What has changed?
Intangible supplies (including legal and other professional services) that may be GST–free are set out in Item 2 in section 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (“GST Act”).
GST-free treatment allowed under Item 2 is subject to an “override” in section 38-190(3) of the GST Act. When the said override applies, the supplies are taxable and subject to GST.
Item 2 of section 38-190(1) of the GST Act: GST-free legal services
Pursuant to Item 2 of s.38-190(1), legal services will be GST-free if:
- The services are supplied to a “non-resident”;
- The non-resident is not present in Australia in relation to the supply of the services; and
- The services are not directly related to real property located in Australia; or
- The non-resident is acquiring the services in the course of carrying on an enterprise and is not registered for GST purposes, or required to be registered for GST purposes.
In relation to the requirement for the non-resident to not be present in Australia, the Australian Taxation Office (“ATO”), recognises that GST exemption should not be “auto-declined” because a non-resident company, which does not have an office or carry on business in Australia, sends its executives or staff members to Australia for a brief period in respect of a transaction. This is notwithstanding that these representatives may receive legal advice while in Australia. See GSTR 2004/7:
s.38-190(3) of the GST Act 1999 (Cth)- Override provisions
Pursuant to s.38-190(3), legal services that are otherwise covered in Item 2 will ceased to be GST-free, rendering it taxable and subject to GST if:
- services are supplied pursuant to an agreement entered into, whether directly or indirectly, with a “non-resident”; and
- services are provided, or if the agreement requires the services to be provided, to another “entity in Australia”.
Amendments to the GST Act (s.9-26(2)) have included a new definition of “Australian-based business recipient”, as follows:
- An entity is registered; and
- An enterprise of the entity is carried on in the indirect tax zone; and
- The entity’s acquisition of the thing supplied is not solely of a private or domestic nature.”
As of 01 October 2016, s.38-190(3) of the GST Act will not be applicable if:
“the other entity would be an Australian based business recipient of the supply, if the supply had been made to it”.
Why was the GST law changed?
The reforms is designed to keep non-resident entities “untangled” with Australia’s GST legislation. If there is to be an increase of services supplied to non-residents by Australian business (that are GST-free), it will largely reduce the need of non-resident entities to register for GST in Australia in order to claim GST credits.
How will these changes benefit?
The benefit of the reforms for “non-resident clients” include:
- WILL NOT need to register to claim GST credits;
- if GST is not applicable on legal and/or other professional fees, there will not be prolonged waiting period to receive GST credits, making this a CASH FLOW BENEFIT; and
- reduces needs for professional advisers to establish separate files for services provided to local subsidiaries and/or other entities in Australia on instructions from a “non-resident” client. This may benefit when a client wants to CENTRALISE ALL COSTS.