Private ruling: Secondment of employee to Australia - section 188-40 of the GST Act
Published: April 2014

Ruling: Q1: Does X make a supply pursuant to the first Agreement between X and Y? | A1: No, X does not make a supply pursuant to the first Agreement. | Q2: If X does make a supply, what is the character of that supply, what is the consideration for that supply, and is that supply taxable or GST-free? | A2: As X does not make a supply pursuant to the first Agreement it is not necessary to determine the character of that supply, the consideration for that supply, and whether that supply is taxable or GST-free. | Q3: Does X provide consideration for a supply made by Y pursuant to the first Agreement? | A3: Yes, X does provide consideration for a supply made by Y pursuant to the first Agreement. | Q4: Does X make a supply pursuant to the second Agreement? | A4: No, X does not make a supply pursuant to the second Agreement. | Q5: If X does make a supply, what is the character of that supply, what is the consideration for that supply, and is that supply taxable or GST-free? | A5: As X does not make a supply pursuant to the second Agreement it is not necessary to determine the character of that supply, the consideration for that supply, and whether that supply taxable or GST-free. | Q6: Does X provide consideration for a supply made by Y pursuant to the second Agreement? | A6: Yes, X does provide consideration for a supply made by Y pursuant to the second Agreement.

Relevant facts and circumstances: The Applicant: X is a company incorporated in Australia and registered for GST. First Agreement: X entered into the first Agreement with Y. Y is a company incorporated overseas which is related to X. Y is not a resident of Australia, not registered for GST, and does not carry on business in Australia at or through a fixed and definite place of its own or through an agent at a fixed and definite place. The first Agreement recites that X is desirous of receiving a person (the designee) to be dispatched from Y, that Y is willing to dispatch the designee, and that the parties wish to specify the terms and conditions of the dispatch of the designee. The first Agreement states that Y shall dispatch the designee to X and that X shall accept the designee as an employee of X under the terms and conditions set out in the first Agreement. And that X will have the designee occupy the position of senior executive of X on full time employment working at X's Australian office. The dispatch period is from dd/mm/yyyy until dd/mm/yyyy unless either extended or terminated by mutual agreement. The first Agreement states: During the dispatch period that the designee will work for X, Y agrees to bear all of salary, payroll/work cover, tax, welfare and other costs and expenses that Y has obligations to pay to the designee. The first Agreement states that during the dispatch period X agrees to contribute AUD X per month towards total costs (including salary, welfare and other costs and expenses) that X has obligation to pay to the designee. X agrees to pay salary to the designee in accordance with X's rules and regulations and agreement with Y, although the first Agreement obliges Y to bear all salary costs. X agrees to bear all income tax, social security contribution and any other taxes imposed on the designee's income derived from Australia under the first Agreement. Y bears the cost of all moving expenses in Australia incurred through on-the-job training of the designee and all medical expenses for the designee and the designee's family in Australia. The first Agreement states: Y shall pay to X upon the receipt of invoice from X all expenses that shall be borne by Y in accordance with this Agreement as management fee. Such invoice shall be sent from X to Y every three months. X shall pay to Y upon receipt of invoice from Y the amount of AUD X for every month the designee is employed by X under this Agreement. Such invoice shall be sent from Y to X every three months. The remaining articles of the first Agreement deal with term, governing law, matters for consultation and entire agreement. Second Agreement: The second Agreement contains the same recitals as the first Agreement. The second Agreement states that Y shall dispatch the designee and X shall accept the designee as the employee of X and shall have the designee occupy the position of senior officer. The second Agreement states that the period of dispatch is one year commencing dd/mm/yyyy and shall be automatically renewed annually unless otherwise agreed by the parties. The second Agreement states: During the dispatch period the designee will work for X, X agrees to bear salary, welfare and other costs and expenses that Y has obligations to pay to designee. X agrees to obtain Y's prior written consent before changing the designee's place of work, position or working conditions. X agrees to pay salary to the designee in accordance with the rules and regulations of X and agreement with Y. The second Agreement states: A part of the salary to designee as agreed with Y shall be paid in AUD in Australia by X and the balance is paid in [overseas currency] in the [overseas country] by Y. The second Agreement states: X shall bear all of income tax, social security contribution and any other taxes imposed to designee's income derived in Australia under this agreement. The second Agreement states that the amount that X and Y shall pay to the designee is set out in Exhibit A, but a copy of Exhibit A was not supplied. The second Agreement obliges Y to pay all moving expenses related to the designee's move from overseas to Australia and obliges X to pay all moving expenses related to the designee's move back overseas after the period of dispatch expires. The second Agreement obliges X to bear all medical expenses for the designee and the designee's family in Australia and obliges X to maintain all required insurances applicable to the designee. The second Agreement states that X shall pay to Y upon receipt of an invoice from Y all expenses that shall be borne by X in accordance with the second Agreement and that such invoice shall be sent from Y to X every three months. Submissions in ruling request: The ruling request referred to the definition of 'supply' in section 9-10 of the GST Act, including paragraph 9-10(2)(g) (an entry into, or release from, an obligation'), the definition of ' taxable supply', a supply which is GST-free under item 2 in subsection 38-190(1), and subsection 38-190(3). It was submitted that both Agreements are agreements to share the costs associated with the employment of the designees and do not give rise to any supplies between X and Y. Alternatively, if the Agreements do give rise to supplies between X and Y, the substance of both Agreements is that X supplies the entry into an obligation to engage each designee as X's employee for a specified period (i.e. a supply that falls within paragraph 9-10(2)(g) of the GST Act). It was submitted that X's AUD X monthly contribution to total costs pursuant to the first Agreement is not consideration for a separate supply of labour made by Y because the designee, rather than Y, provides their labour to X pursuant to the designee's employment contract with X. It was also submitted that Y's undertaking pursuant to the first Agreement to bear all salary, payroll and other costs of the designee is not a separate supply but a way of expressing the consideration for X's supply (reference was made to paragraph 85 of Goods and Services Tax Ruling GSTR 2001/6 which states that obligations which are essentially a way of describing the consideration do not have a separate existence). In relation to the second Agreement it was submitted that X's undertaking to bear the costs of the designee was not consideration for a supply made by Y and that X's reimbursement of overseas currency paid by Y to the designee overseas is not consideration for a supply made Y but a simple reimbursement of money's paid on X's behalf. In relation to the first Agreement it was submitted that if X does make a supply to Y, the consideration for that supply is the total costs paid by Y to X related to the designee less X's contributions (and the separate invoicing arrangements in the first Agreement are simply a practical means of recognising the net payment due for the supply made by X). In relation to the second Agreement it was submitted that if X makes a supply to Y then that supply is not a taxable supply as it is not made for consideration as Y makes no payments to X and does not provide any non-monetary consideration. In the event that the ATO considers that X does make supplies to Y for consideration pursuant to the Agreements, it was submitted that those supplies are GST-free under either item 2(a), 2(b), or 3 in subsection 38-190(1) of the GST Act. In relation to item 2(a) it was submitted that Y is non-resident and not in Australia and that the supply is neither a supply of work physically performed on goods in Australia nor directly connected with real property in Australia. In relation to item 2(b) it was submitted that Y acquires the supply in carrying on an enterprise and that Y is neither GST registered nor required to be so registered (because any supplies that Y does make under the Agreements do not have to be taken into account in determining whether Y meets or exceeds the registration turnover threshold). In relation to item 3 in subsection 38-190(1) it was submitted that the relevant supply is made to a recipient (Y) which is not 'in Australia' (as Y has no presence in Australia), the effective use or enjoyment of the supply takes place outside Australia (where Y enjoys the benefit as recipient of the obligation entered into), and the supply is neither a supply of work physically performed on goods situated in Australia nor a supply directly connected with real property situated in Australia. In relation to subsection 38-190(3) of the GST Act (i.e. a supply which falls within item 2(a) or 2(b) of subsection 38-190(1) is not GST-free where it is a supply under an agreement entered into with a non-resident and the supply is provided or the agreement requires it to be provided to another entity in Australia) it was submitted that the entry by X into the obligation to take on the designee as an employee is both made and provided to Y and is not provided to any third party in Australia (including the designee as it is the employment contract with the designee which secures the designee's tenure as employee and not the provision of X's undertaking). Further information provided: In a telephone conversation X's adviser confirmed that Y has a Z% direct shareholding in X. X's adviser also explained that in the case of the first Agreement the designee was a trainee with little experience and therefore Y agreed to bear all salary, payroll, tax and other costs pursuant to the first Agreement less the AUD X per month received from X. The designee under the second Dispatch Agreement, on the other hand, was more experienced and engaged by X as senior officer and X therefore agreed to bear the costs of salary, tax, and removal costs from Australia to overseas.

Relevant legislative provisions: Section 188-40 of the A New Tax System (Goods and Services Tax) Act 1999

Reasons for decision: Detailed Reasoning - Summary of decision:: We do not consider that the first Agreement is simply an agreement to share costs. Pursuant to the first Agreement Y supplies to X the services performed by the designee while working as X's senior executive during the period of dispatch. X does not make a supply to Y of entry into an obligation to do anything, i.e. to take on the designee as an employee for the period of dispatch as agreeing to receive a supply is neither non-monetary consideration for that supply nor a supply made by X to Y. The other obligations entered into by X under the first Agreement do not have economic value and independent identity separate from the transaction and are neither non-monetary consideration for the supply made by Y nor a supply made by X to Y. | Detailed Reasoning - Detailed reasoning:: We do not agree with the submission that the first Agreement is 'simply an agreement to share the costs associated with the employment of the designee which does not give rise to any supplies for GST purposes between X and Y'. Subsection 9-10(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that a supply is any form of supply whatsoever and paragraph 9-10(2)(b) states that supply includes a supply of services. The first recital to the first Agreement, i.e. Whereas X is desirous of receiving a person to be dispatched from Y (hereinafter referred to as 'designee') and Y is willing to dispatch its designee to X indicates that Y is willing to supply to X the services of Y's employee (i.e. the designee) and the first Agreement states that Y shall dispatch the designee to X. We consider that pursuant to the first Agreement Y makes a supply to X of the services of the designee during the period of dispatch. The arrangement is similar to the supply by a group training company of an employee apprentice to a host employer which is stated to be a taxable supply by the group training company in Goods and Services Tax Determination GSTD 2000/7 . Nor do we agree with the submission that the substance of the first Agreement is that X makes a supply to Y of entry into an obligation to do anything, i.e. to take on the designee as an employee for the period of dispatch. As noted above, we consider that Y makes the relevant supply pursuant to the first Agreement (i.e. the supply of the services of the designee). It is true that X also enters into a number of obligations under the first Agreement but not every obligation entered into by X is non-monetary consideration for the supply made by Y and therefore a supply made by X to Y. This view is set out in the ruling section of Goods and Services Tax Ruling GSTR 2001/6 which states (Para 15): Many transactions involve parties entering into multiple obligations. The question arises as to whether those obligations are consideration (or additional consideration) for a taxable supply. By providing non-monetary consideration for a supply, you are in turn making a supply. Where this happens, you need to determine the GST consequences of the supply you make. If it is a taxable supply, you need to determine the GST inclusive market value of the consideration you receive for this supply to account for the GST payable. You may also be entitled to claim input tax credits for the supply made to you. and explained further in GSTR 2001/6 as follows: 80. As stated at paragraph 68, the test for determining whether a payment is consideration for a supply is whether there is sufficient nexus between the supply and the payment. Consideration for a supply may include acts, rights or obligations provided in connection with, in response to, or for the inducement of a supply. However, things such as acts, rights and obligations can often be disregarded as payments as they do not have economic value and independent identity separate from the transaction. 81. For a thing to be treated as a payment for a supply, it must have economic value and independent identity provided as compensation for the making of the supply. That is, it must be capable of being valued and be a thing that an acquirer would usually or commercially pay money to acquire. Whether this requirement is satisfied will usually be demonstrated by the parties to an arrangement assigning a specific or separate value to the thing. However, the assigning of a value by the parties is not necessary for a thing to have economic value. In the present case we consider that the obligation entered into by X referred to in the submissions in the ruling request (i.e. entry into an obligation to take on the designee as an employee) is not part of the consideration for the supply made by X as it amounts to entry into an obligation to receive a supply. GSTR 2001/6 states (Para 83): Many transactions involve exchanging various rights and obligations between the parties to the transaction. In particular, the true character of the transaction may characterise the payment as a condition of the contract rather than the provision of non-monetary consideration. For example, in many cases, agreeing to enter into a contract to receive a supply for a specific period of time is not non-monetary consideration for that supply. In our view the other obligations entered into by X under the first Agreement - i.e. to obtain Y's prior written consent to any changes to the designee's place of work or working conditions, to pay a salary to the designee, and to assist with Customs clearance - do not have economic value and independent identity separate from the transaction. Consequently those obligations are not non-monetary consideration for the supply made by Y and do not constitute supplies made by X to Y. We do not agree with the submission in the ruling request that the designee provides the designee's labour to X pursuant to the designee's employment with X. The designee is not a party to the first Agreement and it is clear from that agreement that Y supplies the services of the designee to X. We consider that the designee remains the employee of Y and is seconded by Y to X. Nor do we consider that Y's obligations pursuant to the first Agreement (i.e. to bear all salary, payroll and other costs of the designee) are consideration for a supply made by X - those obligations merely reflect the fact that the designee is Y's employee and is seconded to X. For the reasons set out above we consider that X does not make a supply to Y pursuant to the first Agreement. | Detailed Reasoning - Summary of decision:: As we have ruled that X does not make a supply pursuant to the first Agreement (Question 1), it is unnecessary to determine the character of any such supply, the consideration for it, or whether it is taxable or GST-free. | Detailed Reasoning - Summary of decision:: X provides consideration for the supply of the services of the designee by Y. This raises the issue of whether Y exceeds the registration turnover threshold. | Detailed Reasoning - Detailed reasoning:: For the reasons set out in Question 1 we consider that X does provide consideration for a supply made by Y pursuant to the first Agreement. The first Agreement indicates that X provides monetary consideration in the form of the AUD X payable monthly by X to Y for the supply made by Y to X, i.e. the services of the designee, although we have not been asked to rule on the amount of any consideration (and the position may be complicated by the fact that X pays a salary to the designee but Y bears the cost of that salary). Our conclusion that Y makes a supply pursuant to the first Agreement raises the issue of whether Y is obliged to register for GST and account for GST on the supply of the designee's services. Although we have not been asked to rule on these issues, it was submitted in the ruling request that 'Y does not make any supplies to X pursuant to the Agreements the value of which would otherwise be required to be taken into account in measuring whether Y reaches or exceeds the registration turnover threshold of $75,000'. We disagree with that submission. For the purpose of calculating the registration turnover threshold (but not any other turnover threshold) subsection 188-40(1) of the GST Act states: 188-40 Supplies of employee services by overseas entities to be disregarded for the registration turnover threshold In working out a non-resident's current GST turnover or projected GST turnover in order to determine whether it meets the registration turnover threshold, if: (a) the non-resident makes a supply of the services of an employee of the non-resident; and (b) the recipient of the supply is the non-resident's 100% subsidiary; and (c) the services that the employee performs for the recipient are performed in Australia; disregard the supply to the extent that the payments that the non-resident makes to the employee for performing those services would, if they were made by the recipient, be withholding payments. 'Non-resident' is defined in section 195-1 of the GST Act as an entity that is not an 'Australian resident' and 'Australian resident' is defined as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA). It was confirmed in the ruling request (p. 4) that Y is a 'non-resident'. In relation to whether Y makes a supply of the services of an employee, the Explanatory Memorandum to the Taxation Laws Amendment Act (No. 8) 2000 , which inserted section 188-40, states: | Detailed Reasoning - Supply of employees by offshore entity to an onshore subsidiary: 6.64 Paragraph 9-20(2)(a) of the GST Act provides that employee services are generally not subject to GST. Similarly, subsection 84-15(2) of the GST Act provides that where a non-resident entity makes a transfer of the services of an employee to its Australian enterprise, the transfer is not subject to GST under the reverse charge rules. However, this exclusion from the reverse charge rules only applies where the payments from the Australian enterprise to the overseas enterprise would be withholding payments if they were payments made from the Australian enterprise to the employee. Where the services of an employee are provided by a registered entity to another entity, it will generally be a taxable supply under section 9-5 of the GST Act. 6.65 Where a non-resident entity makes a supply of employee services, in Australia, to its 100% owned subsidiary that supply will be a supply that is connected with Australia and be included in the calculation of the non-resident's annual turnover. Where an entity is carrying on an enterprise and its annual turnover exceeds $50,000, the entity is required to be registered for GST. If the non-resident entity is required to register, the supply of employee services performed in Australia will be a taxable supply and subject to GST. 6.66 Item 32 inserts new section 188-40 to remove, in limited circumstances, the requirement for a non-resident entity making supplies of employee services in Australia to its 100% owned subsidiary, to register for GST. 6.67 New section 188-40 provides that when determining whether a non-resident's current annual turnover or projected annual turnover meets the registration turnover threshold, the entity can disregard a supply, to the extent that: · the supply consists of employee services performed in Australia and provided to a 100% subsidiary of the non-resident entity; and · the payments that the non-resident entity makes to the employee for its services would be withholding payments, if they were made by the Australian entity. | Detailed Reasoning - [Section 188-40]: 6.68 However, when determining your annual turnover in relation to other turnover thresholds, these supplies are still included in your annual turnover. [Subsection 188-40(2)] 6.69 Item 33 inserts a definition of "100% subsidiary" into section 195-1 of the GST Act. "100% subsidiary" is defined as having the meaning given to that term by section 975-505 of the ITAA 1997. Paragraph 6.65 of the Explanatory Memorandum states that the supply by a non-resident of employee services in Australia is a supply that is connected with Australia and included in the calculation of current GST turnover and projected GST turnover (as the exclusions in paragraph 188-15(3)(a) and paragraph 188-20(3)(a) do not apply). The Example set out in paragraph 6.69 of the Explanatory Memorandum refers to a United States corporation seconding and employee to its wholly-owned Australian subsidiary and states that the supply of the seconded employee is connected with Australia because the seconded employee performs their duties in Australia. We consider that the supply of the services of each designee by Y to X pursuant to the first Agreement and the second Agreement is connected with Australia for the same reason. The exemption in section 188-40 of the GST Act applies only where the recipient of the relevant supply is a 100% subsidiary of the non-resident supplier. '100% subsidiary' is defined in section 975-505 of the Income Tax Assessment Act 1997 , i.e. a subsidiary company is a 100% subsidiary of a holding company if all the shares in the subsidiary company are beneficially owned by the holding company, one or more 100% subsidiaries of the holding company, or the holding company and one or more 100% subsidiaries of the holding company. As X's adviser confirmed that Y holds only a Z% direct interest in X, the exemption in section 188-40 of the GST Act does not appear to apply and the supply by Y of the services of each Designee appears to be required to be taken into account in determining whether Y is required to register for GST. | Detailed Reasoning - Summary of decision:: We do not consider that the second Agreement is simply an agreement to share costs. Pursuant to the second Agreement Y supplies to X the services performed by the designee while working as X's senior officer during the period of dispatch. X does not make a supply to Y of entry into an obligation to do anything, i.e. to take on the designee as an employee for the period of dispatch as agreeing to enter into a contract to receive a supply is neither non-monetary consideration for that supply nor a supply made by X to Y. The other obligations entered into by X under the second Agreement do not have economic value and independent identity separate from the transaction. Consequently those obligations are not non-monetary consideration for the supply made by Y and do not constitute supplies made by X to Y. | Detailed Reasoning - Detailed reasoning:: We do not agree with the submission that the second Agreement does not give rise to any supplies for GST purposes between X and Y but instead clarifies which parties are to bear particular costs in relation to the Designee's secondment. The first recital to the second Agreement, i.e. Whereas X is desirous of receiving a person to be dispatched from Y (hereinafter referred to as 'designee') and Y is willing to dispatch its designee to X indicates that Y is willing to supply to X the services of Y's employee (i.e. the designee) and the second Agreement states that Y shall dispatch the designee to X. We consider that pursuant to the second Agreement Y makes a supply to X of the services of the designee as X's senior officer during the period of dispatch. We do not agree with the submission that the substance of the second Agreement is that X makes a supply to Y of entry into an obligation to do anything, i.e. to take on the designee as an employee for the period of dispatch. For the reasons set out in relation to Question 1 we consider that the obligation entered into by X pursuant to the second Agreement (i.e. to accept the designee as the employee of X) is merely a condition of the contract and does not constitute the provision of non-monetary consideration or a supply made by X to Y (paragraph 83 of GSTR 2001/6 (above) refers). We also consider that the other obligations entered into by X pursuant to the second Agreement, e.g. to obtain Y' prior written consent to changes to place of work, position or working conditions, do not have economic value and independent identity separate from the transaction, are not non-monetary consideration for the supply made by Y and do not constitute supplies made by X. For the reasons set out above we consider that X does not make a supply to Y pursuant to the second Agreement. | Detailed Reasoning - Summary of decision:: As we have ruled in Question 4 that X does not make a supply pursuant to the second Agreement, it is unnecessary to determine the character of any such supply, the consideration for it, or whether it is taxable or GST-free. | Detailed Reasoning - Summary of decision:: We consider that X provides monetary consideration for the supply of the designee's services made by Y pursuant to the second Agreement in the form of payments for salary, income tax, social security contribution and other taxes, moving expenses, health management expenses, medical expenses and social security contribution, and insurance. We disagree with the submission made in the ruling request that these payments are not consideration for a supply made by Y. As we pointed out in Question 3, we have not been asked to rule on the amount of any consideration and we have not seen Exhibit A to the first Agreement. As noted in Question 3 above, this raises the issue of whether Y meets or exceeds the registration turnover threshold and is obliged to register for GST and account for GST on the supply of the designee's services.