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Only services connected with ITZ (indirect tax zone) can possibly be subject to GST. If a service is not connected with ITZ, it can’t be a taxable supply.
Services Connected With ITZ
In the last episode we covered the export of goods. Now we move to the export of anything else. Anything else that is neither goods nor real property. So this is commonly services and intangible.
But before you can look at GST exemptions, you need to check something else. You need to check whether the service is even connected with the ITZ.
If there is no connection, there is no point looking for an exemption. Without a connection there is no taxable supply.
We already covered the indirect tax zone in episode 137. So in this episode Simon Dorevitch of A & A Tax Legal Consulting will talk about what makes a service connected to the indirect tax zone.
Here is what we learned but please listen to the episode itself, since Simon explains it much better than we do.
To listen while you drive, walk or work, please listen through a podcast app on your mobile phone.
The Thing is Done
For anything else that is neither goods nor real property it is all about where the thing is done. A supply is connected with the indirect tax zone, if the thing is done in the indirect tax zone or if the thing is done through an enterprise carried on in the ITZ.
Enterprise Carried on in the Indirect Tax Zone
Section 9-27 (1) of the GST Act defines when an enterprise is carried on in the indirect tax zone. It all depends on the physical location of people and its place of business. The enterprise needs to have people and a place of business in the ITZ.
People
The enterprise has people in the indirect tax done when there is at least one person acting for the enterprise within the ITZ. This might be an individual sole trader (s 9-27(3)(a)) or an employee or officer of the entity (s 9-27(3)(b)).
It gets more complicated when the entity has an individual agent or employees of an agent acting on their behalf. Then it all depends on how independent the agent is.
If the agent is a broker, general commission agent or other independent agent and is acting in the ordinary course of the agent’s business and not the entity’s business, then this agent wouldn’t connect the entity to the indirect tax zone (s 9-2 7 (3) (c) (ii)).
But if the agent has authority to conclude contracts on behalf of the entity and habitually exercises this authority, then this agent would connect the entity to the ITZ (s 9-27(3)(c)(i)).
Place of Business
In addition, the enterprise must have a place of business in the ITZ – be it one or several – be it a fixed one or intermittently changing – be it already in place or only intended.
One fixed place in the indirect tax zone (s 9-2 7(1)(b)(i)) or one or more places for more than 183 days in a 12-month period (s 9-27(1)(b)(ii)) or just one or more intended places for more than 183 days in a 12-month period (s 9-27(1)(b)(iii)) is enough to establish a place of business.
So if an enterprise has people and a place of business in the ITZ, then it is an enterprise carried out in the indirect tax zone. And then anything it does counts as a thing done through an enterprise carried on in the ITZ.
The Thing Done
So the key phrase is “THE THING IS DONE”. But what does that mean? What is THE THING? How is it DONE? And how to tell whether it is done in the ITZ? It depends on the type of supply you are looking at.
Services
For a service, the thing is done where the service is commonly performed. Think of accounting and legal services, repair and maintenance, research, testing and experiments or the development of designs, models, plans, drawings or other like property. If it is performed in the ITZ, it is done in the ITZ.
Individual Advice
The provision of individual advice is done where it is created or developed. If a QC prepares a legal opinion in the ITZ, then that opinion is prepared in the ITZ, ie. the thing is done in the ITZ.
Instantaneous Information
Instantaneous advice and information is done where it is provided. So for Google ads displayed on a mobile phone in the ITZ, the thing is done in the ITZ.
Rights
If the supply is about a right – be it the creation, grant, transfer, assignment or surrender of this right – the thing is done where the right is created, granted, transferred, assigned or surrendered. This is usually where the contract is made and signed.
Subcontracted Services
Subcontract arrangements are done where the subcontractor performs the service. So even if the supplier has no presence in the ITZ as such – no people and no place of business in the ITZ – engaging a subcontractor to perform a service in the ITZ, will still connect the supplier to the ITZ.
Let’s say a supplier is based outside of the ITZ but signs a contract to perform a service within the ITZ. To honour this contract the supplier engages a subcontractor who performs the service in the ITZ. The subcontractor will connect the supplier to the ITZ.
GSTR 2005/6
Subcontract arrangements were an issue in SAGA Holidays Limited v Commissioner of Taxation [2006] FCAFC 191 regarding foreign tour operators in 2006. As a result the legislator broadened the tests for connection with Australia in s 9-25 (5) by the insertion of the new s 9-25 (5)(c). And updated GSTR 2005/6.
GSTR 2000/31
The Commissioner also updated GSTR 2000 /31 and stressed that the supply of the right or option is connected with Australia if the supply of the other thing would be connected with Australia. The updated GSTR uses the following example in para 225A to D.
Cuisineworld is a non-resident entity in the United Kingdom (UK) that supplies cooking classes at renowned restaurants with accomodation and bus tours. Cuisineworld buys the Australian holiday cooking package on a GST inclusive basis from a resident tour wholesaler in Sydney, and then on-sells these to tourists as rights or options to cooking, accommodation and bus tours in Australia. The Commissioner breaks Cuiseworld’s supplies into two parts – accommodation and cooking classes.
Accommodation
Cuiseworld’s supply of rights or options to accommodation in Australia, is a contractual right that is exercisable over or in relation to land in Australia. It is therefore a supply of real property in Australia and hence with a connection to the indirect tax zone under subsection 9-25 (4).
Cooking Classes
Cuiseworld’s supply of rights or options to cooking classes (training services) and bus tours (services) is the supply of things other than goods or real property. Neither s 9-25 (5)(a) nor (b) is applicable as the supply of the rights takes place in the UK and Cuisineworld does not carry on an enterprise in Australia. And so s 9-25(5)(c) kicks in and connects Cuisineworld with the indirect tax zone.
Separate Supplies
Sometimes a supply is partly in and partly out. One part of the supply has a connection with the indirect tax zone. And the other part doesn’t
If this is the case, then s 96-5 advises to treat the supply as two separate supplies. So you treat the part of the actual supply connected with the ITZ as if it was a separate, stand-alone supply.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only. And it might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 04 May 2020
Tax Talks spoke to Simon Dorevitch - Corporate & International Tax Manager at A&A Tax Legal Consulting - for more details.
