Edited version of private advice

Authorisation Number: 1052216519847

Date of advice: 20 March 2024

Ruling

Subject: Goods and services tax

Question

Is the supply of services by Entity A to a non-resident Entity B, a GST-free supply under section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. The supply of services made by Entity A to the non-resident Entity B is a GST-free supply under table item 2 of subsection 38-190(1) of the GST Act.

Relevant facts and circumstances

1.    Entity A is incorporated in Australia, is based in Australia, and carries on an enterprise of providing transport and logistics services in Australia.

2.    Entity A is registered for the goods and services tax (GST).

3.    Under an agreement between Entity A and the non-resident Entity B, Entity A is required to transport and deliver goods to Entity C in Australia. The job that Entity B requires Entity A to perform is to pick up the goods from an address in Australia and to deliver the goods to another address in Australia. Entity C is an Australian-based business.

4.    No physical work is performed on the goods during transport.

5.    Entity A makes supplies of transport and logistical services to Entity B through its enterprise.

6.    The supplies of transport and logistical services are made by Entity A in Australia. The supply of these services does not involve international transport.

7.    Entity A does not make any supplies of goods or real property to Entity B.

8.    Entity B is incorporated overseas. Its registered office is outside Australia.

9.    Entity B is not a resident of Australia for Australian income tax purposes.

10. Entity B carries on a business outside Australia.

11. Entity A and Entity B are not related entities.

12. Entity B does not have any representatives or employees or any presence in Australia at any time, including the time when the supplies of the transport and logistical services by Entity A are done.

13. Entity B is currently not registered or required to be registered for GST in Australia.

14. Entity A has issued a GST inclusive tax invoice to Entity B for the transportation and delivery of goods to Entity C in Australia.

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 9-25

A New Tax System (Goods and Services Tax) Act 1999, section 9-26

A New Tax System (Goods and Services Tax) Act 1999, section 9-40

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

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

Reasons for decision

In this reasoning, unless otherwise stated,

•        all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act);

•        all legislative terms marked with an asterisk (*) are defined in section 195-1 of the GST Act;

•        where the term 'Australia' is used, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act; and

•        all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity must pay the GST payable on any taxable supply that it makes.

GST is payable on a taxable supply.

No GST is payable where a supply is not a taxable supply or where a supply is GST-free or input taxed.

Taxable supply

An entity makes a taxable supply if it meets the requirements of section 9-5, which states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an enterprise that you carry on; and

(c) the supply is *connected with indirect tax zone; and

(d) you are *registered or *required to be registered.

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

All of the above requirements of a taxable supply under section 9-5 must be met for the supply to be a taxable supply.

The supply made by Entity A is a supply of transport and logistics services made under an agreement between Entity A and the non-resident Entity B.

The supply satisfies the requirements of paragraphs 9-5(a), (b) and (d) above as the supply is for consideration, is made in the course of an enterprise that Entity A carries on, and Entity A is registered for GST.

What remains to be considered is whether the supply by Entity A is connected with the indirect tax zone, as required under paragraph 9-5(c). A supply that is not connected with the indirect tax zone is not a taxable supply under section 9-5.

Connected with the indirect tax zone

Section 9-25 establishes when a supply is 'connected with the indirect tax zone'. Relevantly, subsection 9-25(5) provides that a supply of services is connected with the indirect tax zone if:

(a) the thing is done in the indirect tax zone; or

(b) the supplier makes the supply through *an enterprise that the supplier *carries on in the indirect tax zone; or

(c) all of the following apply:

(i) neither paragraph (a) nor (b) applies in respect of the thing;

(ii) the thing is a right or option to acquire another thing;

(iii) the supply of the other thing would be connected with the indirect tax zone; or

(d) the *recipient of the supply is an *Australian consumer.

Under subsection 9-25(7), to be an 'Australian consumer' of a supply, an entity must:

•        be an Australian resident for income tax purposes, with an exception for residents of external Territories (the 'residency element '), and

•        either:

•        - not be registered for GST, or

•        - if the entity is registered for GST, the entity did not acquire the thing for their enterprise (solely or partly) for the purpose of an enterprise that the entity carries on (the 'consumer element').

Broadly, an Australian consumer is an Australian resident that is not engaged in an enterprise and not registered for GST or is registered for GST but acquires the thing wholly or partly for private purposes.

On the facts, the supply made by Entity A would be connected with the indirect tax zone as the transport services are provided by Entity A in Australia, and paragraph 9-5 (c) will be satisfied.

Consequently, all the requirements of paragraphs 9-5(a) to 9-5(d) will be met and the supply of the transport services will be a taxable supply unless it is input taxed or GST-free.

A supply is GST-free if it is GST-free under Division 38 or under a provision of another Act.

Entity A's supply of the transport services is not an input taxed supply. Therefore, what remains to be considered is whether the supply of the services is GST-free under Division 38.

GST-free supply

Section 38-190 sets out the circumstances in which certain supplies of things other than goods or real property, for consumption outside of Australia are GST-free. As Entity A makes a supply of services, section 38-190 is relevant for consideration.

The table in subsection 38-190(1) comprises five items which set out supplies of things other than goods or real property that are GST-free. If the requirements of one of those items are met the supply is GST-free, provided that subsections 38-190(3) does not negate that GST-free status.

Item 2

Table item 2 of subsection 38-190(1) (Item 2) provides that a supply of a thing, other than goods or real property, made to a non-resident is GST-free if the non-resident 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 is not registered or required to be registered.

Item 2 applies to a supply of a thing, other than a supply of goods or real property, which is made to a non-resident. A supply is made to a non-resident for the purposes of item 2 if the supply is made to an entity that is a person who is not a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936). A non-resident is an 'entity that is not an Australian resident'.

We determine whether the 'not in Australia' requirement is satisfied by determining whether the non-resident entity is in Australia in relation to the supply. If the entity is in Australia in relation to the supply, the entity does not satisfy the 'not in Australia' requirement.

On the facts, the supplies of transport services made by Entity A to Entity B are supplies that are made to a non-resident who is not in the indirect tax zone when the thing supplied is done. Therefore, supplies made to Entity B, a non-resident, will satisfy the requirements of table item 2 of subsection 38-190(1) and will be GST-free under item 2, provided that subsections 38-190(3) does not negate that GST-free status.

Subsection 38-190(3), provides that a supply covered by item 2 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.

Subsection 9-26(2) provides that 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.

Paragraph 38-190(3)(a)

The supply of transport and delivery services is made under an agreement between Entity A and Entity B. Paragraph 38-190(30(a) is satisfied.

Paragraph 38-190(3)(b)

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.

Under the agreement between Entity A and Entity B, Entity A is required to transport and deliver the goods to another entity in Australia, Entity C. The job that Entity B requires Entity A to perform is to pick up the goods from a depot in Australia and to deliver the goods to an Entity in Australia. Therefore, paragraph 38-190(3)(b) is satisfied.

Paragraph 38-190(3)(c)

Under the agreement between Entity A and Entity B, the supply of transport and delivery services is required to be provided to Entity C, in Australia. Entity C is an Australian-based business recipient, and the supply will not satisfy paragraph 38-190(3)(c)(i).

Therefore, subsection 38-190(3) will not apply on the supply of transport and delivery services provided by Entity A to Entity B. This means, subsection 38-190(3) will not negate the GST-free status of the supply under table item 2 of subsection 38-190(1). The supply will be GST-free under table item 2 of subsection 38-190(1).

Additional information

Division 142

Division 142 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 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'.

Once the supplier reimburses the recipient for the passed-on GST, section 142-10 will cease to apply, and the supplier will have a decreasing adjustment under section 19-55.

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

Generally, section 29-20 provides that an adjustment is attributable to the tax period in which you become aware of the adjustment. The adjustments for the supplies made by the supplier to the recipient that were incorrectly treated as taxable supplies are attributable to the tax period in which the supplier reimburses the recipient 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).