Private ruling: GST and the supply of sub-contracted services to a non-resident
Date of advice: 21 February 2017
Published: August 2017

Ruling: Q1: Is the supply by Entity A to Entity B GST-free under subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Yes. The supply is GST-free under item 2 of subsection 38-190(1) of the GST Act and subsection 38-190(3) does not apply.

Relevant facts and circumstances: Entity A and Entity B are both incorporated outside of Australia. Entity A is not registered for GST and does not have its central management and control in Australia, nor have its voting power controlled by shareholders who are residents of Australia. Entity B is registered for GST but does not have its central management and control in Australia, nor have its voting power controlled by shareholders who are residents of Australia. Entity A entered into a contract with Entity B project operating in Australia (the Contract). Entity C, is incorporated outside of Australia and has a branch in Australia. Entity C is registered for GST. To fulfil its obligations to Entity B under the contract, Entity A subcontracted a portion of the Australian component of the works to Entity C. The balance of the Australian component of the works is performed by Entity A itself. Under the contract Entity A prepares and provides information, procedures and training materials (the Deliverables) and consulting services to Entity B outside of Australia. To fulfil its obligations to Entity B under this service order, Entity A operates a team of people outside of Australia. Entity A prepares the Deliverables by gathering on-site data in relation to operational safety risks and procedures through: ● the subcontract arrangement between Entity A and Entity C; and ● Entity A employees that are sent from outside of Australia to Australia from time to time, given the highly specialised nature of the works required by Entity B. At all times, the data collected by the Entity C and Entity A employees is repatriated to Entity A outside of Australia where it is analysed and interrogated to prepare the Deliverables. This is a complicated process in which the Deliverables are constantly being refined as existing processes are modified and/or new processes are developed and adopted. In these circumstances, Entity A prepares and directly provides the Deliverables to Entity B outside of Australia. Entity B instructs both Entity A and Entity C employees on a daily basis. Entity A does not engage in any operational management of the employees or exercise control over the tasks performed by Entity C. The Deliverables are customised to Entity B's needs for its internal use, rather than for the benefit of distributing the Deliverables to an external third party. For the avoidance of doubt, Entity A and Entity B do not physically perform work on the equipment in Australia at any time.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 38-190.

Reasons for decision: Summary: There are no provisions in the GST Act that would result in the supplies being input taxed but consideration needs to be given to whether the supplies are GST-free under section 38-190 of the GST Act. GST-free Section 38-190 of the GST Act provides that certain supplies of things other than goods or real property, for consumption outside of Australia are GST-free. The supply of services made by Entity A to Entity B is neither a supply of goods nor a supply of real property therefore, item 2 in the table in subsection 38-190(1) of the GST Act (Item 2) is relevant. Item 2 provides that a supply of a thing (other than goods or real property) made to a non-resident is GST-free if it is a supply that is made to a non-resident that is not in Australia when the thing supplied is done, and: 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 for GST. The requirement that the non-resident in item 2 is not in Australia when the thing supplied is done is a requirement that the non-resident is not in Australia in relation to the supply when the thing supplied is done. Section 195-1 of the GST Act provides that for GST purposes 'non-resident' means an entity that is not an Australian resident and 'Australian resident' means a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936). Accordingly, a supply that is made to an entity is a supply to a non-resident for GST purposes if the entity is not a resident of Australia for income tax purposes. Subsection 6(1) of ITAA 1936 provides that a company is a resident of Australia for income tax purposes if: ● the company is incorporated in Australia, or ● if not incorporated in Australia, it carries on business in Australia and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia. In this circumstance, neither Entity A or Entity B has its central management and control in Australia, nor does either of them have their voting power controlled by shareholders who are residents of Australia. Therefore, both Entity A and Entity B are non-residents for GST purposes. Not in Australia For the supply of the services to be covered under Item 2, there is a precondition that the non-resident must not be in Australia in relation to the supply when the supply is performed/provided. Goods and Services Tax Ruling GSTR 2004/7 discusses when an entity is considered not to be in Australia when the thing supplied is done. Paragraphs 37 to 41 of GSTR 2004/7 explain when a non-resident company is in Australia. These paragraphs state: 37. A non-resident company is in Australia if that company carries on business (or in the case of a company that does not carry on business, carries on its activities) in Australia: (a) at or through a fixed and definite place of its own for a sufficiently substantial period of time; or (b) through an agent at a fixed and definite place for a sufficiently substantial period of time. 38. We consider that it would be reasonable for a supplier to conclude that a non-resident company is in Australia if: ● the company is registered with ASIC; or ● the company has a permanent establishment in Australia for income tax purposes. 39. However, a non-resident company to which the supplier makes a supply may be able to demonstrate to the supplier that, even though it is registered with ASIC or has a permanent establishment, on application of the test (at paragraph 37) to its particular circumstances, the non-resident company is not in Australia. 40. Suppliers should be aware that even if a company is not registered with ASIC, it may still be in Australia on an application of the test (at paragraph 37). Similarly, even if a company does not have a permanent establishment in Australia for income tax purposes, it may still be in Australia on application of the test to its particular circumstances. 41. A non-resident company is in Australia in relation to the supply if the supply is solely or partly for the purposes of the Australian presence, for example, its Australian branch. If the supply is not for the purposes of the Australian presence but that Australian presence is involved in the supply, the company is in Australia in relation to the supply, except where the only involvement is minor. Entity A's supply to Entity B is not done when Entity A is in Australia in relation to the supply and neither is it a supply of work physically performed on goods situated in Australia nor a supply directly connected with real property situated in Australia. Therefore, the supply will satisfy paragraph (a) of item 2 in the table in subsection 38-190(1) of the GST Act. Having met the requirements of paragraph (a) of Item 2, it is necessary to consider whether subsection 38-190(3) of the GST Act limits the scope of Item 2. From the information received subsection 38-190(3) of the GST Act is not applicable to the supply of services because Entity A is not required to provide the services to another entity in Australia and therefore the supply will be GST-free under Item 2.