Are consultancy services provided in Australia to recipients based overseas GST free? This is a common question we are asked from our Accountants Network. The answer is that it depends on the facts of the case.
Essentially, to be considered as an export of services and hence GST-free, several criteria need to be met, otherwise GST will be applicable on these services.
Relevant to the supply described above is item 2 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (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 it is a supply that is made to a non-resident, who is not in Australia when the thing supplied is done, and:
- 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
- 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.
Thus a supply is GST-free under Item 2 if it meets the requirement that the non-residents are not in Australia, and satisfies either paragraph (a) or (b) of Item 2.
Even if a supplier is able to satisfy the above requirements, to be GST free, subsection 38-190(3) of the GST Act also requires that the services must not be on-supplied to another Australian entity.
If the supply covered by item 2 is under an agreement entered into with a non-resident entity that requires the services to be provided to another entity in Australia, subsection 38-190(3) of the GST Act negates the GST-free status of that supply. That is, in the above example where an Australian entity provides general consultancy services to a non-resident, the services will not be GST free if the service agreement requires that the services are provided to another entity in Australia.
Thus the first risk for an Australian supplier is in satisfying the precondition that the non-resident (company or individual) to whom you supply your service is not in Australia in relation to the supply when those services are provided. Where the recipient is a company, a supplier needs to determine whether the company has a “presence in Australia” in relation to the supply.
Goods and Services Tax Ruling GSTR 2004/7 and Law Companion Guideline LCG 2016/1 provide some guidance in determining when a non-resident company is in Australia when the thing supplied is done in the application of Item 2.
Even if an Australian supplier can confidently confirm that the recipient is “not in Australia when the thing supplied is done”, one of the criteria under item 2(a) or item 2(b) needs to be satisfied for the services to be GST free.
The GST free concession under item 2(a) requires that the services must not be work physically performed on goods situated in Australia, nor can it be a supply directly connected with real property situated in Australia. Where this criteria is not met, the Australia supplier will need to adhere to item 2(b) for GST free treatment.
GST free treatment under item 2(b) requires the Australia supplier to confirm that the non-resident recipient acquires the services in carrying on of the non-resident’s enterprise and that the non-resident is not registered, nor is it required to be registered for GST.
This requirement is particularly onerous on suppliers as they will often not know the Australian GST profile of the non-resident. In these instances, it would be prudent for the Australian supplier to obtain from the non-resident written confirmation that the recipient is not registered for GST.
The main indeterminate risk of the Australian supplier is in confirming that the non-resident is not “required to be registered”. Where this is uncertain, some Australian suppliers have erred on the side of caution and charged and remitted GST on their services. It would then be up to the non-resident recipient to provide details to the supplier that it is not required to register in order to obtain GST free treatment.
The issues discussed above are not matters that can simply be assumed or ignored. We recommend that specific consideration of the above factors be addressed prior to an Australian supplier treating their services as GST free as the risk of getting this incorrect can be costly.
The onus is on a supplier to remit the correct amount of GST to the ATO. If a transaction has been incorrectly assumed to be GST free when it was not, the GST shortfall will need to be remitted by Australian supplier to the ATO with possible risk of shortfall penalties and general interest charges.
If you would like to discuss the above issues further, please contact Mimi Ngo.