided to that employee. On the other hand, contact by an employee with a supplier is of little relevance in circumstances where the employee's involvement with the provision of the supply is simply to facilitate the provision of the supply to the non-resident employer. This is the case where, for example, an employee of a non-resident employer interacts with a law firm in circumstances where the firm is providing legal advice concerning a business venture of the non-resident employer.

In accordance with GSTR 2005/6, the fact that a given party derives a benefit from a supply of a service will not necessarily mean that they are a provide of the service. Paragraphs 134 to 136 and 502 to 515 state:

Another entity in Australia benefits from the supply, but the supply is not provided to another entity in Australia

134. If the nature of the supply is such that the supply is only provided to an entity outside Australia, subsection 38-190(3) does not apply. This outcome is not altered even if another entity in Australia benefits from a supply provided to another entity outside Australia.

135. This can occur with, for example, the supply of advertising services. If the advertising services are made and provided to a non-resident, subsection 38-190(3) does not apply to that supply even if another entity in Australia derives a benefit from that supply (see Example 23 at paragraphs 504 to 508, Part V of the Explanation section of this Ruling).

136. As stated at paragraph 133, the enquiry for the purposes of subsection 38-190(3) is one of determining the nature of the supply having regard to all the facts and circumstances of the supply, and then whether that supply, as properly described, is provided to another entity in Australia.

Another entity in Australia 'benefits' from a supply but that supply is not provided to another entity in Australia

502. If the nature of the supply is such that the supply is only provided to an entity that is not in Australia, subsection 38-190(3) does not apply. This outcome is not altered even if another entity in Australia benefits from a supply made to a non-resident and provided to another entity that is not in Australia.

503. Consider the following example.

Example 23 - a supply of advertising services made and provided to a non-resident in respect of goods sold in Australia

504. A non-resident US company that is a distributor of soft drinks contracts for the supply of advertising air time on a national television network in Australia. The soft drinks are available from supermarket chains throughout Australia. The non-resident US company does not carry on business in Australia either through a place of business of its own or through an agent acting on its behalf.

Item 2

505. The supply of air time by the Australian television network is made to the non-resident company that is not in Australia when the services are performed. The supply satisfies the requirements of item 2 and is, therefore, a supply covered by item 2.

Subsection 38-190(3)

506. The supply of air time by the Australian television network to the non-resident US company is a supply under an agreement entered into with a non-resident. Paragraph 38-190(3)(a) is therefore satisfied.

Provided to another entity

507. What is being supplied is air time on an Australian television network advertising the US distributor's products in Australia generally. The nature of the supply of air time is such that the supply is provided to the US company. While Australian retailers potentially benefit from the supply of advertising air time through increased sales, this does not alter the nature of the supply and the fact that the supply, as properly described, is not provided to another entity.

508. Subsection 38-190(3) does not negate the GST-free status of the supply of advertising services covered by item 2.

509. The advertising example illustrates that, for the purposes of applying subsection 38-190(3), the focus is on the nature of the supply and the actual flow of that supply. It is not about tracing benefits. The next example also illustrates this.

Example 24 - a supply of repair services made and provided to a non-resident landlord in respect of a rental property in Australia

510. Angela is a non-resident individual who owns a residential apartment at Redcliffe which is currently being rented. The apartment is managed by a real estate agent on Angela's behalf. The real estate agent advises Angela that the air-conditioner needs repairing as it has ceased working. Angela authorises the repairs and the agent arranges for a person to carry out the repairs to the air-conditioner. Angela is not physically located in Australia at any time during which the repairs to the air-conditioner are performed. Angela is not registered, or required to be registered, for GST in Australia.

Item 2

511. The repair services are contracted for by Angela's agent on her behalf. The supply of the repair services to the rental property are therefore made to Angela, a non-resident who is not in Australia when the repair services are performed. As Angela is not registered, or required to be registered, the supply satisfies the requirements of item 2 and is, therefore, a supply covered by item 2. Subsection 38-190(3)

512. The supply of repair services by the repairer is a supply under an agreement entered into indirectly with a non-resident (that is, through Angela's agent in Australia). Paragraph 38-190(3)(a) is therefore satisfied.

Provided to another entity

513. What is being supplied is the service of repairing an air-conditioner. The circumstances of the supply are that Angela, as landlord, is maintaining the leased premises and all inclusions such as the air-conditioner in working order as leased by the tenant.

514. The supply of the repair services is provided, therefore, to Angela. It is not provided to the tenant. While the tenant benefits from the supply of the repair services as she is able to once again use the air-conditioner, this does not alter the nature of the supply and the fact that the supply, as properly described, is not provided to another entity, the tenant. (The supply is also not provided to the agent who merely arranges for the supply to be made to Angela.)

515. Subsection 38-190(3) does not negate the GST-free status of the supply of repair services covered by item 2.

We consider that the providers of some of your services (at least to some extent) are the Australian distributors, based on a holistic analysis of all the facts and circumstances of the supplies because, for example:

• you are supplying a service of promoting the sale of your customer's products (amongst other things); and
• in the course of performance of that service, one of the tasks you need to do is find business opportunities for distributors in Australia, and in the course of performance of this task, the actual flow of the particular service that that task involves is to those distributors, given that:

o   you are finding business opportunities for those distributors; and

o   you bring back those business opportunities to those distributors so that they can make further/additional sales which they do as principals and you are interacting with those parties.

You also propose some promotions or activities to the Australian retailers to enhance your customer's brand and meanwhile enhance the sales made by the retailers. We consider that as you propose these particular promotions or activities to the retailers and the purpose is partly to enhance the sales made by the retailers, these activities that you do, to some extent, involve a provision of a supply to the retailers.

Additionally, you assist distributors and retailers to resolve sales and post-sales problems if any. This involves a provision of services to those parties.

Your customer gets benefits (some indirect) from assistance you give to distributors and retailers. For example, your act of bringing back business opportunities to the Australian distributors, would lead to the generation of further sales for X as the distributors would then source more units of the product from your customer to replenish stock and meet further orders from retailers. However, in accordance with GSTR 2005/6, the fact that your customer benefits from this assistance does not necessarily mean that you are solely providing services to your customer.

Under your consulting arrangement with X, you do not provide services to entities other than X, the distributors and the retailers. Any education of end customers (who buy from the retailers) would be part of a promotional service, which you provide to the retailers and X.

Although you are supplying your services to a non-resident customer and you are providing some of these services to third parties who are in Australia, these third parties are GST-registered entities that operate businesses in Australia and they do not utilise your services for private or domestic purposes. Therefore, these third parties would have been Australian based business recipients of your supplies if you had made your supplies to them. Additionally, your supplies of services are not input taxed. Therefore, subsection 38-190(3) of the GST Act does not operate to prevent your supply of services to X from being entirely GST-free under item 2.

No other exclusions from GST-free treatment under item 2 apply.

Therefore, you are making a GST-free supply of consulting services to X under item 2.

Hence, in accordance with section 9-5 of the GST Act, GST is not payable on your supply of the consulting services to X.