Edited version of private advice

Authorisation Number: 1052175542331

Date of advice: 5 October 2023

Ruling

Subject: GST and supply of services to a non-resident

Question 1

Is the supply of services provided by an entity X to a non-resident entity Y GST-free pursuant to section 38-190 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The supply of services is GST-free as entity Y is not in Australia when the supply is made and acquired the supply in carrying on its enterprise but is not required to be registered for GST.

Question 2

Does the excess GST passed on by entity X in relation to supplies made to entity Y remain payable under section 142-10 of the A New Tax System (Goods and Services Tax) Act 1999?

Answer

The GST that was incorrectly passed on remains payable until entity X reimburses entity Y that GST amount.

Question 3

In which tax period are the decreasing adjustments attributable under section 29-20 of the A New Tax System (Goods and Services Tax) Act 1999 when entity X reimburses entity Y the GST incorrectly passed on in relation to the supplies?

Answer

The decreasing adjustments are attributable to the tax period in which entity X reimburses entity Y.

This ruling applies for the following periods:

Not applicable

The scheme commences on:

Not applicable

Relevant facts and circumstances

•         Entity X is carrying on an enterprise and has been registered for GST.

•         Entity X entered into agreements with entity Y to provide services in respect of Australian commercial properties. None of the properties comprise residential premises.

•         Entity Y is a non-resident and does not make any supplies connected with Australia and is not required to be registered for GST in Australia.

•         Entity Y has no employees in Australia and has no physical presence in Australia.

•         Entity X has been charging GST on the supply of asset management services (fees) to entity Y and issued tax invoices to entity Y for the supplies.

•         Agreements are given the title of 'Asset Management Agreement', however the agreements also state that a separate 'Property Manager' is appointed by the Trustee of each sub-trust to manage the property.

•         Under the agreements, entity X is required to provide quarterly performance reports to entity Y which includes information about the financial performance of the property (including updates on expenditure and leasing) as well as analysis of the financial statements and the property market more generally. Entity X also has an oversight role to ensure that the Property Manager performs its duties appropriately as well as providing advice and analysis to entity Y.

In addition, the agreements also provide that entity X may be directed to act as entity Y or the trustee's representative for the purposes of the Co-Owners Agreement and the Owner's Corporation on matters related to the management and leasing of the Property and common properties. To-date neither entity Y nor the Trustee has directed entity X to act as entity Y or Trustee's representative.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 - section 19-10, 19-40 and 19-55

A New Tax System (Goods and Services Tax) Act 1999 - section 29-20

A New Tax System (Goods and Services Tax) Act 1999 - subsection 38-190(1),

A New Tax System (Goods and Services Tax) Act 1999 - section 142-10

A New Tax System (Goods and Services Tax) Act 1999 - section 195-1

Reasons for decision

Question 1.

You are liable to pay goods and services tax (GST) on a taxable supply unless the supply is GST-free or input taxed.

Section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a supply that is neither goods nor real property may be GST-free in certain circumstances. The table in subsection 38-190(1) of the GST Act lists a number of items where the supply is GST-free. If a supply satisfies the requirements of one of the items in the table and it is not excluded by any other provision in section 38-190 of the GST Act, it will be GST-free.

Item 2 in the table in subsection 38-90(1) of the GST Act is relevant to consider for the supply of asset management services provided by entity X to entity Y, a non-resident.

Item 2 in the table in subsection 38-90(1) of the GST Act provides that a supply is GST-free if it is made to a non-resident who is not in the indirect tax zone when the thing supplied is done, and:

(a) the supply is neither 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 acquires the thing in carrying on the non-resident's enterprise, but it is not registered or required to be registered for GST.

Under item 2 in the table in subsection 38-190(1) of the GST Act, a supply is GST-free if it is made to a non-resident who:

•         is not in the indirect tax zone when the thing supplied is done; and

•         the non-resident acquires the thing in carrying on their enterprise; and

•         the non-resident is not registered or required to be registered for GST.

Whether an entity is a non-resident is a question of fact. Section 195-1 of the GST Act defines a non-resident with reference to Income Tax Assessment Act 1936. That is, if an entity is not an Australian resident for the purposes of income tax, it is a non-resident for the purposes of the GST Act. Entity Y is a non-resident for GST purposes.

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'?

explains that a non-resident entity is considered to be in the indirect tax zone (Australia) if it carries on a business (or conducts its activities) in Australia:

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

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

Entity Y is the appointed manager and provides overall management services to the trustee. Entity Y does not provide its management services through any place located within Australia. Although the management services include services that relate to real property located in Australia, those services are provided directly to the trustee.

Although the agreements provide entity X with the ability to act as agent for entity Y, the scope of authority is limited to circumstances which may arise and is not ordinarily exercised. As entity X has not been authorised to act as agent of entity Y, it cannot be said that entity Y carries on its activities through an agent located in Australia.

Item 2b in the table in subsection 38-190(1) of the GST Act requires that the non-resident entity must be acquiring the thing in carrying on its enterprise and cannot be registered or required to be registered for GST for the supply to be GST-free. Entity Y carries on a business outside Australia providing management services to the trustee. In order to provide those services entity Y must engage others to provide it with various services. This is likely to include legal and taxation advice services as well as research and analysis services. Entity X provides its services to entity Y so that entity Y can provide its services to the trustee.

Generally, an entity is required to be registered for GST in Australia if it has an annual GST turnover of $75,000 or more. However supplies that are not connected with Australia are excluded from the calculation of the annual turnover. Consequently, entity Y is not required to be registered for GST in Australia as its supplies of management services are not connected with Australia.

Therefore, the supplies of services by entity X to entity Y under the agreements are GST-free under item 2b in the table in subsection 38-190(1) of the GST Act as the supplies are:

•         made to a non-resident; and

•         the non-resident is not in the indirect tax zone in relation to the supplies; and

•         the non-resident acquires the services in carrying on its enterprise; and

•         the non-resident is not registered or required to be registered for GST.

Question 2

Generally, Division 142 of the GST Act provides that an amount of GST that has been incorrectly charged by a supplier to a recipient and paid to the ATO (excess GST) will not be refunded where that refund would result in a windfall gain for the entity.

Section 142-10 of the GST Act deems the excess GST to have been always payable on a taxable supply until the entity incorrectly charged GST has been reimbursed.

The Goods and Services Tax Ruling; Goods and services tax: the meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 (GSTR 2015/1) notes that whether the excess GST has been passed on is a question of fact and must be determined on a case-by-case basis taking into account the particular circumstances of each case.

Paragraphs 24 and 25 of GSTR 2015/1 state:

24. The Explanatory Memorandum to the Tax Laws Amendment (2014 Measures No. 1) Bill 2014 states that the GST Act envisages that the supplier 'passes on' the GST to the recipient of the supply. This simply reflects the design of the GST as an indirect tax which is generally expected to be passed on to the customer when a supply is treated as a taxable supply.

25. If excess GST is included on a tax invoice, this is prima facie evidence that the excess GST has been passed on.

As explained at paragraph 31 of GSTR 2015/1, a common circumstance in which excess GST may arise includes 'incorrectly treating something which is not a supply as a taxable supply' or 'incorrectly treating a GST-free ... supply as a taxable supply...'.

Entity X charged GST on invoices issued to entity Y and has paid those GST amounts to the ATO. The GST has been passed-on to entity Y even though the supplies were GST-free. As entity X paid those GST amount to the ATO on supplies that weren't subject to GST, the amounts are 'excess GST' for the purposes of Division 142 of the GST Act. Section 142-10 of the GST Act applies to ensure that the excess GST remains payable until such a time that entity X reimburses entity Y.

Question 3

If entity X reimburses entity Y for the passed-on GST, section 142-10 of the GST Act will cease to apply, and entity X will have a decreasing adjustment under section 19-55 of the GST Act.

Section 19-40 of the GST Act provides that an adjustment for a supply arises where an adjustment event under section 19-10 of the GST Act and the GST on the supply was attributable to an earlier tax period (ie included in a previous activity statement) attributed GST amount is incorrect.

Section 19-55 of the GST Act provides that an entity has a decreasing adjustment where the correct GST amount on a supply is less than the previously attributed GST amount.

Paragraph 18 of GSTR 2015/1 states:

18. In cases where the supplier actually makes a supply, an adjustment event arises under Division 19 when the supplier reimburses the recipient as the reimbursement has the effect of changing the consideration for the supply or causing the supply to stop being a taxable supply. In these cases, the supplier has a decreasing adjustment which is attributable to the tax period in which the reimbursement is made to its recipient. The recipient ............... The Commissioner's view on the operation of Division 19 is explained in Goods and Services Tax Ruling GSTR 2000/19 Goods and services tax: making adjustments under Division 19 for adjustment events.

Causing a supply to stop being a taxable supply is an adjustment event under paragraph 19-10(1)(c) of the GST Act. When entity X reimburses entity Y for the GST amount previously included in invoices, an adjustment event arises for each because section 142-10 of the GST Act ceases to apply and therefore causes those supplies to stop being taxable supplies. As entity X had previously included the GST paid by entity Y in its activity statements, the previously attributed GST no longer reflects the correct GST on the supplies. Consequently, entity X has decreasing adjustments when it reimburses entity Y.

Generally, section 29-20 of the GST Act provides that an adjustment is attributable to the tax period in which you become aware of the adjustment. The adjustments for entity X's supplies to entity Y that were incorrectly treated as taxable supplies are attributable to the tax period in which entity X reimburses entity Y for the GST amount. This is because that is the point in time that the supplies cease to be taxable supplies (because of the operation of section 142-10 of the GST Act). Even though entity X may have been aware of the incorrect treatment of the supplies earlier, the supplies remain taxable until the reimbursement occurs and therefore the adjustment cannot occur before that point in time.