GST and reverse charge on cross border leases

Does a non-resident lessor that leases substantial equipment for the effective life of the equipment 'make the supply through an enterprise that the supplier carries on in Australia' for the purposes of paragraph 83-5(1)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

No, the non-resident does not make the supply through an enterprise that it carries on in Australia. Accordingly, paragraph 83-5(1)(b) of the GST Act is satisfied.

The non-resident supplier (non-resident lessor) supplies substantial equipment to an Australian entity (sublessor) under a lease for the effective life of the equipment. There will be no residual value in the equipment at the end of the lease

The non-resident lessor does not provide personnel to operate the equipment. The sublessor leases the substantial equipment out to third parties who in turn use the equipment for their business activities within Australia.

The sublessor maintains the equipment in the sense that it pays all maintenance and running costs. The equipment is entirely under the control of the sublessor. As the equipment becomes obsolete it is used for spare parts in maintaining other leased equipment.

The non-resident lessor does have an enterprise for the purposes of subsection 9-20(1) of the GST Act of leasing substantial equipment.

The non-resident lessor made the equipment available in Australia to the sublessor. The supply of the substantial equipment under the lease is a supply that satisfies all the conditions of section 9-5 of the GST Act and is therefore a taxable supply.

The non-resident lessor has no other business connection with Australia other than through the leased substantial equipment.

One of the conditions that needs to be satisfied before a non-resident lessor and sublessor can enter into a reverse charging agreement is for paragraph 83-5(1)(b) of the GST Act to be satisfied. Paragraph 83-5(1)(b) states: the supplier does not make the supply through an *enterprise that the supplier *carries on in Australia (emphasis added and '*' refers to a defined term in the GST Act)

The non-resident lessor does carry on an enterprise of leasing substantial equipment. However, for the purposes of paragraph 83-5(1)(b) of the GST Act it needs to be determined if the non-resident lessor's enterprise is carried on in Australia.

Under subsection 9-25(6) of the GST Act an enterprise is 'carried on in Australia' if the enterprise is carried on through: • a permanent establishment (as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)); or • a place that would be such a permanent establishment if paragraph (e), (f) or (g) of that definition did not apply.

Under subsection 6(1) of the ITAA 1936 the relevant parts of the permanent establishment definition are as follows; Permanent establishment , in relation to a person (including the Commonwealth, a State or an authority of the Commonwealth or a State), means a place at or through which the person carries on any business and, without limiting the generality of the foregoing, includes: (a) ........... (b) a place where the person has, is using or is installing substantial equipment or substantial machinery; (c) .........

Taxation Ruling TR 2002/5 considers the opening paragraph of the permanent establishment definition under subsection 6(1) of the ITAA 1936. In general what is required is that the business is carried on in Australia at a fixed place for a period of time (both geographic and temporal permanence are required). In this particular situation the non-resident lessor has no presence in Australia other than through the substantial equipment. Accordingly, there is no fixed place in which the non-resident lessor carries on business in Australia. The non-resident does not have a permanent establishment in Australia under the opening paragraph of the permanent establishment definition under subsection 6(1) of the ITAA 1936.

At paragraph 55 in Taxation Ruling TR 2007/11, it is explained that where a person satisfies paragraph (b) of the permanent establishment definition under subsection 6(1) of the ITAA 1936 that person will be considered to have a permanent establishment without any need to consider the opening paragraph of the permanent establishment definition in subsection 6(1) of the ITAA 1936. Accordingly, paragraph (b) of the definition of permanent establishment in subsection 6(1) of the ITAA 1936 can be considered separately.

The term 'permanent establishment' is drawn from international treaties. International treaties draw a distinction between the 'use' and 'sale' of equipment. This distinction is relevant in the interpretation of paragraph (b) of the definition of permanent establishment in subsection 6(1) of the ITAA 1936. Under the view explained in paragraph 76 of TR 2007/11, where the substantial equipment is treated as if it has initially been disposed of by the non-resident lessor, the non-resident lessor will not have a place where it 'has or is using substantial equipment'. Accordingly, the non-resident lessor would not have a permanent establishment in Australia under paragraph (b) of the definition of permanent establishment in subsection 6(1) of the ITAA 1936. However, where the lease by the non-resident is treated as the hire of substantial equipment to the sublessor, then the non-resident lessor will have a permanent establishment under paragraph (b) of the definition of permanent establishment in subsection 6(1) of the ITAA 1936.

Taxation Ruling TR 98/21 discusses the characteristics of many cross border leases in terms of whether they should be treated as in effect a purchase of equipment or the hire of equipment and then discusses the withholding tax implications of the characterisation. As discussed in paragraphs 50 and 51 of TR 98/21, where a lease covers the effective life of the equipment and many of the incidents of ownership and the economic risks are transferred to the lessee, the substance of the lease is that of a purchase and therefore should be treated as such.

In this particular situation the non-resident lessor leases the substantial equipment for its effective life: there will be no residual value in the equipment at the end of the lease. Also, many of the incidents of ownership and all the economic risks are transferred to the sublessor such that the sublessor is required to maintain the equipment and has the ability to sublease the equipment to third parties. In this instance the leasing arrangement should be treated as in effect an initial sale of the equipment to the sublessor. Accordingly, the non-resident is not regarded as having or using the equipment in the sense contemplated by paragraph (b) of the definition of permanent establishment in subsection 6(1) of the ITAA 1936 as the equipment is regarded as being initially sold.

Therefore as the non-resident lessor does not have a permanent establishment in Australia the supply of the substantial equipment is not made through an enterprise that is carried on in Australia. Paragraph 83-5(1)(b) of the GST Act is therefore satisfied. Note 1 : on the facts set out the non-resident lessor and the sublessor are entitled to enter a reverse charging agreement because all the elements of subsection 83-5(1) of the GST Act are satisfied and subsection 83-5(2) of the GST Act is not applicable. Note 2 : it is important to note that the amount of the 'reverse charge' is 10% of the 'price' of the supply.