Private ruling: GST and supply of services to non-resident
Published: February 2013

Ruling: Q1: 1. Is your supply of technical support services provided to the non-resident's customers of in Australia a taxable supply? 2. Is your supply of marketing and research services to the non-resident a taxable supply? 3. If the supply of any of your services is GST-free and you are entitled to a refund of GST, will the Commissioner exercise his discretion under section 105-65 of the Taxation Administration Act 1954 (TAA) to allow the refund? Advice/Answers 1. Yes, your supply of technical support services provided to the non-resident's customers in Australia is a taxable supply. 2. No, your supply of marketing and research services to the non-resident is not a taxable supply. The supply is GST-free. 3. Refer to the 'Reasons of decisions'.

Relevant facts and circumstances: A non-resident entity provides services that are primarily delivered online via a website hosted outside Australia. Clients of the non-resident log onto the website to receive the services for which they have paid. The non-resident does not have permanent establishment in Australia. It is not registered or required to be registered for GST in Australia. It does not carry on any business in Australia and is not registered with the Australian Securities and Investments Commission (ASIC). You are a direct subsidiary of the non-resident. The non-resident has other subsidiaries outside Australia. The primary role of the subsidiaries is the provision of marketing services to the non-resident You do not have authority to enter into contracts on behalf of the non-resident. You are registered for goods and services tax (GST). You supply the following services: · technical support to the non-resident's customers that reside in Australia. This entails technical support to explain the data and information offered (via the internet) and their application; · marketing services seeking to identify potential new subscribers; and · research and analysis of data on behalf of the non-resident. You also provide consulting services, (face-to-face and by email) to local businesses in Australia. These services form part of your enterprise in Australia. Your business operations are separate from those of the non-resident. As with most internet based services, customers are entitled to technical support free of charge. The non-resident guarantees to deliver 24 hour client service. The technical support that you provide to the non-resident's customers ranges from explanations about how to access the non-resident's services to explanations about how to interpret the data accessed. There is no written agreement between you and the non-resident. The agreement in relation to the provision of technical support was made verbally. However, there is no known recorded evidence of this by way of a transcript or minute of a meeting. You issue a tax invoice to the non-resident on a yearly basis. In your application, you advised that the amount invoiced is based on the costs of maintaining the Sydney office. The actual amount billed is the cost of maintaining the office less any amounts that you received from your clients. In your subsequent correspondence dated, you advised that the amount payable by the non-resident (the recharge) is based on the estimated proportion of each of the staff members' annual salary that represents work done for the non-resident plus a percentage of your overheads. You have made an annual recharge every year. The only situation where a recharge would not be made is if you did not provide any services to the non-resident; though this has never occurred. You provided us with a copy of a tax invoice that you issued to the non-resident together with a worksheet showing how the amount was calculated. With your application, you also sent two worksheets showing more detailed calculations of the amount charged to the non-resident. In particular, the worksheets indicate how each of your staff members' salary relates to work done for the non-resident. The percentages are further broken down into the types of work done, that is, technical support, research, and marketing. You have treated the supply of all your services to the non-resident as a taxable supply.

Relevant legislative provisions: 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

Reasons for decision: Detailed Reasoning - 1. Technical support services: GST is payable on a taxable supply. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states: 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 Australia; and d. 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). Supply for consideration The requirement in paragraph 9-5(a) of the GST Act is satisfied if there is a supply, a consideration, and a sufficient nexus between the two. The services that the non-resident supplies to its customers are delivered online and, as you advised, these supplies also entitle the customers to free technical support. This means that if the customers require technical support, the non-resident will provide that support for no extra cost to the customers. The non-resident further guarantees that it is available 24 hours a day for any inquiries from the customers. To fulfil its promise of a 24-hour customer service, the non-resident entered into a verbal agreement with you to provide your services to its customers who require technical support. For the purpose of this ruling, we consider that you make the supply of technical support services when you actually provide the services to the non-resident's customers. While the actual flow of your supply is to the customers, the contractual flow is to the non-resident. In other words, you make the supply to the non-resident but that supply is provided to its customers. In determining the exact nature of your supply to the non-resident, we do not consider that your obligation to provide technical support services to the non-resident's customers is the essential character of your supply. In your application, you submitted that you are paid irrespective of whether any technical support is ordered by, and provided to customers of the non-resident. You also submitted that the actual amount billed to the non-resident is the cost of maintaining the Sydney office less any amount billed directly to your own customers for consultancy services. The preceding statements from your application indicate that you receive consideration from the non-resident even if you do not make a supply. And even if you make a supply, you do not receive consideration from the non-resident if the amount that you receive from your own customers exceeds the cost of maintaining the Sydney office. In your subsequent correspondence, you advised that this is not the case. Rather, the consideration payable by the non-resident is based on the estimated proportion of each of the staff members' annual salary that represents work done for the non-resident plus a percentage of your overheads. You further advised that the only situation where you would not charge the non-resident is if you did not provide any services to the non-resident. This statement suggests that you only receive consideration when you make a supply. Based on the following information that you provided, our view is that there is a sufficient nexus between your supply of technical support services to the non-resident that was provided to its client and the consideration that you receive from the non-resident: · you would not receive a consideration if there is no supply of your services; · in calculating the amount payable by the non-resident, the proportion of technical support services done is considered; · the supply of technical support services is not incidental to the supply of your other services given the breakdown of the recharge into the types of your services and the proportion of technical support done. (For most of the staff members the technical support services comprise 66 to 92% of the total work they do for the non-resident). Therefore, you make the supply of your technical support services for consideration. The requirement in paragraph 9-5(a) of the GST Act is satisfied. Paragraphs 9-5(b), 9-5(c) and 9-5(d) of the GST Act are also satisfied as: · you make the supply of your services in the course of carrying on your enterprise; · the supply is connected with Australia; and · you are registered for GST. Accordingly, your supply of technical support services is a taxable supply unless it is GST-free or input taxed. There is no provision in the GST Act under which your supply of technical support services would be input taxed. GST-free supply The table in subsection 38-190(1) of the GST Act provides a list of supplies (other than supplies of goods and real property) that would be GST-free if certain conditions are met. Under item 2 in the table (item 2), a supply made to a non-resident who is not in Australia when the thing supplied is done is GST-free if: (a) the supply is neither 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 acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered. Subsection 38-190(3) of the GST Act, however, provides that a supply covered by item 2 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 Australia.' Goods and Services Tax Ruling GSTR 2005/6 explains the operation of subsection 38-190(3) of the GST Act. According to paragraph 224 of GSTR 2005/6, the meaning of 'provided to another entity' means that in the performance of a service, the actual flow of that supply is, in whole or part, to an entity that is not the 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. In this case, you entered into an agreement with the non-resident to provide technical support services to its customers if required. When you actually provide technical support services to the non-resident's customers, you do so pursuant to your agreement with the non-resident. By its nature, the technical support services can only be provided to the non-resident's customers. As mentioned above, the contractual flow of your supply is to the non-resident and the actual flow is to the non-resident's customers. Therefore, if the customer is in Australia, your supply is provided to another entity in Australia. Accordingly, the supply of technical support services that you provide to the non-resident's customers in Australia is not GST-free under item 2 because of subsection 38-190(3) of the GST Act. The supply is a taxable supply. | Detailed Reasoning - 2. Marketing and research services: Your supply of marketing and research services to the non-resident is covered by item 2 in the table in subsection 39-190(1) of the GST Act as: · the non-resident does not have a permanent establishment in Australia, and thus is not in Australia; · your supply of marketing and research services is neither a supply of work physically performed on goods nor a supply directly connected with real property located in Australia; and · the non-resident acquires your services in carrying on its enterprise but is not registered or required to be registered for GST. Subsection 38-190(3) of the GST does not apply as your supply of marketing and research services is not provided to another entity in Australia. Therefore, your supply of marketing and research services to the non-resident is GST-free. | Detailed Reasoning - Refund of GST: Under the general rules the Commissioner is required to give a refund or apply that amount in accordance with the running balance account provisions in Divisions 3 and 3A of Part IIB of the TAA. However, the requirement to give a refund of overpaid GST is subject to section 105-65 of Schedule 1 to the TAA (section 105-65) which modifies the general rules so that the Commissioner need not give a refund or apply that amount if an entity overpaid its net amount or an amount of GST where the requirements of the section are satisfied. Subsection 105-65(1) states: (1) The Commissioner need not give you a refund of an amount to which this section applies, or apply (under Division 3 or 3A of Part IIB) an amount to which this section applies, if: (a) you overpaid the amount, or the amount was not refunded to you, because a *supply was treated as a *taxable supply, or an *arrangement was treated as giving rise to a taxable supply to any extent, and (b) the supply is not a taxable supply, or the arrangement was treated as giving rise to a taxable supply, to that extent (for example, because it is *GST-free), and (c) one of the following applies: (i) the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply or (in the case of an arrangement treated as giving rise to a taxable supply) to an entity treated as the recipient; (ii) the recipient of the supply, or (in the case of an arrangement treated as giving rise to a taxable supply) the entity treated as the recipient, is *registered or *required to be registered. Note: * asterisk denotes a defined term in the Act Miscellaneous Tax Ruling MT 2010/1 (MT 2010/1), which was issued on 15 December 2010, provides the ATO view on how section 105-65 applies. Whether subsection 105-65(1) applies to the circumstances Section 105-65 applies to restrict refunds of overpaid GST if all three of the following conditions are satisfied: · there was an overpayment of GST · a supply was treated as a taxable supply when it was not a taxable supply or was taxable to a lesser extent, and · the recipient has not been reimbursed a corresponding amount of the overpaid GST and/or the recipient of the supply is registered or required to be registered for GST. | Detailed Reasoning - Meaning of overpaid: In the context of section 105-65, 'overpaid' means the amount that has been remitted must be in excess of what was legally payable on the particular supply in the relevant tax period prior to taking into account or applying section 105-65. You have advised that you have remitted GST of 1/11 th of the price of the services including GST on the GST-free components. It follows that you remitted more than was legally payable and that there has been an overpayment of GST. A supply was treated as a taxable supply when it was not a taxable supply or was taxable to a lesser extent Broadly, in the context of section 105-65 a supply would be treated as a taxable supply where the supplier mischaracterises a supply as taxable, either in whole or in part. You have contended that you have mistakenly treated the supplies of the services as being wholly taxable. This is the mischaracterisation of the GST-free components that led to the overpaid GST. In this case, due to the inclusion of GST-free components of the services in the calculation of the GST amount, the supply was treated as fully taxable when in fact it was taxable to a lesser extent. The recipient has not been reimbursed a corresponding amount of the overpaid GST and/or the recipient of the supply is registered or required to be registered for GST. If you reimburse the corresponding amount to the recipient, section 105-65 will not apply to restrict the refund in your circumstances. The Tax Office will refund you the overpaid GST amount on the GST-free component of the services. (Please refer to paragraphs 133-142 of MT 2010/1 for further information on 'what is the amount of any refund given'). If you do not intend reimbursing a corresponding amount of the overpaid GST to the recipient, the three conditions above are satisfied, section 105-65 applies to restrict the refund on the overpaid GST. Accordingly the Commissioner has no obligation to pay a refund that would otherwise be payable under section 8AAZLF of the TAA. | Detailed Reasoning - The discretion to refund: It is the ATO view (refer paragraphs 116 and 117 of MT 2010/1) that the Commissioner, although under no obligation to do so, may choose to pay a refund. This view is supported by the decision in Luxottica Retail Australia Pty Ltd v FC of T 2010 ATC 10-119 at 57 when the Administrative Appeals Tribunal (AAT) referred to "residual discretion": As to paragraph (c), and accepting of course that subparagraph (ii) cannot apply, it is a fact that the customer has not been "reimbursed" to the extent of the overpayment. The question then becomes whether, in these circumstances, the residual discretion to pay the refund to the Applicant should be exercised. We think it should. [Emphasis added]. Paragraph 128 of MT 2010/1 provides some guiding principles to consider when exercising the discretion. | Detailed Reasoning - Will the Commissioner exercise the discretion to refund you the 'overpaid' amount?: Paragraph 128 of GSTR 2010/1 provides guiding principles to consider in exercising the discretion. Specifically, subparagraph 129(d) provides the circumstances in which the Commissioner considers it may be fair and reasonable to exercise the discretion. They include, but are not limited to: (i) The overpayment of GST arises as a direct result of the actions of the Commissioner and the taxpayer has not had the opportunity to factor in the cost of the GST or otherwise pass on the GST, for instance through a gross up clause. For instance, an entity had treated its supply as GST-free, the Commissioner subsequently treats the supply as taxable, the entity pays an amount for GST on the supply, but the Commissioner later reverses that decision. In such circumstances it would not be necessary for the supplier to refund the recipient of the supply whether the recipient is registered or unregistered. (ii) The taxpayer can demonstrate that, for other reasons, they did not otherwise pass on the GST. As mentioned in Avon , 'it is for the taxpayer to establish a circumstance out of the ordinary, namely that the amount of the overpayment ... has not been passed on'. (iii) The supplier is able to satisfy the Commissioner that an amount corresponding to the refund will be, or has been, passed on to the party that ultimately bore the cost of the overpaid GST. In a business to business transaction it is generally not enough simply to show that the supplier refunded the immediate business recipient. A supplier must be able to prove that an unregistered end consumer is the one ultimately compensated. Where the registered recipient is unable to claim input tax credits or is only allowed to partially claim input tax credits, then, before the Commissioner would pay a refund to the supplier, the supplier would have to refund the registered recipient and the registered recipient would have to show it either did not pass the foreseeable cost (that is denied input tax credits) to the next recipient or that they have also refunded that amount to the next recipient and the entity that ultimately has borne the cost is compensated. | Detailed Reasoning - 'Arithmetic or recording error made by the supplier': It is not considered that the overpayments were due to arithmetic or recording errors as contemplated in MT 2010/1. For example, refer to paragraph 128(d)(i) and Example 17 at paragraph 191 where inadvertent errors occurred after the transactions with the recipients were completed. In your case, however: · you were aware of the treatment of the supply of the services as wholly taxable. · the errors occurred prior to/at the reporting time and were reflected in the tax invoice provided to customers. · the amount of GST liability calculated by your system was the same as that reported in your Business activity statements. | Detailed Reasoning - 'No windfall gain: Of relevance to your circumstances is the guiding principle that the Commissioner must have regard to the subject matter, scope and purpose of section 105-65 which is explained in paragraph 127 of MT 2010/1. It states: … the provision is designed to prevent windfall gains to suppliers and to require the supplier to ensure that any refund ultimately compensates the person or entity who ultimately bore the cost. In relation to a refund of overpaid GST, the potential or otherwise for a windfall gain, the requirement to ensure the refund compensates the person or entity that ultimately bore the cost and the potential to disturb the symmetry envisaged by the GST system, are factors that must be taken into account in relation to the exercise of the discretion. The Explanatory Memorandum to the Tax Law Amendment (2008 Measures No 3) (which introduced the current version of section 105-65) adds further: 2.2 Without the restriction on refund requirement, there is a potential for windfall gain to arise to businesses that receive the refund of GST but have not borne the incidence of tax. It follows from the above that it is important when considering the exercise the discretion to determine who has borne the burden of the GST. That is, whether a supplier has passed on the GST to the recipients. In answering this question, the Commissioner takes into consideration the factors outlined in Avon Products Pty Ltd v Commissioner of Taxation (2006) HCA 29 (Avon). It is considered that the guidance provided by Avon about who bears the burden of the indirect tax impost applies equally in the GST context given the similarity in the sales tax and GST regimes in that respect. In that case the High Court stated, at paragraphs 9 and 12: 9. That sales tax is expected to be passed on depends upon the circumstance that sales of goods occur within an economy geared to making profit … In a profit-making structure, businesses will set prices so as to ensure at least that all foreseeable costs are recovered ... it forms part of the cost structure of doing business...There is nothing extraordinary in the proposition that in the usual course of things sales tax will be passed on … 12. Additionally, once it is appreciated that it is in the nature of sales tax to be passed on, there is nothing remarkable in the consequences that proof to the contrary will occur comparatively seldom … This means that the presumption is that the cost of any GST liability is a foreseeable cost that will be passed on as part of the cost recovery and pricing structure of the supplier. It is for the supplier to prove that the GST has not been passed on. Each case must be assessed on its merits. You are registered for GST. You knew over a long period of time that you were accounting for GST on the whole value of the services and that the GST was a cost to you. You have contended that you will not 'enjoy' a 'windfall gain' because 'you will refund the recipient. If it is the case, section 105-65 will not apply in the first instance as discussed above. Please note that the wordings of section 105-65 indicate that you are required to refund the overpaid amount to the recipient before you revise your relevant BAS for the refund. As discussed if you do not refund the recipient of the overpaid GST, a refund to you will create a windfall gain to you. You have not provided any reasons/evidence to support the notion that you will not receive any windfall if the discretion is made to refund you the overpaid GST you paid. Given the presumption noted above, it is reasonable to conclude that the cost of the overpaid GST was passed on to customers in the price charged for the services. The Commissioner considers that the overpaid GST has been included in the price charged for the services and accordingly has been borne by the recipient as intended by the GST regime. You have not absorbed the overpaid GST. To provide a refund to you would therefore result in a windfall gain contrary to the underlying purpose of section 105-65. Under paragraph 127 of MT 2010/1 the Commissioner must take this into account in relation to the exercise of the discretion.

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