Issue
Is Entity X, a resident company, making a GST-free supply under item 3 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 services to Entity Y, a company incorporated outside Australia that has its central management and control in Australia and carries on its entire core business in Australia through Entity X?
Decision
No, Entity X is not making a GST-free supply under item 3 in the table in subsection 38-190(1) of the GST Act, as the recipient of the supply, Entity Y, is in Australia in relation to the supply during the period the services are performed.
Facts
Entity X supplies services to Entity Y, pursuant to an agreement between the two entities. The services are not provided, nor does the agreement require that they be provided, to another entity outside Australia.
The services provided by Entity X to Entity Y essentially amount to the carrying on Entity Y's entire core business. Entity X carries on the business, as an agent of Entity Y, at a fixed and definite place in Australia.
Entity Y is not incorporated in Australia, but is a resident of Australia for income tax purposes. Entity Y's central management and control is in Australia.
Any business activities that Entity Y undertakes outside Australia are incidental to its core business. Such activities may, for instance, amount to the provision of minor administrative and support services.
Entity X is registered for goods and services tax.
Reasons for Decision
Subsection 38-190(1) of the GST Act sets out the circumstances in which supplies of things, other than goods or real property, for consumption outside Australia are GST-free.
Item 3 in the table in subsection 38-190(1) of the GST Act (Item 3) provides that a supply is GST-free if, amongst other things, it is made to a recipient who is not in Australia when the thing supplied is done.
The term 'recipient', in relation to a supply, is defined in section 195-1 of the GST Act to mean the entity to which the supply is made. Entity X makes its supply of services to Entity Y. It follows that Entity Y is the recipient of the supply.
The 'not in Australia' requirement present in Item 3 is in effect a proxy test for determining place of consumption. The term 'not in Australia' should be interpreted in the context of the supply in question. The requirement that a recipient not be in Australia is, in the Tax Office's view, a requirement that a recipient not be in Australia 'in relation to the supply'.
The Tax Office considers that a company not incorporated in Australia is 'in Australia' if it carries on business in Australia: • at or through a fixed and definite place of its own for a sufficiently substantial period of time; or • through an agent at a fixed and definite place for a sufficiently substantial period of time.
If it is established that such a company is in Australia, the Tax Office considers that the company will be in Australia 'in relation to the supply' if: • the supply is for the purposes of the Australian presence of the company; or • the presence of the company in Australia is involved in the supply, unless the involvement is minor.
Entity Y carries on business in Australia through an agent, Entity X, at a fixed and definite place for a sufficiently substantial period of time and is thus 'in Australia'.
Entity X's supply, which essentially amounts to the carrying on of Entity Y's core business, is made for the purposes of furthering Entity Y's business as a whole. As Entity Y's entire business is carried on in Australia, save for some incidental activities, and its central management and control is in Australia, the supply is for the purposes of the Australian presence of Entity Y. It follows that Entity Y is in Australia in relation to Entity X's supply.
The mere fact that Entity Y is incorporated overseas is not, of itself, sufficient reason to conclude that Entity Y is not in Australia in relation to Entity X's supply. In keeping with Item 3 being a proxy place of consumption test, such a conclusion could only be reached if a sufficient connection existed between Entity X's supply and Entity Y's overseas presence. In this case no such connection exists. At most, Entity Y's overseas presence may undertake some incidental activities, such as the provision of minor administrative and support services. The relationship between Entity X's supply of services and Entity Y's overseas presence is not such that the services could reasonably be thought of as being for consumption by the overseas presence.
As Entity Y is in Australia in relation to Entity X's supply, the supply is not GST-free under Item 3 in the table in subsection 38-190(1) of the GST Act. The supply will be a taxable supply if the requirements of section 9-5 of the GST Act are met. Note (1) - this scenario can be contrasted with the scenario discussed in paragraphs 374 to 379 of Goods and Services Tax Ruling GSTR 2004/7 which involves the provision of agency services by a resident to a non-resident company. Note (2) - in this case, subsection 38-190(4) of the GST Act has no application, as Entity X's services are not provided, nor does the agreement between Entity X and Entity Y require that they be provided, to another entity outside Australia.