GST and legal services to a non-resident company that has a subsidiary situated in Australia

Is the entity, an Australian law firm, making a GST-free supply 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), when it supplies legal services to a non-resident company that has a subsidiary situated in Australia?

Yes, the entity is making a GST-free supply under item 2 in the table in subsection 38-190(1) of the GST Act (Item 2) when it supplies legal services to a non-resident company that has a subsidiary situated in Australia.

The entity is an Australian law firm. The entity supplies legal services to a non-resident company. The services are in relation to an international trademark, which is to be registered in the name of an Australian subsidiary.

The letter of engagement is with the non-resident company. All subsequent advice and other correspondence has been with the non-resident company. In regard to its professional services, the entity has not communicated with the Australian subsidiary. No representative or personnel from the Australian subsidiary has made any representations to the entity in regard to the services it was providing.

The entity is registered for goods and services tax (GST).

Under section 38-190 of the GST Act, certain supplies of things other than goods or real property, for consumption outside of Australia, are GST-free. As a supply of legal services is not a supply of goods or real property, the GST status of the supply is appropriately considered under section 38-190 of the GST Act.

Of most relevance to this case is Item 2 which deals with supplies that are made to a non-resident who is not in Australia. Item 2(a) provides that a supply is GST-free where: • it is made to a non-resident who is not in Australia when the thing supplied is done; • it is not a supply of work physically performed on goods situated in Australia when the work it done; and • it is not a supply directly connected with real property situated in Australia.

The first requirement is that the non-resident must not be in Australia when the legal advice is supplied.

Goods and Services Tax Ruling GSTR 2000/31 considers whether an entity is in Australia when the services are provided. Paragraph 68 of GSTR 2000/31 states: 'For the purposes of items 2 and 3 in subsection 38-190(1), the precondition that the recipient is not in Australia at the relevant time requires that neither the recipient, nor a representative acting on behalf of the recipient if the recipient is a company, is in Australia in relation to the supply'.

Therefore, it is necessary to determine if the Australian subsidiary is acting on behalf of the non-resident company.

Paragraph 197 of GSTR 2000/31 provides an example in relation to legal advice prepared in Australia, but used outside Australia. Paragraph 197 of GSTR 2000/31 states: 'An Australian resident lawyer supplies advice to a US resident company. The US company has a permanent establishment in Australia but that US permanent establishment is not representing the US company in Australia in relation to that supply. The supply of the legal advice to the US company is GST-free under subsection 38-190(1) because the company is not an Australian resident and the company is not in Australia while the legal services are performed. It is assumed in this example that the supply is not directly connected with goods or real property situated in Australia'.

In this case, the entity is providing its legal services direct to the overseas entity and the Australian subsidiary is not making any representations in relation to that supply. Therefore, the legal services are provided to a non-resident who is not in Australia when the services are performed.

As the legal services involve advice and action on legal matters, the legal services are not work physically performed on goods. Additionally, as the services are in relation to a trademark, the supply is not directly connected with real property situated in Australia. As such, the supply satisfies Item 2(a).

However, Item 2 is limited by the operation of subsection 38-190(3) of the GST Act. Subsection 38-190(3) of the GST Act provides that a supply covered by Item 2 is not GST-free if: • it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident; and • the supply is provided, or the agreement requires it to be provided, to another entity in Australia.

Therefore, if it is considered that the agreement requires the entity either directly or indirectly to provide legal services to the subsidiary in Australia, the supply is not GST-free.

In this regard, Goods and Services Tax Ruling GSTR 2001/1 looks at the meaning of 'provided'. Paragraph 91 of GSTR 2001/1 states:

"Provided' is not defined in the Act and therefore takes on its ordinary meaning. 'Provide' is defined to mean 'to furnish or supply'. 'Supply', in this context, takes on its ordinary meaning rather than its GST meaning and is defined to mean 'to furnish a person with what is lacking or requisite' or 'to furnish or provide (something wanting or requisite)'. 'Requisite' is defined to mean 'a necessary thing' or something 'required by circumstances''.

Thus, 'provided to' requires the actual provision of something by the supplier to another entity. In the context of professional services, services are provided to another entity where there is communication to that party. As no such communications have been made with the Australian subsidiary, the services provided by the entity are not provided to the subsidiary.

Therefore, subsection 38-190(3) of the GST Act does not exclude the service from being GST-free under Item 2. Accordingly, the entity is making a GST-free supply under Item 2 when it supplies legal services to a non-resident. History: The above paragraph was amended on 9 August 2004. The reference to subsection 38-30(3) in the original ATO ID has been replaced with a reference to subsection 38-190(3).