Private ruling: GST and supply of marketing and business development services to a non-resident entity and refund of overpaid GST
Published: October 2013

Ruling: Q2: Will the Commissioner exercise the discretion available under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to allow a refund of any overpaid GST in relation to your supply of marketing and business development services to a non-resident entity? Advice/Answers | A2: Yes. You can make your claim by: · revising the earlier activity statement/s the relevant tax period/s, or · taking the refund or credit into account in your next activity statement, provided it is within certain time and correction limits. For more information go to our website, www.ato.gov.au and search for 'Correcting GST mistakes'.

Relevant facts and circumstances: You are an Australian company which is registered for goods and services tax (GST). You have entered into a "a non-resident entity Reseller Agreement" ("agreement") with the non-resident entity to supply marketing and business development services to customers of the non-resident entity that are located in Australian and other designated countries within the Asia Pacific region. You will receive a fee for your supply of marketing and business development services. The fees are calculated in accordance with the agreement. Under the agreement, the non-resident entity will pay you with respect to each calendar month during the Term, the following fees: i. a percentage of Revenue in such month. ii. In the event that the Revenue Goal is achieved during the Initial Term, you will be paid a higher percentage of the portion of the Revenue that exceeded the Revenue Goal during the initial term, within thirty (30) days of the end of the initial term. The non-resident entity is an overseas company with its principal office and place of business located outside Australia. The non-resident entity is not registered or required to be registered for in Australia. The non-resident entity does not have an office or presence in Australia. There are no representatives of the non-resident entity in Australia when you perform/provide your marketing and business development services. The non-resident entity offers its customers services relating to the display and measurement of interactive online video advertising. Under the agreement, you are engaged by the non-resident entity to perform prospecting, development, sales and account management services to customers in connection with the display of advertisements. The non-resident entity and each customer will enter into an agreement for the services directly with each other. You are not authorised to enter or conclude any contract on the non-resident entity's behalf. Your interaction with the customers is limited to promoting the products and services of the non-resident entity. You are not presently engaged to provide "after sales" or "help desk" services to customers. If customers contact you with their queries, you pass those queries on to the non-resident entity. Under the agreement, you are required to invoice the non-resident entity at the beginning of each month with respect to the fees due by the non-resident entity for the previous calendar month at the agreed rate. Under the agreement, all the amounts payable exclude all applicable sales, use and other taxes. You will be responsible for all such taxes (other than taxes based on the non-resident entity's net income). The fees were not negotiated on a basis that took GST into account (which is reflected by the taxes clause that provides that the fees exclude all taxes…)". In other words, the fees were negotiated on a GST exclusive basis. You have commenced invoicing the non-resident entity. The fees are invoiced in foreign currency. However, you have converted the fees to Australian currency for the purposes of calculating and reporting your GST liabilities. In the past four tax periods, you have made GST payments in error in your activity statements: If the GST payments made in error are refunded to you by the ATO, you do not intend to refund that amount to the non-resident entity. This is because the fees were not negotiated on a basis that took GST into account. As the non-resident entity is not registered for GST, it has not claimed any input tax credits in relation to the services supplied to it by you. You are authorised by the non-resident entity to state the following: · The non-resident entity does not consider any GST cost to have been passed on to it by you. · The non-resident entity was of the understanding that the fees did not include GST and it was not initially aware that you were remitting GST to the ATO. · The non-resident entity will not be seeking a refund of the overpaid GST from you (in the event a refund is paid by the Commissioner). · The non-resident entity will not be seeking to renegotiate/reduce the fees for the services to be provided by you moving forward (if the Commissioner confirms that the services are GST-free). Additional facts and circumstances provided: · Copies of invoices to the non-resident entity for the months in question. · You advise that the agreement between you and the non-resident entity was drafted overseas and does not contain a standard GST gross up clause (or any express reference to GST). In other words the fees were determined on a GST exclusive basis calculated in accordance with the formula in the agreement with you being responsible for the payment of any GST if it nonetheless applied. · You submit that the price agreed to, in accordance with the agreement, was not intended to cover nor include any GST.

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 9-25 | A New Tax System (Goods and Services Tax) Act 1999, Section 38-190 | A New Tax System (Goods and Services Tax) Act 1999, Subsection 38-190(3) | Taxation Administration Act 1953, section 105-65 of Schedule 1

Reasons for decision: Summary: The supply of marketing and business development services by you to the non-resident entity is not provided, and you do not have any agreements with the non-resident entity to provide the marketing and business development services, to any other entity in Australia. Therefore, the supply of marketing and business development services by you to the non-resident entity is GST-free under section 38-190 of the GST Act and no GST payable on this supply. | Detailed Reasoning - Detailed reasoning: GST is payable on a taxable supply. Section 9-5 of the A New Tax System (Goods and Service 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 defined term in section 195-1 of the GST Act) The supply of marketing and business development services by you to the non-resident entity will be taxable if all the requirements in section 9-5 of the GST Act are satisfied. From the facts given, the supply of marketing and business development services by you to the non-resident entity satisfies paragraphs 9-5(a) to (d) of the GST Act, as follows: (a) you make a supply of services in return for consideration by way of payments; (b) you make the supply in the course of your business; (c) the services are performed/provided in Australia or made through an enterprise that you carry on in Australia (and therefore the supply is connected with Australia); and (d) you are registered for GST in Australia. However, section 9-5 of the GST Act also provides that the supply is not taxable to the extent that it is GST-free or input taxed. The supply of marketing and business development services by you to the non-resident entity does not satisfy the input taxed provisions under the GST Act. The GST-free provisions are taken into consideration. | Detailed Reasoning - GST-free: Section 38-190 of the GST Act lists supplies of things other than goods or real property, for consumption outside Australia that are GST-free. Of relevance to the supply of marketing and business development services by you to the non-resident entity is item 2 in the table in subsection 38-190(1) of the GST Act (Item 2). Item 2 provides that a supply of a thing (other than goods or real property) made to a non-resident is GST-free if the non-resident is not in Australia when the thing supplied is done and: (a) the supply is neither the 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. Accordingly, where the provisions of either (a) or (b) above are met, the supply will be GST-free if the non-resident is not in Australia when the thing supplied is done. | Detailed Reasoning - Non-resident not in Australia in relation to the supply: For the supply of your services to be GST-free under Item 2, there is a precondition that the non-resident must not be in Australia in relation to the supply when it is performed/provided. Goods and Services Tax Ruling GSTR 2004/7 discusses when an entity is not in Australia when the thing supplied is done. Paragraph 37 of GSTR 2004/7 provides that a non-resident company is in Australia if that company carries on business (or in the case of company that does not carry on business, carries on its activities) in Australia through: (a) a fixed and definite place of its own for a sufficiently substantial period of time; or (b) an agent at a fixed and definite place for a sufficiently substantial period of time. In addition, if a non-resident company is determined to be in Australia on the basis of the above test, it is necessary to determine if the company is in Australia in relation to the supply, when the supply is done (that is, provided/performed). From the facts given, you supply the marketing and business development services to the non-resident entity that is based overseas. You advise that the non-resident entity does not carry on business or activities at or through a fixed and definite place of its own for a sufficiently substantial period of time in Australia. Furthermore, the non-resident entity does not have any representatives acting on its behalf in Australia in relation to your marketing and business development services and you deal directly with the non-resident entity who is overseas. Therefore, it is considered that the non-resident entity is 'not in Australia' for the purposes of Item 2. | Detailed Reasoning - Paragraphs (a) and/or (b) of Item 2: Where a non-resident entity is not in Australia in relation to the supply when the thing supplied is done, it is necessary to determine if the other requirements in either paragraph (a) or (b) of Item 2 are satisfied. Under paragraph (a) of Item 2, a supply of a thing that is made to a non-resident who is not in Australia when the thing supplied is done is GST-free if the supply is neither a supply of work physically performed on goods situated in Australia nor directly connected with real property situated in Australia when the work is done. From the facts given, you advised that the supply of marketing and business development services by you to the non-resident entity is neither a supply of work physically performed on goods situated in Australia nor a supply directly connected with real property situated in Australia. Further, paragraph 44 of Goods and Services Tax Ruling GSTR 2003/7 establishes that the supply of marketing and business development services is not directly connected with goods or real property. This is because we consider that a direct connection does not exist where the supply does not relate to particular goods or real property or only indirectly relates to such goods or real property. Therefore, the supply of marketing and business development services by you to the non-resident entity satisfies paragraph (a) of Item 2 and is GST-free. In addition, where the non-resident entity acquires your services in carrying on its enterprise (business), and is neither registered nor required to be registered for GST in Australia, the supply of services by you to the non-resident entity will also be GST-free under paragraph (b) of Item 2. Please note that you are able to ascertain the GST registration status of an entity that you deal with by checking the Australian Business Register at www.abr.gov.au . | Detailed Reasoning - Limitations: Finally, having met the requirements of Item 2, it is also necessary to consider subsection 38-190(3) of the GST Act. Subsection 38-190(3) of the GST Act states: Without limiting subsection (2), 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 Australia. From the facts given, the supply of marketing and business development services by you to the non-resident entity is not provided, and you do not have any agreements with the non-resident entity to provide the marketing and business development services, to any other entity in Australia. Therefore, subsection 38-190(3) of the GST Act does not exclude this supply from being GST-free under Item 2. It is noted that the limitations by subsection 38-190(2) of the GST Act is not applicable (as you are not supplying a right or option), and subsection 38-190(2A) of the GST Act is not applicable (as the marketing and business development services by you to The non-resident entity is not related to the making of input taxed supplies of real property). In summary, the supply of marketing and business development services by you to the non-resident entity is GST-free under Item 2 and no GST payable on this supply. | Summary: The Commissioner is satisfied that you have overpaid an amount because you treated the supply of marketing and business development services as a taxable supply when the supply was GST-free. However, the Commissioner is not satisfied that you have reimbursed a corresponding amount to the recipient of the supply and so need not give you a refund. Section 105-65 of Schedule 1 to the TAA contains a discretion which the Commissioner may exercise in certain limited circumstances to allow the refund. The Commissioner considers that, in your particular circumstances, he will exercise his discretion to allow a refund to you. | Detailed Reasoning - Detailed reasoning: 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 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) of Schedule 1 to the TAA 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 | Detailed Reasoning - Whether subsection 105-65(1) of the TAA applies to your circumstances: The restriction on refunds of overpaid GST under section 105-65 of the TAA will apply 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 · either the recipient has not been reimbursed a corresponding amount of the overpaid GST or the recipient of the supply is registered or required to be registered for GST. Miscellaneous Tax Ruling MT 2010/1 Miscellaneous tax: restrictions on GST refunds under section 105-65 of Schedule 1 to the Taxation Administration Act 1953 (MT 2010/1) provides the view of the Commissioner on section 105-65 of Schedule 1 to the TAA. Paragraph 20 of MT 2010/1 explains the 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. For the quarterly tax periods in question you remitted GST on supplies of marketing and business development services to a non-resident entity when these supplies are in fact GST-free. It follows that you remitted more than was legally payable and that there has been an overpayment of GST. Paragraph 21 of MT 2010/1 explains the meaning of 'treated' as a taxable supply. You mischaracterised the supplies of marketing and business development services as taxable supplies and remitted GST to the Commissioner when the supplies are in fact GST-free. You have advised that the non-resident entity has not been reimbursed an amount corresponding to the GST overpaid. As the three conditions are satisfied section 105-65 of Schedule 1 to the TAA applies and the Commissioner has no obligation to pay a refund that would otherwise be payable under section 8AAZLF of the TAA. However, paragraph 27 of MT 2010/1 explains the circumstances in which the Commissioner may choose to pay a refund even though the conditions in paragraphs 105-65(1)(a), (b) and (c) of Schedule 1 to the TAA are satisfied. Further, paragraphs 116 and 117 of MT 2010/1 state: 116.The operation of section 105-65 to deny the requirement to pay refunds that would otherwise be payable is not discretionary.…The words of the provision say that where the section applies the Commissioner need not give you a refund of the amount or apply the amount under the relevant RBA provisions…. 117. The Commissioner considers that the words "need not", in the context of section 105-65, do not prohibit the giving of a refund and accordingly the Commissioner has a discretion to pay a refund in appropriate circumstances…. 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 AAT referred to "residual discretion": The question then becomes whether, in these circumstances, the discretion to pay the refund to the applicant should be exercised. Paragraph 128 of MT 2010/1 provides some guiding principles to consider when exercising the discretion. It states: 128. Section 105-65 does not specify what factors are relevant to the exercise of this discretion. In exercising the discretion, the Commissioner will have regard to the following guiding principles: (a) The Commissioner must consider each case based on all the relevant facts and circumstances. (b) The Commissioner needs to follow administrative law principles such as not fettering the discretion or taking into account irrelevant considerations. (c) The Commissioner must have regard to the subject matter, scope and purpose of section 105-65. As explained in paragraph 127 of this Ruling, it clear from the scope and purpose that section 105-65 is designed to prevent windfall gains to suppliers and to maintain the inherent symmetry in the GST system and is based on the underlying design feature and presumption of the GST system that the cost of the GST is ultimately borne by the non registered end consumer. (d) The discretion should be exercised where it is fair and reasonable to do so and must not be exercised arbitrarily. The circumstances in which the Commissioner considers it may be fair and reasonable to exercise the discretion include, but are not limited to, the following: 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. (e) The discretion would generally not be exercised where it produces an unreasonable result, for example an asymmetrical revenue outcome. This could occur where, for example, a supplier reimburses a registered recipient for the overpaid GST but the Commissioner is unable to reclaim the overclaimed input tax credit from the recipient. 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 as follows: …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 exercising the discretion to determine who has borne the burden of the GST. That is, whether a supplier has passed on the GST to the recipient. | Detailed Reasoning - The burden of GST: In answering this question, the Commissioner takes into consideration the factors outlined in paragraphs 9-12 of Avon Products Pty Ltd v Commissioner of Taxation (2006) HCA 29 (Avon). It is considered that the guidance provided by the Avon case 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. Those paragraphs are reproduced as follows: 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. It is the profit-making motive of business which, in the nature of things, generally results in sales tax being passed on. This is because, leaving aside rare cases where sales tax is separately identified and superadded to the invoice price after sale, sales tax can only be passed on indirectly through the price mechanism. In a profit-making structure, businesses will set prices so as to ensure at least that all foreseeable costs are recovered, anything above this being conceptualised as a margin of profit. Because sales tax is levied upon the vendor prior to the ultimate sale by retail in the manner explained by Dixon J in Ellis & Clark[, 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. 10. As has been explained, it is for the taxpayer to establish a circumstance out of the ordinary, namely that the amount of the overpayment of sales tax has not been passed on. Where the whole or part of the economic burden of sales tax may have been passed on indirectly through prices, the inquiry in this regard is likely to be complex. The complexity arises because prices may be set with reference to a wide range of factors (including considerations of cost of production, competitive advantage, operational cash flow and customer goodwill). However the starting point must be the seller's pricing policy and practice. 11. In this way, the question is to be approached with reference to the actual conduct of the seller in setting prices based upon its actual knowledge at the relevant time. That knowledge includes the belief that the component of sales tax which later proves to have been an overpayment is a real cost of doing business. Accordingly, it is unsurprising that a seller's intention, whether subjective or objectively ascertained, will generally be to pass the burden of the impost on to the purchaser. Since the onus of proof lies upon the taxpayer, it will be for it to establish that a price which is set so as to ensure that it recovers its cost does not include the economic burden of the sales tax. 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 consequence that proof to the contrary will occur comparatively seldom. …. But, given what has been said above, realism requires a recognition that in the ordinary course sales tax will have been passed on. 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. The case must be assessed on its merits to determine if the GST has been passed on to the recipient. You submit that the amount payable for supplies of marketing and business development services, negotiated between you and the non-resident entity, were exclusive of "…all applicable sales, use and other taxes." in accordance with the agreement. Consequently it was understood by the non-resident entity that it would not be required to pay for any items constituting "sales, use and other taxes" and these terms were intended to cover such taxes on sales or usage and any other similar imposts. You have submitted that: · The non-resident entity does not consider any GST cost to have been passed on to it by you. · The non-resident entity was of the understanding that the fees did not include GST and it was not initially aware that you were remitting GST to us. · The non-resident entity will not be seeking a refund of the overpaid GST from you (in the event a refund is paid by the Commissioner). · As the non-resident entity is not registered for GST, it has not claimed any input tax credits in relation to the services supplied to it by you. · The non-resident entity will not be seeking to renegotiate/reduce the fees for the services to be provided by you moving forward (if the Commissioner confirms that the services are GST-free). It is considered: · that the agreement between you and the non-resident entity was drafted overseas and was silent on Australian GST (or any express reference to GST). · that the price agreed to, in accordance with the agreement, was not clear as to whether GST was considered. · that you believed the fees payable by the non-resident entity were not intended to be subject to GST. We do not agree that clause xx of the agreement is conclusive evidence that GST has not been passed on to the non-resident entity. We consider the clause to mean that any Australian …" sales, use and other taxes" are your responsibility and any tax paid by you will not be recovered from the non-resident entity. Further we also do not consider that the copies of invoices submitted, showing no GST included in the fees payable by the non-resident entity, to be conclusive evidence that GST was not passed on to the non-resident entity. There is no conclusive evidence, from all of the facts and circumstances submitted in relation to this issue, that GST was not passed on to the non-resident entity. However, all of the evidence and circumstances in relation to the tax agent's dealings with us support your actions in paying the GST and, on balance, support the view that the fees paid by the non-resident entity were considered by both parties to be GST exclusive in this particular case. We accept that, in this particular case and from all of the facts and circumstances as submitted, the non-resident entity has not borne the burden of the GST, that is, you have not passed on the GST to the non-resident entity. It is reasonable to conclude in the circumstances, and on balance, that the agreed price for the marketing and business development services between you and the non-resident entity did not include a GST component. In the circumstances the Commissioner will exercise his discretion under section 105-65 of Schedule 1 to the TAA to refund any incorrectly remitted GST by you for supplies of marketing and business development services to the non-resident entity during the tax periods in question. All public rulings and/or publications referred to in this ruling are available at the Tax Office website at www.ato.gov.au .

Question 1: Is the supply of marketing and business development services by an Australian entity (you) to a non-resident entity GST-free under section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | Answer 1: Yes, the supply of marketing and business development services made and provided to a non-resident entity outside Australia is GST-free under section 38-190 of the GST Act.