Is GST payable on supplies made by Company A under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 when it provides services to Company B - a non-resident company, under an agreement?
No. To the extent that Company B is not registered, or required to be registered for GST, acquires the thing in carrying on their enterprise and is outside the indirect tax zone when the service is supplied, GST is not payable on the supplies that you have made under the agreement if you have not charged GST to Company B or have not reported a GST liability amount in your Business Activity Statement (BAS). However, if you passed on GST to Company B in respect of a given invoice and reported the GST in your BAS, GST is payable to the ATO in respect of that invoice unless and until you have refunded the GST to Company B. If you have passed on GST toCompany B in respect of a given invoice and reported the GST in your BAS, but you subsequently refunded the GST to Company B, you can make a 'decreasing adjustment' in your BAS for the tax period in which you give the GST refund to Company B. This ruling applies for the following period : 27 August 20YY to 26 August 20YY
The relevant facts include all documents and materials provided in the private ruling application, an email including pdf copies of agreements received on 19 October 20XX and a telephone conversation on 10 January 20XX. • Company A is an Australian Private Company and is registered for GST effective from 1 January 20XX. • Company A carries on an enterprise providing a fixed wire service that forms a greater connection between a telecommunications network service here in Australia and a non-resident enterprise. • The fixed wire connection provided is within Australia and it connects a network in Australia to a device that is connected to a submarine cable that effectively extends the network to another country. • The traffic delivered on this connection are data services that mainly involve communications between computers and servers. • Whilst one side of the connection is outside the Indirect Tax Zone, the other side of the connection is in State A, but it may also extend to connections that ultimately go overseas as well. • On 6 April 20XX, Company A entered into an agreement with Company B.
• Company B is a company incorporated and based outside the Indirect Tax Zone. Company B is a not registered for GST in Australia. Company B is the wholesale internet market operator another country, as well as a retail access provider through its internet service provider. • Under the agreement and the accompanying documents, Company A is required to provide a telecommunications fixed wire service which is part of a greater internet connection between Australia and outside the Indirect Tax Zone. • In accordance with the terms and conditions of the agreement, Company B has requested services from Company A. These services include 'XXXXXXX'. The duration of those supplies is stated as 12 months from 1 April 20XX. Essentially, Company A provides part of a connection between the other country and Australia to Company B through a data centre located in Australia. The services are provided in accordance with the stated service levels in the agreement and the associated terms and conditions. • The terms and conditions of the agreement advises that GST will be charged.
• The accompanying documents show that GST of $XXX.XX was charged for the 1 April 20XX order. • Company B has advised that the provider of the submarine cable, does not charge them GST for their services and has disputed the GST charged by Company A.
A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 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
In this reasoning: • all legislative references are to the A New Tax System (Goods and Services) Tax Act 1999, unless otherwise stated. • The 'indirect tax zone' is defined in section 195-1 of the GST Act and is hereafter referred to as 'Australia'.> GST is payable on taxable supplies. Section 9-5 of the GST Act defines a taxable supply as follows: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with the indirect tax zone (Australia); (d) and you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (* denotes a term defined under section 195-1 of the GST Act) You are supplying a fixed wire service under the agreement. Company B has requested a range of services which are described as 'Fibre Cross-Connect'; 'Copper Cross-Connect'; '1RU Colocation'; and 'Media Convertor'. This involves storing Company B's server/equipment and powering this equipment etc and supplying internet.
You make your supply of fixed wire services to Company B for consideration and in the course or furtherance of an enterprise that you carry on in Australia; you perform the service in Australia and you are registered for GST. Therefore, you meet the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. There are no provisions of the GST Act under which your supply of fixed wire services is input taxed. Therefore, what remains to be determined is whether you are making GST-free supplies. GST-free supplies of services to non-residents A supply of an intangible (something other than goods or real property) to a non-resident who is not in the indirect tax zone (Australia) is GST-free under table item 2 of subsection 38-190(1) of the GST Act (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.
There are exclusions from GST-free status under item 2. These exclusions are contained in subsections 38-190(2), 38-190(2A) and 38-190(3) of the GST Act. We shall now determine whether for GST purposes, the essential character of the supply you make to Company B, which is a non-resident company without a presence in Australia, is a fixed wire service only or whether it should be considered to be a supply that also consists of a supply of goods or real property to any extent. You are making a supply of fixed wire services to Company B. The transaction involves a bundle of features and acts, none of which are goods. Therefore, we do not treat you as making a supply of goods for the purposes of item 2. Whether you are making a supply of real property We shall now explain why we consider that you are not making a supply of real property. In accordance with section 195-1 of the GST Act, real property includes: (a) any interest in or right over land (b) a personal right to call for or be granted any interest in or right over land (c) a licence to occupy land or any other contractual right exercisable over or in relation to land.
Goods and Services Tax Ruling GSTR 2003/7> 'Goods and Services Tax: what do the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods' mean for the purposes of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999?' (GSTR 2003/7) distinguishes between storage arrangements that involve a supply or real property and a supply of storage services. Paragraphs 106 and 107 of GSTR 2003/7 state: 106. Where the supply is of storage services only, there being no right to occupy particular storage space, the real property is merely the setting for the service performed. The supply is the service of storing goods. There is no supply of real property. 107. Where, on the facts of a particular case, it is established that the essential character of a supply of this kind is the supply of a licence to occupy land, the supply is a supply of real property. We consider that: • you do not give Company B a right to occupy a particular space. • you are not supplying a right to occupy land to Company B; and
• the real property you use is merely the setting for performance of a storage service that you supply to Company B. This is supported by the following facts: The agreement does not specify that you are leasing storage space or granting a licence to occupy storage space or granting a licence to store goods. You have not committed to a particular space to Company B. The agreement provides for 'XXXX, not a dedicated space for Company B. Hence, in accordance with paragraphs 106 and 107 of GSTR 2003/7, we conclude that you are not making a supply of real property under the arrangement you have with Company B. Work physically performed on goods situated in Australia We shall now explain why we consider your supply of the fixed wire service is not a supply of work physically performed on goods situated in Australia when the work is done. Paragraph 58 of GSTR 2003/7 explains what work physically performed on goods means. It states:
58. A supply is a supply of work physically performed on goods where something is done deliberately to the goods to change them or to otherwise affect them in some physical way. The repair of goods is an example of work that is physically performed on goods. Paragraph 39 of GSTR 2003/7 states: 39. Examples of supplies where there is a physical interaction with the goods or real property but without changing the goods or real property include supplies of services of the following kind: • transport services - the removal of goods from one place to another; • security services in relation to goods or real property; and • storage services for goods (which do not involve renting storage space - see paragraph 106 of the Explanation section of the Ruling). (While this supply is directly connected with goods, it is not directly connected with real property - see further paragraph 54 below). Each of these supplies is directly connected with goods or real property. The essential character of the supply you make to Company B is a fixed wire service rather than a supply of work on goods. Directly connected with real property
We shall now consider whether you are making a supply directly connected with real property. Paragraphs 32 to 35 and 51 of GSTR 2003/7 provide guidance on this concept. They state: 32. As explained above, we consider that the expression 'directly connected with' contemplates a very close link or association between the supply and particular goods or real property. 33. We consider that such a close link or association between the supply and particular goods or real property exists where, for example, the direct object of the supply is the goods or real property in the sense that: • the supply changes or affects the goods or real property in a physical way; or • there is a physical interaction with the goods or real property but without changing the goods or real property; or • the supply establishes the quantity, size, other physical attributes or the value of the goods or real property; or • the supply affects (or its purpose is to affect) or protects the nature or value (including indemnity against loss) of the goods or real property; or • the supply affects, or is proposed to affect, the ownership of the goods or
real property including any interest in, or right in or over goods or real property. 34. This is not an exhaustive list of the situations where, in our view, a direct connection exists. There may be some supplies that are directly connected with goods or real property that do not readily fit into one of these categories. 51. If a supply involves the use of real property in circumstances where that use is ancillary to the dominant part of the supply, the real property merely providing the setting for the dominant part of the supply, that supply is not directly connected with real property. In accordance with paragraph 51 of GSTR 2003/7, as the real property in your case - the data centre merely provides the setting for the dominant part of your supply, which is telecommunications fixed wire services, your supply to Company B is not directly connected with that real property. Hence, the preconditions at paragraph (a) of item 2 are met. Finally, no exclusions from GST-free treatment (as set out in subsections 38-190(2), 38-190(2A) or 38-190(3)) apply.
Therefore, you are making a GST-free supply of fixed wire services under table item 2 of subsection 38-190(1) of the GST Act. Accordingly, GST is not payable on your sale of the fixed wire services, subject to the overriding rule in Division 142 of the GST Act. Refund of incorrectly charged GST The object of Division 142 of the GST Act is to ensure that excess GST is not refunded if this would give an entity a windfall gain. Generally, the Division operates so that the supplier is not entitled to a refund of an amount of excess GST where the supplier has passed on GST to another entity (the recipient) and has not reimbursed that other entity for the passed-on GST. Under subsection 142-5(1) of the GST Act 'excess GST' is an amount of GST that has been taken into account in an entity's assessed net amount and is in excess of what was payable by the entity in the relevant tax period prior to taking into account or applying the provisions of Division 142 of the GST Act.
In relation to refunding the excess GST, section 142-10 of the GST Act provides that the excess GST that has been passed on to a recipient is taken to have always been payable and payable on a taxable supply, until the recipient has been reimbursed for the passed-on excess GST. This means that an amount of excess GST will only be refundable if: • it has not been passed on to the recipient, or • it has been passed on to the recipient and the recipient has been reimbursed. The Commissioner's view on the meaning of the terms 'passed on' and 'reimburse' for determining whether section 142-10 applies to an amount of excess GST is explained in Goods and Services Tax Ruling GSTR 2015/1 'Goods and services tax: the meaning of the terms 'passed on' and 'reimburse' for the purposes of Division 142 of the A New Tax System (Goods and Services Tax) Act 1999 (GSTR 2015/1)'. Paragraph 12 states: Excess GST passed on
17. If the excess GST has been passed on to the recipient, section 142-10 applies to treat the excess GST as always having been payable, and payable on a taxable supply, until the excess GST has been reimbursed to the recipient. Once section 142-10 ceases to apply, the supplier can claim a refund of the excess GST. Paragraph 110 of GSTR 2015/1 further states: 110. For example, where the supplier mischaracterises a supply by incorrectly treating an input taxed or GST-free supply as a taxable supply, the costs of the GST will generally be embedded in the price of the supply, and be passed on to the recipient. In this case, where Company A has incorrectly treated its supply of services to Company B as a taxable supply and has not refunded the relevant amount of GST that should not have been charged, excess GST has been passed-on to Company B. Consequently, consistent with the view in paragraph 17 of GSTR 2015/1, section 142-20 of the GST Act applies, and Company A is not entitled to the refund of the excess GST and the excess GST is treated as always having been payable on the supply.
However, where Company A refunds Company B the excess GST, Company A will be entitled to a refund of excess GST as it is no longer considered to have passed-on GST to Company B. Company A can then claim a refund for the amount of excess GST by making an adjustment to its' business activity statement.