Edited version of your written advice

Authorisation Number: 1012867270228

Ruling

Subject: GST and commission agreement

Question 1

Is the supply of services by OzCo to XCo, an overseas company partly GST-free under item in the table in subsection 38-190( 1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) and partly taxable under subsection 38-190(3) of the GST Act?

Answer

Yes.

Relevant facts and circumstances

OzCo is a company incorporated in Australia which has been registered for GST since 1 July 2006.

Agreement between OzCo and XCo:

Licence Agreement:

OzCo entered into an Agreement with XCo.

XCo is a company incorporated outside Australia which does not have a fixed place or business or other presence in Australia. XCo provides scouting and promotional services to students (Prospects) to assist those Prospects to obtain scholarships with overseas colleges.

The Agreement states that XCo appoints OzCo to supply the Services in the Marketing Area during the term of the Agreement in consideration of a one-off payment made by OzCo to XCo although OzCo holds no exclusive rights to the Marketing Area and XCo can appoint another supplier to supply the Services in the Marketing Area if OzCo does not meet a quota of a minimum number of Prospect sales annually.

The Agreement states that OzCo agrees to supply the Services to XCo in the Marketing Area in for the commission fee and that XCo authorises OzCo to enter into Promotional Contracts (PC) with Prospects and their parents or guardians (Guardians) on XCo's behalf in which XCo contracts to expose the Prospects to overseas colleges in return for a fee, although OzCo is not authorised to enter into PCs in OzCo's own right, and the parties acknowledged that OzCo is acting as an independent agent in entering into PCs with Prospects and Guardians on XCo's behalf and on the basis that XCo has no presence in the Marketing Area.

The Agreement also authorises OzCo to collect payments from Prospects/Guardians on XCo's behalf and sets out the commission which XCo agrees to pay OzCo.

The Agreement sets out XCo's obligations. XCo is obliged to maintain an interactive website so that OzCo may post links of Prospects and track the monitoring of Prospects by overseas colleges, implement programs to connect Prospects to those colleges, provide ongoing consultation and assistance to OzCo, provide national advertising and exposure, conduct a free training program, and provide OzCo with copies of XCo's confidential operations manual.

The Agreement states that OzCo may operate OzCo's business in any manner OzCo deems appropriate and consistent with OzCo's obligations under the Agreement and that OzCo enters into the Agreement at OzCo's own risk. The Agreement also states:

Relationship of the parties

In all matters pertaining to the operation of the Business, OzCo is and shall be an independent contractor operating an independent business… OzCo does not have, and shall not hold itself out as having, any right, power or authority to create any contract or obligation, either express or implied, on behalf of, or in the name of or binding upon XCo with the exception of current and future authorised and approved Prospect Agreements between XCo and the Prospect.

Sample PC between XCo and a Prospect and Guardian:

The PC states that OzCo enters into the PC 'for itself and for XCo', that OzCo is the authorised licensee of XCo, and that the services outlined in the PC will be provided by XCo and OzCo will guarantee performance to the Prospect and the Guardian.

The PC outlines the services to be provided by XCo (i.e. provided by XCo and in respect of which OzCo guarantees performance to the Prospect and the Guardian) as follows:

• Supply a communicator to maintain personal telephone contact with overseas colleges;

• Design a colour brochure about the Prospect;

• Contact all colleges each month, giving the Prospect's personal data file and website link;

• Edit and produce a master evaluation video demonstrating the Prospect's abilities using raw footage provided by the Prospect;

• Use XCo's direct college mailing service to provide a comprehensive Prospect pack (i.e. video, brochure and covering letter) to colleges;

• Promote the Prospect to the Prospect's preferred colleges;

• Produce a personal website for the Prospect;

• Encode the Prospect's personal video and place it on a server with high speed, wide band transfer capabilities so that colleges can view it;

• Send the Prospect's website to colleges each month;

• Maintain the Prospect's personal profile on XCo's website;

• Where the Prospect meets criteria requested by a college, provide the Prospect's profile, data file and a web-link to the Prospect's video to that college;

• Provide a special, unpublished email address to the Prospect to be used exclusively by colleges;

• Provide expert advice and assistance;

• Manage contact with colleges, review scholarships and offers, assist Prospect with college decision-making and application forms;

• Assist Prospects with submitting information for International Student Visas;

• Provide registration information and advice to Prospects;

• Provide SMS notifications to Prospects about interested colleges; and

• Ensure that itinerary and travel plans are prepared in advance and in accordance with future college acceptance.

The PC sets out the total cost of the services provided by XCo and states that the obligation to pay XCo must be discharged by paying OzCo on the dates specified in the attached payment options form.

Additional information provided in the ruling request:

The ruling request described a process that begins with OzCo identifying a Prospect and concludes with the Prospect being recruited to a college. It was stated that the activities undertaken by OzCo in relation to that process comprised:

• Organising and conducting trials for potential Prospects;

• Conducting interviews, identifying Prospects, executing PCs on XCo's behalf, and collecting payments from Prospects;

• Editing video footage supplied by Prospects which is then uploaded to an overseas hosting service with links that are posted on XCo's website;

• Responding to queries from Prospects;

• Communicating with colleges about Prospects;

• Assisting Prospects with visas for travel; and

• Providing Prospects with a client pack that helps Prospects use XCo's website and provides tips on how to be recruited by colleges.

It was stated that the activities undertaken by XCo in relation to that process comprised:

• Providing proprietary processes and systems (i.e. XCo's website and technology for creating individual profiles for Prospects and allowing Prospects to update their profiles directly on the website) for exposing Prospects to colleges;

• Conducting trade shows and conventions annually promoting Australian Prospects;

• Buying the data that gives Prospects access to colleges, thereby facilitating two-way communication with colleges;

• Issuing monthly e-mails promoting Prospects to colleges;

• Providing a toll-free telephone service to allow colleges to contact XCo about Prospects; and

• Providing technical support for OzCo's e-mail server, including full website support and an e-mail address.

Submissions made in the ruling request:

It was submitted that the supply made by OzCo in consideration for the payment received from XCo pursuant to the CA was GST-free pursuant to Item 2(a) or 2(b) in subsection 38-190(1) of the GST Act.

In relation to the requirement in Item 2 that the supply is made to a non-resident who is not in Australia 'when the thing supplied is done', reference was made to paragraph 199 in Goods and Services Tax Ruling GSTR 2004/7 (GSTR 2004/7) which states that if the thing supplied is a service when the service is done refers to the period of time during which the service is performed and if the supply is the provision of advice or information when that is done includes the period of time during which the advice is prepared.

It was submitted that XCo is a 'non-resident' because XCo is incorporated offshore and XCo's central management and control is located offshore and that XCo is not 'in Australia' in relation to the supply made by OzCo because XCo is not registered with ASIC; XCo does not have a permanent establishment in Australia for income tax purposes; XCo does not have ownership interests in other entities as a result of which it could be said that XCo has a presence in Australia; OzCo is authorised to enter into contracts with Prospects on XCo's behalf as an independent contractor with no general authority to bind XCo; and OzCo's guarantee of XCo's obligations is inconsistent with OzCo being a dependent agent of XCo as it would be customary for the principal to guarantee the agent's obligations.

It was submitted that paragraph (a) of Item 2 is satisfied as OzCo's services are neither a supply of work physically performed on goods situated in Australia nor a supply directly connected with real property situated in Australia. Reference was made to Goods and Services Tax Ruling GSTR 2003/7 (GSTR 2003/7).

It was submitted in the alternative that paragraph (b) of Item 2(b) is satisfied, i.e. that XCo acquires the supply made by OzCo in carrying on XCo's enterprise but XCo is neither registered for GST nor required to be so registered.

The submissions then addressed subsection 38-190(3) of the GST Act, i.e. whether the supply made by OzCo is a supply under an agreement entered into with a non-resident which is provided, or the agreement requires it to be provided, to another entity in Australia. It was submitted that subsection 38-190(3) does not apply.

Further information provided:

In response to a request from the ATO it was stated that OzCo carries on OzCo's own business and that at the time OzCo commenced business it was not pre-determined that OzCo would have a relationship with XCo. It was acknowledged that XCo had become OzCo's main client, but OzCo was not precluded from acting for other clients and OzCo actively pursues other clients.

The ATO also asked OzCo to address the factors listed in paragraph 281 of GSTR 2004/7 for determining whether a non-resident company (i.e. XCo) is 'in Australia' for the purposes of item 2 in subsection 38-190(1) as a result of carrying on business in Australia through an agent (i.e. OzCo). OzCo's responses are referred to in the Reasons for Decision (below)

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 section 188-10

A New Tax System (Goods and Services Tax) Act 1999 section 188-20

Income tax Assessment Act 1936 section 6

Corporations Act 2001

Reasons for decision

Summary

The supply of services by OzCo to XCo is partly GST-free under item 2 in the table in subsection 38-190(1) of the GST Act partly taxable under subsection 38-190(3) of the GST Act.

Detailed reasoning

Item 2 subsection 38-190(1)

GST is payable on a taxable supply. Section 9-5 of the 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.

The supply made by OzCo to XCo pursuant to the Agreement satisfies the requirements in section 9-5 of the GST Act and will be taxable except to the extent that that supply is GST-free or input taxed.

Paragraph 9-30(1)(a) of the GST Act states that a supply is GST-free if it is GST-free under Division 38 of the GST Act or under a provision of another Act. Division 38 of the GST Act includes section 38-190 which deals with supplies of things, other than goods or real property, for consumption outside Australia. Subsection 38-190(1) states:

The third column of this table sets out supplies that are GST-free (except to the extent that they are supplies of goods or real property):

Item 2 in the table in subsection 38-190(1) (Item 2) states:

Is XCo a non-resident?

XCo is incorporated offshore and it was stated in the ruling request that XCo has its central management and control offshore. On that basis we accept that XCo is a 'non-resident' for GST purposes.

Is XCo in Australia?

The Ruling section of GSTR 2004/7, which deals with the application of Item 2, states:

31. The requirement that the non-resident in item 2, or the recipient in item 3, is not in Australia when the thing supplied is done is a requirement, in our view, that the non-resident or recipient is not in Australia in relation to the supply when the thing supplied is done.

…

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.

In relation to the test in paragraph 38 of GSTR 2004/7, it was stated in the ruling request that XCo is not registered with ASIC because XCo does not carry on business in Australia within the meaning of the Corporations Act 2001.

The first limb of the test in paragraph 37 of GSTR 2004/7 (i.e. whether the non-resident company carries on business or activities in Australia at or through a fixed and definite place of its own for a sufficiently substantial period of time) adopts the language of paragraph 1 of Article 5 (Permanent Establishment) in the OECD Model Tax Convention on Income and Capital (Condensed Version 2010) (2010 Model Tax Convention), i.e. a fixed place of business through which the business of an enterprise is wholly or partly carried on. The Commentary on Article 5 of the 2010 Model Tax Convention states (Para 2) that 'a fixed place of business at or through which the business of an enterprise is wholly or partly carried on' requires the existence of a place of business which is established at a distinct place with a degree of permanence and the carrying on of the business of the enterprise through that fixed place, i.e. persons dependent on the enterprise conduct the enterprise's business in the State where that fixed place is situated.

The first two requirements (a distinct place with a degree of permanence) were endorsed in paragraph 9 of Taxation Ruling TR 2002/5 (TR 2002/5):

That place must have an element of permanence, both geographic and temporal.

It was stated in the ruling request that it was understood that XCo does not have a permanent establishment in Australia for income tax purposes.

We consider that the premises leased by OzCo satisfy the first two requirements, i.e. those premises amount to a place of business established at a distinct place with a degree of permanence. In relation to whether the business of XCo is carried on through the premises leased by OzCo, paragraph 18 of TR 2002/5 refers to the statement in paragraph 2 of the Commentary on Article 5 of the 2010 Model Tax Convention that this means usually that persons who, in one way or another, are dependent on XCo (personnel) conduct the business of XCo. The Commentary on Article 5 of the 2010 Model Tax Convention also indicates that it would be sufficient if XCo had a certain amount of space at its disposal at OzCo's premises which is used for XCo's business activities (Para 4.1) and that the presence of a XCo employee for a long period of time at OzCo's premises in order to ensure that OzCo complies with OzCo's obligations under the Agreement would result in XCo having a place of business at OzCo's office (Para 4.3).

Based on the information provided, this does not appear to be the case as the Agreement states that OzCo has an independent scouting and exposure business and desires to provide services to XCo, that during the term of the Agreement OzCo may operate OzCo's business in any manner OzCo deems appropriate and consistent with OzCo's obligations under the Agreement, and that OzCo shall independently do business under OzCo's own name or business name and may represent that OzCo provides services offered by XCo. In the further information provided it was stated that XCo is OzCo's main client but OzCo is not precluded from acting for other clients. In our view the terms of the Agreement and the further information provided indicate that OzCo's business (which includes the supply of services to XCo) is carried on at the premises leased by OzCo.

The second limb of the test in paragraph 37 of GSTR 2004/7 is whether a non-resident company carries on business or activities in Australia through an agent at a fixed place for a sufficiently substantial period of time. The first issue relevant to that test is whether OzCo is XCo's agent. Paragraph 11 in Goods and Services Tax Ruling GSTR 2000/37 (GSTR 2000/37) states:

For commercial law purposes, an agent is a person who is authorised, either expressly or impliedly, by a principal to act for that principal so as to create or affect legal relations between the principal and third parties.

Paragraph 28 of GSTR 2000/37 refers to a number of factors that may indicate an agency relationship, although no single factor (by itself) is determinative:

Any description of you as an agent, having authority to act for another party, in an agreement (expressed or implied) between you and the other party;

Any exercise of the authority that you are given to enter into legal relations with a third party;

Whether you bear any significant commercial risk;

Whether you act in your own name;

Whether you are remunerated for your services by way of commissions and whether you are entitled to keep any part of your remuneration secret from another party; and

Whether you decide the price of things that you might sell to third parties.

In relation to the first and second factors in paragraph 28 of GSTR 2000/37, the Agreement states that 'in all matters pertaining to the operation of the Business, OzCo is and shall be an independent contractor operating an independent business'. However the Agreement also states:

OzCo does not have, and shall not hold itself out as having, any right, power, or authority to create any contract or obligation, either express or implied, on behalf of, or in the name of or binding upon XCo with the exception of current and future authorised and approved PCs between XCo and the Prospect.

In addition, the PC states (in part):

OzCo enters into this Agreement for itself and for XCo. OzCo is the authorised licensee of XCo. The services outlined below…will be provided by XCo and OzCo will guarantee performance to the Prospect and the Guardian.

The provisions of the Agreement and PC set out above indicate that OzCo is described as an 'authorised licensee' rather than an agent but OzCo is authorised by XCo to create or affect legal relations between XCo and Prospects and Guardians located in the Marketing Area to the extent of entering into PCs on XCo's behalf. The further information provided by OzCo confirmed that OzCo does not require authorisation from XCo before entering into a PC on XCo's behalf. We consider that OzCo's authority to create legal relations between XCo and a Guardian without prior authorisation from XCo indicates that OzCo is XCo's agent.

The third factor in paragraph 28 of GSTR 2000/37 is whether an entity bears any commercial risk. We understand this to mean that an entity that bears little commercial risk is more likely to be an agent. Under the Agreement OzCo bears significant commercial risk because OzCo pays an upfront fee in order to be appointed in respect of the Marketing Area and XCo is merely obliged to pay OzCo a commission fee equal to the amount paid by a Prospect or Guardian less a percentage. In addition OzCo runs the risk of XCo appointing another entity to supply services in the Marketing Area if OzCo signs up less than a stipulated number Prospects in any year. The Agreement states that XCo makes no guarantee of earnings and that OzCo enters into the Agreement at OzCo's own risk for any and all losses which OzCo may incur. Based on these provisions we consider that OzCo bears significant commercial risk which indicates that OzCo is not XCo's agent.

The fourth factor in paragraph 28 of GSTR 2000/37 is whether the relevant entity acts in its own name. We accept that OzCo acts in OzCo's own name which indicates that OzCo is not XCo's agent.

The fifth factor in paragraph 28 of GSTR 2000/37 is whether the entity is remunerated by commissions and whether the entity is entitled to keep any part of that remuneration secret from another party. As discussed above, the Agreement states that OzCo receives a 'commission fee' equal to the fee payable by the Prospect or Guardian under each PC less a stipulated percentage which is deducted and paid on to XCo and this arrangement is not disclosed to the Guardian. This indicates that OzCo is an agent.

The sixth factor in paragraph 28 of GSTR 2000/37 is whether the entity decides the price of things sold to third parties. Bowstead and Reynolds on Agency (2001) states (Para 1-032):

The distinction between agent and buyer for resale normally turns on whether the person concerned acts for himself to make such profit as he can, or is remunerated by pre-arranged commission. A supplier who himself fixes the resale price is likely to be a buyer for resale.

The price of the supply made to each Prospect under a PC is set by XCo and the PC states that the obligation to pay XCo is discharged by payment to OzCo. That indicates that OzCo is XCo's agent rather than a buyer for resale.

The ruling request referred to the fact that OzCo guarantees XCo's obligations under the PC (rather than the reverse) not being a feature of an arrangement in which OzCo was a dependent agent. We do not consider that guarantee to be a significant factor as any failure by XCo to perform XCo's obligations would be a breach of the Agreement and the Agreement states that XCo agrees to indemnify OzCo from and against any and all costs resulting directly or indirectly from or pertaining to XCo's beach of the Agreement.

Application of the first, second, fifth and sixth factors listed in paragraph 28 of GSTR 2000/37 indicates that OzCo is XCo's agent. However GSTR 2000/37 states that no single factor by itself is determinative and it is clear that OzCo bears a very significant commercial risk and acts in OzCo's name. We therefore consider it unlikely that OzCo is XCo's agent.

Even if OzCo was XCo's agent, we do not consider that XCo carries on XCo's business or activities through OzCo as required by paragraph 37 of GSTR 2004/7 in order for XCo to be 'in Australia'. The Explanation section of GSTR 2004/7 explains that test as follows:

278. The key issue in this kind of situation is whether the non-resident company is itself carrying on business in Australia through a duly appointed agent, or whether the business being conducted is the agent's own business, the non-resident company merely being one of its customers.

and adopts the test set out in Adams and Others v Cape Industries Plc [1991] 1 All ER 929 at 1009 (Adams) (Para 279):

…it may be possible to treat a foreign corporation as resident of this country so as to be amenable to the jurisdiction of our court even if it has no fixed place of business here of its own, provided that an agent, acting on its behalf carries on its business (as opposed to its own business) from some fixed place of business in this country.

GSTR 2004/7 then states that it is necessary to weigh up the following factors (as set out in Adams (p. 1014)) in order to determine whether a non-resident company carries on business in Australia through an agent (Para 281):

Was the fixed place of business from which the agent operates originally acquired for the purposes of enabling the agent to carry on the business of the non-resident company?

Does the non-resident company directly reimburse the agent for the cost of accommodation or staff at the fixed place of business?

Does the non-resident company make other contributions to the financing of the business carried on by the agent?

Is the agent remunerated by reference to transactions, for example, by commission, or by fixed regular payments or in some other way? Commission can be an indicator that the agent is carrying on its own business and not that of the non-resident. However, it is not determinative.

What degree of control does the non-resident company exercise over the running of the business conducted by the agent?

Does the agent reserve part of the agent's staff or accommodation for the conducting of business related to the non-resident company?

Does the agent display the name of the non-resident company at the agent's premises or on stationery and, if so, does it indicate that the agent is an agent of the non-resident company?

What business, if any, does the agent transact as principal exclusively on the agent's own behalf?

Does the agent make contracts with customers or other third parties in the name of the non-resident company or otherwise in such a manner so as to bind it?

If the agent does make contracts so as to bind the non-resident company, does the agent require specific authority in advance before binding that foreign company to contractual obligations?

In the further information provided on behalf of OzCo it was stated that:

OzCo commenced business in XXXX in the fields of talent identification and recruitment at premises leased by OzCo and that OzCo's relationship with XCo followed;

XCo does not reimburse OzCo for the costs of accommodation or staff or make other contributions (other than commissions) to the financing of OzCo's business;

XCo does not exercise control over the running of OzCo's business (and the Agreement states that OzCo may operate OzCo's business in any manner OzCo deems appropriate and consistent with OzCo's obligations under the Agreement);

OzCo does not reserve part of OzCo's staff or accommodation for conducting business related to XCo;

In relation to whether OzCo displays XCo's business name and if so, does OzCo indicate that OzCo is XCo's agent it was acknowledged that OzCo's website, premises and stationery adopted XCo's registered business name which is owned by an entity related to OzCo. However there was no reference to OzCo being XCo's agent; and

The Agreement permits OzCo, on behalf of XCo, to enter into PCs with Prospects and Guardians (but not with other persons) without obtaining specific authority from XCo in advance, although such specific authority would be required for other contacts.

Based on the further information provided, we consider that, even if OzCo was XCo's agent, OzCo carries on OzCo's own business and XCo is merely one of OzCo's customers. In reaching this conclusion we have considered the discussion in paragraphs 282 to 310 of GSTR 2004/7 concerning cases where the business of the non-resident company involves making contracts for sale, lease or similar (which we consider to be the case with XCo). That discussion contrasts Thames and Mersey Marine Insurance Company v Societa Di Navigazone A Vaporre Del Lloyd Austriaco [1914-15] All ER Rep 1104 with The Lalandia [1032] All ER Rep 391 and Saccharin Corporation ltd v Chemishe Fabrick von Heydon Aktiengessellschaft [1911] 2 KB 516 and concludes (paragraph 293):

The above three jurisdiction cases illustrate that regard must be had to other factors even if the agent has the requisite power to bind. That is, the power to bind the principal without seeking the company's prior approval, on a habitual basis for a sufficiently substantial period of time, is not an exclusive or conclusive test of presence in a foreign jurisdiction. Other factors such as those outlined at paragraph 281 must also be considered to determine whether the agent's fixed place of business is the non-resident's place of business.

For the reasons set out above we consider that XCo is not 'in Australia when the thing supplied is done' for the purposes if Item 2.

Is XCo 'in Australia' in relation to the supply made by OzCo?

Paragraph 184 of GSTR 2004/7 states:

As the Australian location of the entity to which the supply is made at the relevant time is a proxy test for identifying when consumption occurs in Australia, we consider that the expression 'not in Australia' should be interpreted in the context of the supply in question. The expression 'not in Australia' requires, in our view, that the non-resident or other recipient is not in Australia in relation to the supply. This means that a non-resident or other recipient of a supply may satisfy the 'not in Australia' requirement if that entity is in Australia but not in relation to the supply. We examine this more fully when considering the application of items 2 and 3 and paragraph (b) of item 4 to specific entity types in Part III.

As we are satisfied that XCo is 'not in Australia' we are also satisfied that XCo is 'not in Australia in relation to the supply made by OzCo.

Is paragraph (a) in Item 2 satisfied?

The first requirement in paragraph (a) in Item 2 is that the supply made by OzCo is not a supply of work physically performed on goods situated in Australia when the work is done. Paragraph 56 of Goods and Services Tax Ruling GSTR 2003/7 (GSTR 2003/7) explains that the reference to 'a supply of work physically performed on goods' was inserted into paragraph (a) of Item 2 in order to narrow the scope of the exception to the GST-free status of the relevant supply:

The Indirect Tax Legislation Amendment Act 2000 amended items 2 and 3, changing the words 'a supply directly connected with goods' to 'a supply of work physically performed on goods'. The Explanatory Memorandum for the amending Bill indicates that the amendment was made to 'allow a wider range of services to be GST-free'. This has been achieved by narrowing the scope of the exception to the GST-free status provided by item 2 paragraph (a) and item 3

Paragraphs 58 and 59 of GSTR 2003/7 provide examples of supplies which are or are not 'work physically performed on goods situated in Australia':

A supply is a supply of work physically performed on goods where something is done deliberately to the goods to change them or to otherwise affect them in some physical way. The repair of goods is an example of work that is physically performed on goods.

In contrast, where activities do not change or affect goods in a physical way, there is no supply of work physically performed on goods. For example, a supply of transporting goods is not work physically performed on goods because the supply only changes the location of the goods, not the goods themselves.

It was submitted in the ruling request that the supply of services by OzCo is not 'work physically performed on goods situated in Australia' because those supplies have no physical intervention on goods situated in Australia. We agree with that submission.

The second requirement in paragraph (a) in Item 2 is that the relevant supply is not a supply 'directly connected with real property situated in Australia'. Paragraphs 21 and 22 of GSTR 2003/7 explain the use of 'directly' in the phrase 'directly connected with real property situated in Australia':

Under items 1, 2 and 3 it is only where the connection between the supply and the goods or real property is a direct one that the location of goods or real property is regarded as the place where consumption occurs. The addition of the adverb 'directly' to the phrase 'connected with' implies a more emphatic connection between the supply and goods or real property. The inference is that the supply is so closely aligned with goods or real property that it is appropriate to treat the location of the goods or real property as the place where consumption occurs.

We consider, therefore, that the expression 'directly connected with' contemplates a very close link or association between the supply and goods or real property. (This is discussed further at paragraphs 113 to 134 of the Explanations section of the Ruling.)

Paragraph 33 of GSTR 2003/7 states that a supply is directly connected with real property if that supply changes or affects the real property in a physical way or involves a physical interaction with real property. In our view the supplies made by OzCo do not fall within the examples in paragraph 33 of GSTR 2003/7 and are not 'directly connected with real property situated in Australia'.

For the reasons set out above we consider that paragraph (a) in Item 2 is satisfied.

Is paragraph (b) of Item 2 satisfied?

Paragraph (b) of Item 2 requires that the thing supplied by OzCo is acquired by the non-resident (i.e. XCo) in carrying on the non-resident's enterprise but the non-resident is not registered for GST or required to be registered for GST.

We have already set out above the reasons why we consider that XCo is a 'non-resident' as defined in section 195-1 of the GST Act. We have confirmed that XCo is not registered for GST.

Section 23-5 of the GST Act states that an entity is required to be registered for GST if that entity is carrying on an enterprise and the entity's GST turnover meets the registration turnover threshold (currently $75,000). Paragraph 188-10(1)(a) of the GST Act states that an entity has a GST turnover that meets a turnover threshold if that entity's 'current turnover' is at or above the turnover threshold and the Commissioner is not satisfied that the entity's 'projected turnover' is below the turnover threshold. Paragraph 188-10(b) states that an entity has a turnover that meets a particular turnover threshold if that entity's 'projected turnover' is at or above the turnover threshold. Section 188-20 defines 'projected turnover' and paragraph 188-20(3)(a) states that in working out an entity's 'projected turnover' disregard any supply that is not connected with Australia.

Subsection 9-25(5) of the GST Act states that a supply of anything other than goods or real property is connected with Australia if either the thing is done in Australia, the supplier makes the supply through an enterprise that the supplier carries on in Australia, or the thing is a right or option to acquire another thing and the supply of that other thing would be connected with Australia (e.g. a holiday package for Australia that is supplied overseas).

In relation to the 'thing is done in Australia' test in paragraph 9-25(5)(a), we consider that XCo supplies a service. Paragraph 65 of Goods and Services Tax Ruling GSTR 2000/31 (GSTR 2000/31) states:

If the 'thing' being supplied is a service, the supply of that service is typically done where the service is performed. If the service is performed in Australia, the service is done in Australia and the supply of that service is connected with Australia under paragraph 9-25(5)(a). This is the case even if the recipient of the supply is outside Australia.

and the Explanation section of GSTR 2000/31 includes the following examples:

Example 24 - Services done in Australia

184. Account Co, an accounting firm with offices in Melbourne and Sydney, supplies accounting and taxation services. The supply of any accounting and taxation services, which are performed in Australia, is connected with Australia.

Example 25 - Services not done in Australia

185. If, in Example 24, an employee of Account Co flies to London and performs taxation services in that country, the supply of those services is not connected with Australia under paragraph 9-25(5)(a) because the services are not performed in Australia. It would still be necessary to consider whether the supply of that service is connected with Australia under paragraph 9-25(5)(b) - (refer to paragraphs 213 to 224 below).

Based on the analysis of activities undertaken by XCo in the ruling request (i.e. providing the website and technological applications to create, update and search individual profiles, conducting trade shows (presumably overseas), purchasing the data that gives Prospects access to overseas colleges, sending monthly e-mails to overseas colleges, providing toll-free line for overseas colleges to contact XCo and providing technical support for OzCo's email server) we consider that the services supplied by XCo are 'not done in Australia'.

Paragraph 9-25(5)(b) of the GST Act states that a supply of anything other than goods or real property is connected with Australia if the supplier makes that supply through an enterprise that the supplier carries on in Australia. Subsection 9-25(6) of the GST Act states that an enterprise is carried on in Australia if the enterprise is carried on through a permanent establishment (as defined in subsection 6(1) of the Income Tax Assessment Act 1936 or a place that would be such a permanent establishment if paragraph (e), (f) or (g) of that definition did not apply. The 'permanent establishment' definition (as modified) refers to a place at or through which a person carries on any business and includes a place where a person is carrying on business through an agent. In relation to the issue of whether XCo is 'not in Australia' for the purposes of Item 2 we have already set out above the reasons why we consider that XCo does not carry on business in Australia at or through a place of XCo's own or through an agent. We therefore consider that XCo does not make supplies that are connected with Australia pursuant to paragraph 9-25(5)(b).

We do not consider that XCo makes a supply of a thing that is 'a right or option to acquire another thing' within the meaning of sub-paragraph 9-25(5)(c).

For the reasons set out above we do not consider that XCo makes supplies that are connected with Australia. Consequently XCo does not have a projected turnover that meets the GST registration turnover threshold, XCo is not required to register for GST, and XCo satisfies the requirements of paragraph (b) in Item 2.

Subsection 38-190(3)

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.

A supply covered by Item 2:

Paragraph 40 of Goods and Services Tax Ruling GSTR 2005/6 (GSTR 2005/6) states that if a supply satisfies the requirements of Item 2 and is therefore GST-free, that supply is covered by Item 2. For the reasons set out in Question 1 we consider that supplies made by OzCo under the Agreement are covered by Item 2.

Paragraph 38-190(3)(a) of the GST Act

GSTR 2005/6 discusses the application and scope of subsection 38-190(3). In relation to paragraph (a) of subsection 38-190(3), GSTR 2005/6 states:

41. This paragraph states that it is:

a supply under an agreement entered into, whether directly or indirectly, with a non-resident.

42. 'It' refers to the supply covered by item 2. The supply covered by item 2 must be under an agreement entered into, either directly or indirectly, with a non-resident.

43. The agreement may be either a written, oral or an implied agreement.

44. The agreement is entered into directly with a non-resident if the parties to the agreement are the non-resident and the supplier.

We consider that the supplies made by OzCo under the Agreement satisfy the requirements of paragraph 38-190(3)(a) as those supplies are made pursuant to a written agreement (i.e. the Agreement) entered into by OzCo directly with a non-resident (XCo). In the Reasons for Decision in relation to Question 1 we set out the reasons why we consider that XCo is a 'non-resident'.

Paragraph 38-190(3)(b) of the GST Act:

In relation to whether the supply is provided to, or the agreement requires it to be provided, to another entity for the purposes of paragraph 38-190(3)(b) of the GST Act, paragraphs 51 to 53 of GSTR 2005/6 state:

51. To work out whether a supply covered by item 2 is provided (or is required to be provided) to another entity in Australia, (that is, whether the requirements of paragraph 38-190(3)(b) are satisfied), we follow a two-step approach.

52. We first work out whether a supply covered by item 2 is provided to another entity. We examine this at paragraphs 66 to 82.

53. Secondly, if the supply covered by item 2 is provided to another entity, we determine whether, when the thing supplied is done, that supply is provided to that other entity in Australia. We examine this at paragraphs 83 to 121.

Does the agreement require the supply to be provided to another entity?

Paragraph 59 of GSTR 2005/6 explains that the word 'provided' is used in subsection 38-190(3) to contrast with the word 'made' in Item 2 and that 'provided' indicates that if a non-resident contracts for a supply to be provided to another entity, the place of consumption should be determined with regard to the entity to which the supply is provided, not the entity to which the supply is made.

Paragraphs 61 and 65 of GSTR 2005/6 state:

61. Thus the expression 'provided to another entity' means, in our view, that in the performance of a service (or in the doing of something), the actual flow of that supply is, in whole or part, to an entity that is not the non-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.

65. We consider that an agreement requires that a supply be provided to another entity in Australia if it is an express or implied term of the agreement that the supply is to be provided to another entity in Australia.

We do not consider that the agreement requires the supply to be provided to another entity because the express terms of the Agreement require OzCo to supply the 'Services' to XCo. The Agreement states:

OzCo desires to provide services to XCo associated with exposing…students to colleges …through XCo ('Prospects') in consideration for a commission from XCo, in accordance with the terms and conditions contained in this Agreement.

and:

Subject to the terms and conditions of this Agreement, OzCo agrees to supply the Services to XCo in the Marketing Area for the commission fee as described in…this Agreement.

Is the supply provided to another entity?

However, we consider that the alternative requirement in paragraph 38-190(3)(b) of the GST Act is satisfied, i.e. the supply is provided to another entity. The Agreement also states:

In appointing OzCo to supply the Services in the Marketing Area, XCo authorises OzCo to enter into contracts with Prospects, on behalf of XCo, in which XCo contracts to expose the Prospects to colleges…for the payment of a fee. XCo does not authorise OzCo to enter into contracts with the Prospects in its own right. The parties acknowledge that OzCo is acting as an independent agent in entering contracts with prospects on behalf of XCo and on the basis that XCo has no presence in the Marketing Area.

Notwithstanding that the Agreement states that OzCo is not authorised to enter into contracts with Prospects in OzCo's own right, the PC states that OzCo 'enters into this Agreement for itself and for' XCo and goes on to state:

The services outlined below…will be provided by XCo and OzCo will guarantee performance to the Prospect and the Guardian. Unless expressly provided or the context otherwise requires, references in this Agreement to 'XCo' are to be taken to be references to XCo as the provider and OzCo as the guarantor.

The Agreement also states that XCo has no presence in the Marketing Area.

Thus the Agreement authorises OzCo to enter into PCs with Prospects, the PC states that OzCo enters into the PC 'for itself' and on behalf of XCo and that OzCo guarantees to the Prospect and the Guardian the performance of the services listed in the PC. Given the acknowledgement in the Agreement that XCo has no presence in the Marketing Area, OzCo is obliged to (and does) supply to the Prospects those services listed in the PC which can only be performed in the Marketing Area. We therefore consider that OzCo provides to the Prospects the following services referred to in the PC:

XCo's Prospects receive unique management through personalised communication and software;

Using raw video footage furnished by the Prospect, XCo will edit and produce a top-quality master evaluation video demonstrating the Prospect's abilities;

XCo will encode the Prospect's personal video and place it on a dedicated server;

XCo shall maintain daily management of interested colleges; and

XCo will provide assistance to the Prospect pertaining to the submission of information for an International Student Visa.

This was acknowledged to be the case in the ruling request which stated that the activities undertaken by OzCo include editing video footage supplied by Prospects which are then uploaded to an overseas hosting service with links posted on XCo's website, responding to queries from Prospects about the process and their exposure to overseas colleges, communicating with colleges about Prospects, assisting Prospects with visas for travel overseas, and providing a 'client pack' to Prospects that helps them to use XCo's website and provides tips on how to be recruited by an overseas college. To the extent that any Prospect is physically located in Australia when OzCo performs these services paragraph 38-190(3)(b) is satisfied.

Character of the supplies:

Paragraph 66 of GSTR 2005/6 states that before it can be determined whether a supply is provided to another entity it is essential that the supply is properly characterised and paragraph 74 states that in some cases it is inherent in the nature of the supply that the supply is provided to another entity, for example travel services are by their nature provided to the individual that travels. Paragraph 262 of GSTR 2005/6 refers to the example in the Supplementary Explanatory Memorandum to the A New Tax System (Indirect Tax and Consequential Amendments) Bill (No. 2) 1999 of a school in Australia which provides tuition to overseas students in Australia and bills the overseas parents of those students directly. Paragraph 262 states that although certain rights are supplied to the parents, the essential character of the supply is one of services which comprises teaching the students, a supply which is made to the parents but provided to the students.

We consider that the essential character of the supplies made by OzCo referred to above are supplies of services. We also consider that it is inherent in the nature of some of those supplies (e.g. responding to queries from Prospects or Guardians, providing assistance to the submission of information for an International Student Visa) that those supplies are provided to the Prospects or Guardians.

Are the supplies provided to another entity 'in Australia'?

In relation to whether those supplies are provided to another entity 'in Australia' for the purposes of paragraph 38-190(3)(b), paragraphs 90 and 92 of GSTR 2005/6 state that 'in Australia' is not simply a presence test and that that issue is resolved by determining whether provision is 'to that other entity in Australia'. Paragraph 242 of GSTR 2005/6 states that it is relevant to determine when provision of the supply occurs and paragraph 244 states that, in the case of a service, provision occurs during the period of time when the service is performed. Paragraph 252 of GSTR 2005/6 states:

We consider, therefore, that the requirement in paragraph 38-190(3)(b) that the supply covered by item 2 is provided to another entity in Australia requires that there is some connection between the provision of that supply and that entity's presence in Australia.

Given that the Marketing Area under the Agreement includes Australia, we understand that the some Prospects and Guardians are individuals resident in Australia. To the extent that OzCo provides the services to a Prospect or Guardian who is resident in Australia and physically in Australia when the service is performed then the service is provided to the Prospect 'in Australia' for the purposes of paragraph 38-190(3)(b). This is confirmed in paragraphs 337 to 339 of GSTR 2005/6:

337. If a supply is provided (or is required to be provided) to a resident individual who is physically in Australia when the thing supplied is done, the supply is provided to that individual in Australia.

338. This is consistent with the underlying presumption in item 3 (as it applies to resident individuals) that a supply is consumed by a resident individual in Australia if that individual is physically in Australia when the thing supplied is done.

339. As the supply is provided to the individual in Australia, the requirement in paragraph 38-190(3)(b) is satisfied. Therefore, subsection 38-190(3) negates the GST-free status of the supply (assuming the other requirements of that provision are satisfied).

Apportionment:

GSTR 2005/6 requires apportionment where part of a supply covered by Item 2 is provided to another entity in Australia. Paragraphs 633 and 634 of GSTR 2005/6 state:

633. If a supply made to a non-resident meets the requirements of item 2 and part of the supply covered by item 2 is provided to another entity in Australia, subsection 38-190(3) negates the GST-free status accorded to that part. The supply remains GST-free under item 2 to the extent that it is not provided to the other entity in Australia (unless another provision of the Act negates that GST-free status).

634. Therefore, the need to apportion in the context of subsection 38-190(3) arises if the supply is only partly provided to another entity in Australia.

In the present case the Agreement states that OzCo agrees to supply the Services to XCo in the Marketing Area for the commission fee as defined in the Agreement and the Agreement allows OzCo to retain between 80% and 90% of the amount collected by OzCo from the Prospect or Guardian as the commission fee before paying the balance to XCo. Part of that commission fee is consideration for supplies made and provided by OzCo to XCo which are GST-free (e.g. scouting Prospects in the Marketing Area, procuring those Prospects and their Guardians to enter into PCs, and collecting the fees payable). However part of that commission fee is consideration for supplies made by OzCo to XCo but provided to Prospects or Guardians in Australia (e.g. editing and uploading video footage for Australian Prospects, responding to queries from Australian Prospects, communicating with overseas colleges about Australian Prospects, assisting Australian Prospects with visas, providing client packs to Australian Prospects).

In such cases paragraphs 662 to 662D of GSTR 2005/6 require apportionment on a fair and reasonable basis and the method used must be documented by the taxpayer:

662. Sometimes a supply of services might, for example, be made and provided to a non-resident entity that is not in Australia and also provided to another entity in Australia in circumstances where the supply is not divisible with separate parts of the supply being provided to each entity. Section 9-5 provides that a supply is not a taxable supply to the extent that it is GST-free (or input taxed).

662A. As explained at paragraph 66 of GSTR 2006/4 the High Court in Ronpibon Tin v. FC of T (Ronpibon Tin) indicated, in the income tax context, that if a certain expense, such as directors' fees, has a 'double aspect', it will need to be apportioned if it 'cannot be dissected'.^98B As further explained in GSTR 2006/4 the High Court also emphasised the necessity of considering the facts of the particular case.

662B. Thus if a supply is provided to both a non-resident entity outside Australia and another entity in Australia, but it cannot be said that there are separate and distinct parts of the supply provided to each entity, that supply is nonetheless apportionable on a fair and reasonable basis.

662C. The method used by the supplier to apportion the supply must result in a fair and reasonable reflection of the extent to which the supply is provided to the non-resident entity outside Australia (GST-free part of the supply) and the other entity in Australia (taxable part of the supply). The method used must also be appropriately documented by the supplier.

662D. Having determined the taxable and GST-free parts of the supply, the consideration for the supply is required to be apportioned between those parts. The Commissioner considers that the GST Act requires apportionment of consideration as between the taxable component and the non-taxable component of a supply.

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