Is your supply of marketing and sales facilitation services to X GST-free 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) (item 2)?
Yes. Therefore, the commission that you receive as consideration for the services does not attract GST. However, when the commission that you received included GST and you reported the commission and the GST in your (particular) BAS you effectively treated the supply as taxable and charged/collected GST. In such case, a special rule applies under which the GST remains payable and on a taxable supply unless and until you give X a refund of the GST This ruling applies for the following period 04 October 2023 to 03 October 2027 The scheme commences on: 4 October 2023
You are registered for GST. You account for GST on a cash basis. You carry on a business in Australia. You are a distributor of goods which you buy from a group of companies (that includes X and Y) and on-sell. You have a website that is used to sell products. You use certain internet marketing services to promote the goods. All stock for the Australian market is stored in a warehouse in an overseas country operated by Y, before being sent directly to Australia to meet a customer order. The goods originally come from the overseas country in which X is based. As a distributor, you provide marketing and sales facilitation services to X which mainly involve enrolling customers and other distributors. You enrol them through an automated online process into a customer database maintained by X X pays you commissions when a customer that you enrolled buys products from X and when another distributor that you enrolled generates sales for X. These commissions are referred to by X as bonus volume commissions. X doesn't separate out commissions paid on the sales you generate or the sales generated by the distributors you enrolled. They are all bundled into one commission payment.
The commissions paid each month vary as they are totally dependent on the volume of sales generated. There is no office or physical establishment in Australia held by X. X has a director in Australia; however, you do not have any interactions with that director at the time you perform the services. X has an Australian bank account which it uses to pay commissions to you and to other Australian distributors. The account is in the name of an Australian company that X set up. In the past X did not pay GST on your commission. Recently, you heard that X may have been including GST on each commission payment made to distributors who are registered for GST. After you contacted the Y warehouse stating that you are registered for GST, X started paying GST on your commission payments. For the past few months they have been issuing you a GST statement each time a commission is paid. You have reported those GST payments in your BAS for a single tax period, but not in the BAS for previous tax periods.
A New Tax System (Goods and Services Tax) Act 1999 section 9-5 A New Tax System (Goods and Services Tax) Act 1999 Division 19 A New Tax System (Goods and Services Tax) Act 1999 section 38-190 A New Tax System (Goods and Services Tax) Act 1999 Division 142
Question Is your supply of marketing and sales facilitation services to X GST-free under item 2? Summary You are making a GST-free supply as: • you are supplying intangibles; and • the recipient of your supply is a non-resident who is not in Australia in relation to your supply; and • your supply of services to X is not a supply of work physically performed on goods situated in Australia when the work is done, nor a supply directly connected with real property situated in Australia; and • the exclusions in subsections 38-190(2),38-190(2A) and 38-190(3) of the GST Act do not apply to your case; and • you are not providing your services to a third party who is in Australia. However, because of a special rule in Division 142 of the GST Act, GST is payable on the commissions you reported in the particular quarter BAS. Detailed reasoning A supply of an intangible (something other than goods or real property) to a non-resident who is not in the indirect tax zone (e.g., Australia) is GST-free under item 2 if:
(a) the supply is not a supply of work physically performed on goods situated in Australia when the work is done, nor a supply directly connected with real property situated in Australia; or (b) the non-resident recipient acquires the thing in carrying on their enterprise but is not registered or required to be registered for GST. You are supplying marketing and sales facilitation services to a non-resident. Working out whether your customer is in Australia for the purposes of item 2 To determine whether X is in Australia, for the purposes of item 2, we need to consider Goods and Services Tax Ruling GSTR 2004/7 Goods and services tax: in the application of items 2 and 3 and paragraph (b) of item 4 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999: • when is a 'non - resident' or other 'recipient' of a supply 'not in Australia when the thing supplied is done'? • when is 'an entity that is not an Australian resident' 'outside Australia when the thing supplied is done'?
In order for a non-resident customer be considered to be in Australia for the purposes of item 2, they must be in Australia 'in relation to the supply. Paragraphs 37 to 41 of GSTR 2004/7 explain this further. Paragraphs 37 to 40 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. 38. We consider that it would be reasonable for a supplier to conclude that a non-resident company is in Australia if: • the company is registered with ASIC; or • the company has a permanent establishment in Australia for income tax purposes.
39. However, a non-resident company to which the supplier makes a supply may be able to demonstrate to the supplier that, even though it is registered with ASIC or has a permanent establishment, on application of the test (at paragraph 37) to its particular circumstances, the non-resident company is not in Australia. 40. Suppliers should be aware that even if a company is not registered with ASIC, it may still be in Australia on an application of the test (at paragraph 37). Similarly, even if a company does not have a permanent establishment in Australia for income tax purposes, it may still be in Australia on application of the test to its particular circumstances. There are two broad types of circumstances where a non-resident customer, being a company, is considered to be in Australia, for the purposes of item 2. Paragraph 41 of GSTR 2004/7 explains this as follows:
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. Paragraphs 351 and 352 of GSTR 2004/7 provide guidance on the 'involvement of a minor nature' concept. They state: 351. If the involvement of the Australian presence is limited to the carrying out of simple administrative tasks on behalf of the company, as a matter of administrative convenience, that involvement is minor. The connection between the supply and the presence is so minor in nature that it is reasonable to conclude that the presence of the company in Australia is not in relation to the supply. 352. Tasks of a simple administrative nature include: • payment of, or arranging for payment of, the supplier's invoice on behalf of the company; • passing on an e-mail to the company;
• being a point of telephone contact to pass on messages to the company; • being a mailing address or delivery contact on behalf of the company; • being a point of contact for a visiting representative of the company; and • on-forwarding information to the company. Example 16 in GSTR 2004/7 provides an example where a supply of an intangible would be considered to be for the purposes of a branch a non-resident company has in Australia. It states: Example 16 - supply for the purposes of the branch in Australia 364. Program Aus is contracted to supply a customer-specific computer program to Asia Co, a non-resident company which has a branch in Australia . 365.
The computer program is for use by Asia Co, including its branch in Australia. As the supply is for the purposes of the Australian branch of Asia Co, Asia Co is in Australia in relation to the supply. It makes no difference whether Program Aus sends the program to the branch directly or whether Program Aus sends the program to Asia Co and then Asia Co sends it on to the branch. It is not relevant whether the program is also for use by the head office or other branch operations outside Australia. Therefore, as Asia Co is in Australia in relation to the supply the supply is not GST-free under item 2 or item 3 . Example 13 of GSTR 2004/7 provides another example where a non-resident customer, being a company is considered to be in Australia in relation to the supply. It states: Example 13 - branch in Australia in relation to the supply 359.
A United States company ('US Co') has a branch in Australia. US Co engages a legal firm in Australia ('Aus Legal') to represent it in legal action against an Australian company. US Co sends a director to Australia to provide information to Aus Legal. The director uses an office at the Australian branch and uses employees of the branch to liaise with Aus Legal and to supervise the legal proceedings generally . 360. The involvement of the branch in Australia in relation to the supply is not limited to administrative tasks of a minor nature. US Co is in Australia in relation to the supply. Therefore, the supply is not GST-free under item 2 or item 3 . Example 13 from GSTR 2004/7 demonstrates that a non-resident customer, being a company, may be considered to be in Australia due to the level and nature of interactions the supplier has with the customer's Australian based staff and whether these interactions are significant. We do not consider that X is in Australia in relation to your supply of the services for which you receive bonus volume commissions. This is for the following reasons: X does not have an office or physical establishment in Australia
The stock that you help to find buyers for is sent from a warehouse in an overseas country to Australia to meet a buyer's order. Therefore, even if that warehouse is part of the establishment of X, the services are not supplied for the purpose of an Australian presence of X. You do not interact with any staff X has in Australia in the course of performing your services. Work physically performed on goods situated in Australia and supplies directly connected with real property situated in Australia The supplies that you make to X are not supplies of work physically performed on goods situated in Australia when the work is done, nor are they supplies directly connected with real property situated in Australia. Therefore, the requirements of paragraph (a) in item 2 are met. Subsection 38-190(2) of the GST Act In accordance with subsection 38-190(2) of the GST Act, a supply covered by item 2 is not GST-free if it is the supply of a right or option to acquire something the supply of which would be connected with Australia and would not be GST-free.
You are not supplying a right or option in return for the commissions paid to you. Therefore, subsection 38-190(2) of the GST Act does not negate the GST-free status of the supplies that you make. Subsection 38-190(2A) of the GST Act In accordance with subsection 38-190(2A) of the GST Act, a supply covered by item 2 is not GST-free if the acquisition of the supply relates to the making of a supply of real property situated in Australia that would be input taxed under Subdivision 40-B or 40-C. X's acquisition of your services does not relate to it making a supply of real property that is situated in Australia. Therefore, subsection 38-190(2A) of the GST Act does not negate the GST-free status of the supplies in question that you make. Subsection 38-190(3) of the GST Act If a supply of a service is made to a non-resident but provided to a third party in Australia, the supply may be excluded from GST-free treatment under item 2 due to subsection 38-190(3) of the GST Act, which states: Without limiting subsection (2) or (2A), a supply covered by item 2 in that table is not GST-free if:
(a) it is a supply under an agreement entered, into, whether directly or indirectly, with a non-resident; and (b) the supply is provided, or the agreement requires it to be provided, to another entity in the indirect tax zone; and (c) for a supply other than an input taxed supply - none of the following applies: (i) the other entity would be an Australian-based business recipient of the supply, if the supply had been made to it; (ii) the other entity is an individual who is provided with the supply as an employee or officer of an entity that would be an Australian based business recipient of the supply, if the supply had been made to it; or (iii) the other entity is an individual, who is provided with the supply as an employee or officer of the recipient, and the recipient's acquisition of the thing is solely for a creditable purpose and is not a non-deductible expense. Paragraph 38-190(3)(a) of the GST Act You are supplying marketing and sales facilitation services under an agreement you have entered into with a non-resident. Therefore, the requirement of paragraph 38-190(3)(a) of the GST Act is met.
Paragraph 38-190(3)(b) of the GST Act Goods and Services Tax Ruling GSTR 2005/6 Goods and services tax: the scope of subsection 38-190(3) and its application to supplies of things (other than goods or real property) made to non-residents that are GST-free under item 2 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 provides guidance on determining whether a supply made to a non-resident is provided to a third party who is in Australia. GSTR 2005/6 has not been updated to reflect an amendment to the GST Act, being the insertion of paragraph 38-190(3)(c). Paragraphs 59 to 62 of GSTR 2005/6 explain the meaning of 'provided to an entity'. They state: The meaning of 'provided to another entity' 59. The word 'provided' is used in subsection 38-190(3) to contrast with the term 'made' in item 2. In the context of section 38-190, the contrasting words indicate that if a non-resident contracts for a supply to be provided to another entity, the place of consumption should be determined with regard to the entity to which the supply is provided, not the entity to which the supply is made.
60. The example in the Explanatory Memorandum accompanying the Bill[9] that introduced subsection 38-190(3) illustrates this. In that example, non-resident parents contract for the supply of education services to be provided to their children in Australia. The contractual flow of the services is to the parents, while the actual flow of the services is to the children. The supply is made to the parents (non-residents) and provided to another entity, each child, in Australia. 61. Thus the expression 'provided to another entity' means, in our view, that in the performance of a service (or in the doing of some thing), the actual flow of that supply is, in whole or part, to an entity that is not the non-resident entity with which the supplier made the agreement for the supply. The contractual flow is to one entity (the non-resident recipient) and the actual flow of the supply is to another entity.
62. For example, if a supply of entertainment services is made to a non-resident company and in the performance of that service the employees are the entities that are entertained, the actual flow of that service is to another entity, each employee (see above where the meaning of 'another entity' is discussed). The supply is made to the non-resident company (the employer) and provided to another entity (each employee). Your services involve introducing customers who will buy products from YGUS. You also provide a service of enrolling distributors. X has hired you to introduce customers who will buy products from it and you receive the commission in return for this service. You also receive a commission from X if you have enrolled another distributor and that other distributor has signed up a customer to buy products from X. Therefore, we consider that you are providing the services to X, rather than a third party who is in Australia.
Therefore, the requirement of paragraph 38-190(3)(b) of the GST Act is not met. As not all of the requirements of subsection 38-190(3) of the GST Act are met, the GST-free status of the supplies of services is not negated by subsection 38-190(3) of the GST Act. No other exclusions from GST-free treatment under item 2 apply. Therefore, you are making a GST-free supply of the services to X under item 2. GST is payable on taxable supplies. In accordance with section 9-5 of the GST Act, a supply is not a taxable supply to the extent that it is GST-free. Hence, GST is not payable on your supplies of marketing and sales facilitation services as these are GST-free supplies. However, this is an exception as explained below. When the commission that you received included GST and you reported the commission and the GST in your (particular) BAS you effectively treated the supply as taxable and charged/collected GST. In such case, a special rule in Division 142 of the GST Act applies under which the GST remains payable and on a taxable supply unless and until you give X a refund of the GST
If you give a refund of GST to X in respect of a given commission that you reported in your (particular) BAS, you would claim a decreasing adjustment as a positive amount (equal to the GST refund you give to X) at label 1B of the BAS for the tax period in which you refund that GST. You would need to issue an adjustment note to X and keep a copy of the adjustment note in order to claim the decreasing adjustment.