Issue
Does a non-resident lessor of substantial 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)?
Decision
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.
Facts
The non-resident lessor supplies substantial equipment for use in Australia under a two year lease to an Australian entity (lessee).
The non-resident lessor does not provide personnel to operate the equipment.
The non-resident lessor purchased the equipment from an Australian manufacturer and subsequently gave instructions to the manufacturer to give the equipment to the lessee in Australia. 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 therefore is a taxable supply.
The non-resident lessor has an enterprise for the purposes of subsection 9-20(1) of the GST Act of leasing substantial equipment.
The two year lease agreement was negotiated and signed outside of Australia. The regular payments under the lease agreement are receipted outside of Australia.
The lessee physically uses the equipment in Australia to carry on its own enterprise.
The non-resident lessor has no employees present in Australia or any business connection with Australia other than the leased substantial equipment.
Reasons for Decision
One of the conditions that needs to be satisfied for the GST on a taxable supply to be payable by the recipient and not by the supplier under Division 83 of the GST Act is for paragraph 83-5(1)(b) of the GST Act to be satisfied. The Division applies if amongst other things, pursuant to paragraph 83-5(1)(b): 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 makes the supply through an enterprise that 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) .........
At paragraph 55 in Taxation Ruling 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.
Following on from this, paragraphs 67 to 69 of TR 2007/11 consider the expressions 'has substantial equipment' and 'using substantial equipment'. The conclusion is that where a resident leases substantial equipment from a non-resident and operates the equipment in Australia, the non-resident 'has' and 'uses' the equipment for the purposes of paragraph (b) of the definition of 'permanent establishment' in subsection 6(1) of the ITAA 1936.
Accordingly, the non-resident lessor has a permanent establishment in Australia being a substantial equipment permanent establishment.
However, in order for an enterprise to be 'carried on in Australia' subsection 9-25(6) of the GST Act not only requires that there must be a permanent establishment but also that the enterprise is carried on through that permanent establishment. The mere presence of the leased equipment in Australia will not of itself, constitute the carrying on of an enterprise in Australia through its substantial equipment permanent establishment. An assessment of what activities are relevant in carrying on a leasing enterprise and where those activities are carried out needs to be undertaken.
In this instance the activities involved in carrying on the leasing enterprise include the lease negotiations, signing of the agreement, the instructions for making the equipment available to the lessee, and the receipting of the lease payments. Most of these activities occur outside of Australia.
The fact that the manufacturer from a practical perspective makes the equipment available to the lessee will of itself not be seen as an activity in carrying on the non-resident lessor's enterprise in Australia. In this instance the manufacturer is merely finalising the supply of the equipment according to the instructions of the non-resident lessor. Where the manufacturer has the lessor's authority to do more than this (such as making specific arrangements with the lessee) and does so on a regular basis then other conclusions could arise.
Despite the conclusion that the non-resident lessor has a permanent establishment in Australia, the non-resident lessor's activities in carrying on its enterprise do not occur in Australia and therefore the non-resident lessor does not carry on its enterprise through its substantial equipment permanent establishment in Australia. Accordingly, subsection 9-25(6) of the GST Act is not satisfied.
Following on from this, paragraph 83-5(1)(b) of the GST Act is therefore satisfied. As the non-resident lessor does not carry on its leasing enterprise through its substantial equipment permanent establishment, the supply of the leased substantial equipment is not made through an enterprise the non-resident lessor carries on in Australia. Note 1 - the non-resident lessor and the lessee will be entitled to enter a reverse charging agreement where all the other elements of subsection 83-5(1) of the GST Act are satisfied and subsection 83-5(2) of the GST Act does not apply. Note 2 - the amount of the 'reverse charge' is 10% of the price of the supply.