Edited version of private advice

Authorisation Number: 1052228589300

Date of advice: 6 March 2024

Ruling

Subject: GST and supply to non-resident company

Question 1

Entity A supplies human resource services (payroll services) to a non-resident company for the employees engaged by the non-resident company, where the employees work on a project overseas. Is the supply of payroll services a GST-free supply under table item 2 of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The supply of payroll services provided to the non-resident company will be taxable supply under section 9-5 of the GST Act. The non-resident company will be carrying on their enterprise in Australia under section 9-27 of the GST Act and will have a presence in Australia. Therefore, the supply of payroll services will not satisfy the requirements of table item 2 of subsection 38-190(1) of the GST Act.

Question 2

Entity A supplies human resource services (payroll services) to a non-resident company for the employees engaged by the non-resident company, where the employees provide services to the Australian customers of the non-resident company. Is the supply of payroll services a GST-free supply under table item 2 of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. Please refer to the answer to question 1.

Question 3

Entity A supplies human resource services (payroll services) to a non-resident's Australian subsidiary/permanent establishment,. Will the supply of human resource services be a GST-free supply under table item 2 of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer:

No. The supply of payroll services provided to the subsidiary or permanent establishment of a non-resident company will be taxable under section 9-5 of the GST Act. The non-resident company will have a presence in Australia through their subsidiary or permanent establishment and the supply of payroll services is provided to the subsidiary or permanent establishment of the non-resident company.

Question 4

Entity A supplies human resource services (payroll services) to a non-resident company for the employees engaged by the non-resident company, where the employees perform work on a project in Australia for the non-resident company. Is the supply of payroll services a GST-free supply under table item 2 of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. Please refer to the answer to question 1.

Relevant facts and circumstances

Entity A is carrying on an enterprise of providing human resources services such as human resource support, administration of payroll and superannuation to entities located in Australia and overseas and registered for goods and services tax (GST).

The majority of Entity A's clients are outside of Australia or small foreign-owned subsidiaries in Australia.

Currently, Entity A will only make supply of payroll services to the non-resident company.

Entity A will conduct the payroll processing and will charge its clients a fee covering the employees' salary plus a mark-up.

Entity A will have no involvement in any of the work done by the employees, other than to ensure payments are made to the employees and the employees may or may not be registered for GST.

About the employees

The employees will be reporting directly to the non-resident company and will be working under the instructions of the non-resident company.

The employees will be supervised by the non-resident company.

The employees will provide their services to the customers of the non-resident company.

In most cases, the employees will work directly for the non-resident company.

The non-resident company's customers will be located within Australia and may or may not be registered for GST.

About the non-resident company

The non-resident company does not operate in Australia, has no branch offices or any presence in Australia.

The non-resident company is using the knowledge and skills of the Australian employees to work on their projects.

The non-resident company may have a subsidiary or permanent establishment in Australia and Entity A will provide the supply of payroll services direct to them.

Non-resident company's responsibilities

Under the Agreement the non-resident company shall:

•        provide Entity A with all necessary information and documentation required for the provision of services in a timely and accurate manner.

•        promptly notify Entity A of any changes or updates to the information provided, including but not limited to changes in employee details, compensation, benefits and work locations.

•        do all things required by Entity A to enable Entity A to carry out the services.

•        acknowledge that it is responsible for managing and overseeing the employee's everyday tasks. This includes workload, time management and approving days off.

•        abide by the reasonable directions of Entity A and in accordance with local and international laws (where applicable) at all times whilst dealing with the employees.

•        ensure it provides a safe working environment for the employees.

Entity A does not provide recruitment services to the non-resident company.

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 9-26

A New Tax System (Goods and Services Tax) Act 1999 - section 9-27

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

Reasons for decision

Questions 1,2 and 4

Summary

The supply of payroll services to the non-resident company in relation to the wages paid to employees of the non-resident company in Australia will not be GST-free under table item 2 of subsection 38-190(1) of the GST Act.

The non-resident company has a presence in Australia when they carry on their enterprise of supplying various IT services through their employees in Australia. The activities carried out by the non-resident company through their employees in Australia will satisfy the requirements of subsection 9-27(1) of the GST Act.

Therefore, the non-resident company is in Australia when the supply of payroll services is provided by Entity A to them, and the supply will not meet the pre requirement of table item 2 of subsection 38-190(1) of the GST Act.

Detailed reasoning

You are liable to pay GST on any taxable supplies you make.

You make a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) where:

a) the supply is for consideration; and

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

c) the supply is connected with Australia; and

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

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

The supply of payroll services made to the non-resident company by Entity A will satisfy all of the requirements of section 9-5 of the GST Act. The supply of payroll services is not an input taxed supply. Therefore, it should be determined whether the supply of payroll services to the non-resident company will be GST-free under the GST Act.

GST-free supply

Section 38-190 of the GST Act provides circumstances under which supplies of things other than goods or real property for consumption outside Australia will be GST-free.

Table item 2 of subsection 38-190(1) of the GST Act provides that a supply of anything other than goods or real property is GST-free when made to a non-resident who is not in Australia in relation to the supply when the thing supplied is done 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 in carrying on their enterprise but is not registered or required to be registered for GST.

The very first requirement for a supply to be GST-free under table item 2 of subsection 38-190(1) of the GST Act is that the non-resident company who will be the recipient of the supply is not in Australia when the thing supplied is done. Therefore, it is relevant to consider whether the non-resident company is in Australia in relation to the supply of payroll services made by Entity A.

Subsection 9-27(1) of the GST Act provides that an enterprise of an entity is carried on in Australia if:

a) the enterprise is carried on by one or more individuals covered by subsection (3) who are in Australia; and

b) the enterprise is carried on through a fixed place in Australia or

c) the enterprise is carried on through one or more places in Australia for more than 183 days in a 12-month period; or

d) the entity intends to carry on the enterprise through one or more places in Australia for more than 183 days in a 12-month period.

Subsection 9-27(3) of the GST Act provides the meaning of an individual as follows:

a) if the entity is an individual - that individual;

b) an employee or officer of the entity;

c) an individual who is employed by the entity or an agent of that entity.

The non-resident company will be carrying on their enterprise of providing IT services to their clients in Australia and outside Australia through their employees in Australia. The non-resident company will be making supplies of Project services to their overseas clients, IT support services by providing maintenance services on IT equipment within Australia, expand the market share of a particular software in Australia by hiring a business development manager, selling services and solutions to Australian customers, working on software products etc. These supplies are made by the non-resident company in carrying on their enterprise in Australia through their employees in Australia.

The activities carried out by the employees in Australia would satisfy the requirements under paragraph 9-27(1) (a) of the GST Act which states that the enterprise of the entity is carried on by one or more individuals who are in Australia and the assumption has been made that the supplies made by the non-resident entity are not disconnected by section 9-26 of the GST Act.

The employees of the non-resident company are located in Australia and performing their role as IT service providers for their non-resident company (employer). It is our view based on the facts provided that the non-resident company will be carrying on their enterprise in Australia at a fixed place through their employees for more than 183 days in a 12 month period.

In determining whether an enterprise is carried on through a particular place, the place does not need to be exclusively used by the entity for carrying on the enterprise, nor does the entity need to own, lease or have any other claim or interest in relation to the place. (Explanatory memorandum - Tax and Superannuation Law Amendment (2016 Measures No.1) Bill 2016 at 2.45)

One of the responsibilities of the non-resident company, as per the Master Services Agreement, is that the non-resident company shall ensure that they provide a safe working environment for their employees in Australia. This indicates that the non-resident company would have a fixed place in Australia to carry out their enterprise in Australia.

Therefore, the non-resident company will have a presence in Australia as they will be carrying on their enterprise in Australia.

Non-resident company not in Australia in relation to the supply (Item 2)

Goods and Services Tax Ruling: GSTR 2004/7 explains, amongst other things, 'when is a non-resident or other recipient of a supply not in Australia when the thing supplied is done'.

Paragraph 37 and 41 of GSTR 2004/7 state:

37. A non-resident company is in Australia 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.

41. A non-resident company is in Australia in relation to the supply if the supply is solely or partly for the purposes of the Australian presence, for example, its Australian branch. 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, except where the only involvement is minor.

The supply of payroll services provided by Entity A is in relation to the non-resident company's presence in Australia as part of the supply is that Entity A will process and pay the wages of the employees in Australia. The activities carried out by the employees in Australia is considered as that the non-resident company will have its business operation in Australia. The non-resident company will have a direct control and manage their employees in Australia when they make the supplies of IT services to their clients in Australia and outside Australia.

Paragraphs 230 to 232 states:

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.

The employees of the non-resident company are the representatives of the non-resident company. The supplies made by the non-resident company will be consumed in Australia through their representatives. It is evidenced that the non-resident company will be in Australia through the presence of their employees at the time the supply of payroll service is done.

The pre-requirement of table item 2 of subsection 38-190(1) of the GST Act is that the non-resident recipient should not be in Australia when the thing supplied is done. Since the non-resident entity is carrying on an enterprise in Australia under section 9-27 of the GST Act, the pre-requirement under item 2 is not met when the supply of payroll services is made by Entity A to the non-resident company. Therefore, the supply of payroll services to non-resident entity by Entity A will not be GST-free under table item 2 of subsection 38-190(1) of the GST Act.

The supply of payroll services will be made to the non-resident company who has a presence in Australia for consideration, the supply is connected with Australia as Entity A will be making their supply in carrying on their enterprise in Australia and Entity A is registered for GST. Therefore, the supply of payroll services made by Entity A will be taxable under section 9-5 of the GST Act and Entity A has a GST obligation when making their supply.

Question 3

Summary

The supply of payroll services provided to the subsidiary or permanent establishment of a non-resident will be taxable under section 9-5 of the GST Act.

Detailed reasoning

If a non-resident company has a subsidiary or permanent establishment in Australia, it is evidenced that the non-resident company has a presence in Australia

However, paragraphs 319 and 320 of GSTR 2004/7 states:

319. If a non-resident company has a subsidiary in Australia, the mere presence of that subsidiary does not mean that the non-resident company is carrying on a business in Australia. The fact that the non-resident company owns or controls a majority shareholding in a subsidiary does not make that company present in Australia.

320. However, if the subsidiary is acting as agent of the non-resident parent company and carrying on the business of the non-resident company in Australia at some fixed place of business for a sufficiently substantial period of time, the non-resident company is 'in Australia'.

Since the subsidiary or permanent establishment of the non-resident company carry on the enterprise of non-resident company in Australia and the supply of payroll services is provided to the subsidiary or permanent establishment, the supply will satisfy all of the requirements of a taxable supply.