Carrying on an enterprise in Australia: For GST? Under a DTA?

It seems that it’s becoming relatively easier for many businesses (increasingly smaller businesses) to transact with customers all over the world. With this comes an exposure to taxation in other jurisdictions.

In this edition of The Assessment we focus on non-residents starting to transact with Australian customers and the potential exposure to taxation in Australia (including the associated administrative and compliance obligations).

Ideally, such non-residents would seek to minimise the imposition of any tax and/or utilise the provisions of international Double Tax Agreements (DTAs) in an attempt to eliminate double taxation. The DTAs however tend to only apply to income taxes and capital gains rather than indirect taxes. Therefore, non-residents may be required to register for Australian GST purposes, even though the DTAs may apply in such a way that the non-resident is not subject to Australian income tax. The non-residents, however, are nevertheless cautious of any registration with foreign tax authorities for fear of being on the radar of those tax authorities.

Background: When a non-resident is required to register for Australian GST purposes.

Entities are required to be GST-registered in Australia where they carry on an enterprise (anywhere) and exceed the GST registration turnover threshold (A$75,000 per annum, or A$150,000 for not-for-profit entities).

Generally, it is the value of taxable supplies that counts towards the threshold. One of the conditions for a supply to be a taxable supply is that ‘the supply is connected with the indirect tax zone’ (refer s. 9-5(c)). This is usually a relevant test for non-resident entities dealing with Australian customers.

Connected with the Indirect Tax Zone

The rules for determining whether a supply is connected with the indirect tax zone (ITZ) are set out in s. 9-25 including separate rules for the supply of goods (to, from and within the ITZ), real property (located in the ITZ), and everything else (that is, things other than goods or real property).

In this article we will be concentrating on the supply of things other than goods or real property. Also, the reference to the ITZ is essentially a reference to Australia but excluding certain external territories and specific installations. Therefore, for simplicity, in this article we will refer to the ITZ as ‘Australia’.

Subsection 9-25(5) provides that a supply of anything other than goods or real property will be connected with Australia if:

1. the thing is done in Australia; or
2. the supplier makes the supply through an enterprise that the supplier carries on in Australia; or
3. all the following apply:
   1. neither paragraph (a) or (b) apply in respect of the thing;
   2. the thing is a right or option to supply another thing; and
   3. the supply of the other thing would be connected with Australia; or
4. the recipient of the supply is an Australian consumer.

The only amendment to the above provision in recent GST law changes was the inclusion of paragraph (d). While we will not be dealing with this aspect in any detail in this article, paragraph (d) is a key component of the so-called ‘Netflix’ tax. That is, where an entity (for example, a non-resident entity, such as Netflix) makes a supply to an Australian consumer such supplies will be connected with Australia and therefore fall within the Australian GST regime. Prior to this amendment such a supply would typically not have been connected with Australia under any of the other paragraphs of s.9-25(5). We note ‘Australian consumer’ is a defined term, essentially referring to an individual who is not acquiring the thing for any business purpose. (Therefore supplies such as a movie download from an overseas supplier where the download is done by an Australian private consumer will fall within the Australian GST regime.)

Relevant to this article, however, is paragraph (b) and the reference to whether a supply is made through an enterprise carried on in Australia.

Carrying on an enterprise in Australia for GST purposes

Prior to the recent GST law amendments, the test of whether an enterprise is carried on in Australia was linked to Australia’s domestic income tax definition of permanent establishment (PE). The reason for the change according to the Explanatory Memorandum (EM) to the Bill introducing the amendments was to update the test ‘so that it is better aligned with key GST concepts’ and some of the factors that are relevant in determining when a PE exists for income tax purposes (and found in Australia’s international Double Tax Agreements (DTAs)). The recent amendments have done this by introducing new s. 9-27 which sets out that an enterprise is carried on in Australia if:

1. the enterprise is carried on in Australia through one or more individuals who are in Australia; and
2. any of the following applies:
   1. the enterprise is carried in though a fixed place in Australia; or
   2. the enterprise is carried on through one or more places in Australia for more than 183 days in a 12 month period; or
   3. the entity intends to carry on an enterprise through one or more places in Australia for more than 183 days in a 12 month period.

The reference to individuals includes:

• an individual carrying on its own enterprise;
• individuals who are an employee or officer of an entity; or
• individuals who are an agent (or employees of an agent) that has, and habitually exercises, authority to conclude contracts on behalf of an entity and is not a broker, general commission agent or other agent of independent status that is acting in the ordinary course of the agent’s business as such an agent.

With reference to a fixed place in 2.a above, it doesn’t matter whether the entity has exclusive use of a place, or owns, leases or has any other interest to such a place.

Assuming the non-resident is a company, under the revised tests, an enterprise of the non-resident company will be considered to be carried on in Australia if:

• the enterprise is carried on by individual employees who are in Australia, and any of the following apply:
  • the enterprise is carried on through a fixed place in Australia;
  • the enterprise has been carried on through one or more places in Australia for more than 183 days in a 12 month period; or
  • the entity intends to carry on the enterprise through one or more places in Australia for more than 183 days in a 12 month period

Assuming the non-resident is a company, the non-resident will also be considered as carrying on an enterprise in Australia if an individual agent, or an individual employee of an agent, is engaged by the non-resident company where that agent has the authority to conclude contracts on behalf of the non-resident, and habitually exercises that authority. However, this excludes agents who are independent acting in the ordinary course of their own business as such an agent.

The EM to the bill introducing these amendments describes the changes as follows:

2.27 The revised test can be distinguished from the approach in the income tax definition of ‘permanent establishment’ which applies to a ‘business’ that is carried on through a ‘place’. In particular, the use of the term ‘enterprise’ better aligns the underlying components of the carrying on an enterprise test with the intended scope of the test.

2.28 The combination of the ‘fixed place’ and ‘183 day’ rules is consistent with Australia’s current tax treaty approach for permanent establishments. In the context of Australia’s tax treaties, the concept of a ‘fixed place’ is used as the primary principle for determining when a permanent establishment exists. The 183 day rule in Australia’s tax treaties applies separately to deem an entity to have a permanent establishment where it undertakes business activities for more than 183 days.

With regard to the interpretation of the term ‘fixed place’, the EM goes on to state:

2.35 Although the term ‘fixed place’ is not defined for the purposes of the GST law, the term has been used to align the revised enterprise test with the internationally accepted interpretation of that term that has been adopted in the permanent establishment articles in Australia’s tax treaties.

2.36 Consistent with that approach, for the purposes of the GST law, the term ‘fixed’ requires there to be a stable or continual connection between the enterprise of the entity and the place. While the term ‘fixed’ is not intended to require a connection between an enterprise and a place that is ‘everlasting or forever’, it does require a connection that is more than merely temporary or transitory in nature.

With regard to the more than 183 day rule, the EM makes the following comments:

2.38 There are two parts to the 183 day rule – the first relates to activities in the ITZ that have been carried on, and the second part relates to activities that are intended to be carried on.

2.39 The reference to ‘183 days in a 12 month period’ means that the days over which the enterprise is carried on do not need to be consecutive. Although the 183 day rule applies where an enterprise is carried on through a single place continuously over a period of more than 183 days, it also applies where an enterprise is carried on through different places on a continuous or intermittent basis throughout any 12 month period.

2.40 To determine if an enterprise of an entity has been carried on for more than 183 days in the ITZ, the enterprise of the entity must have been carried on through one or more ‘places’ in the ITZ. In contrast to the ‘fixed place’ rule, the 183 day rule does not require any such places to be ‘fixed’.

2.41 In practice, the 183 day rule means that an evaluation of whether a place is a ‘fixed place’ is only required where an enterprise is carried on in the ITZ for 183 days or less, because enterprises that are carried on for more than 183 days in the ITZ satisfy the 183 day rule.

2.42 This approach reflects that the 183 day rule is primarily focussed on whether an entity has a substantial presence in the ITZ over a period of time. As a result, any place that is used in carrying on an enterprise is counted towards the 183 day threshold, irrespective of whether the connection that the entity has (or the relevant individuals have) with those places is fixed or temporary in nature.

2.43 To the extent that the 183 day rule relates to enterprises that have been carried on in the ITZ, it applies on a prospective basis. Leaving aside intended activities, an entity that has carried on an enterprise in the ITZ through one or more places in the ITZ for 184 days will not be subject to the 183 day rule for the first 183 days. That is, the entity will commence carrying on an enterprise in the ITZ from the start of the 184th day. This approach preserves the position that an entity adopts in relation to the activities it undertakes in the ITZ at the time those activities are undertaken and is consistent with the obligation for entities to determine their GST liability on a ‘real time’ basis as transactions occur.

2.44 However, if at a particular time an entity intends that it will undertake those activities over a period that would exceed 183 days, the entity carries on an enterprise in the ITZ from that time because of the part of the 183 day rule that relates to intended activities.

Particular comments to note include those made in paragraph 2.41, whereby if an entity is carrying on an enterprise in Australia by virtue of having an employee in Australia for more than 183 days it does not matter whether the entity does so through a fixed place.

Also of note from a practical perspective are the comments in 2.43 and 2.44 regarding applying the 183 day test on a prospective basis subject to the intended duration of those activities. We interpret this to mean that if a non-resident entity has an employee in Australia and from the outset expects or intends that employee to carry out activities for more than 183 days in Australia, the non-resident entity will be considered to be carrying on an entity in Australia from day 1. In contrast, if a non-resident entity has an employee in Australia and from the outset does not expect or intend that employee to carry out activities for more than 183 days in Australia, the non-resident entity will not be considered to be carrying on an entity in Australia for up to the first 183 days.

We thought it would be useful to use an example to illustrate these changes. In this regard we refer to the examples provided in the EM:

Example 2.1: 183 day rule – enterprise carried on in the ITZ

Jo Co is a computer service provider and a resident of Japan. It successfully tenders to train the employees of Smith Corp, a company resident in Australia, in a new computer system. To undertake the training, Jo Co sends four of its employees to Australia for seven months. Smith Corp provides Jo Co’s employees with a room in one of its Sydney offices for that time.

In working out whether it carries on an enterprise in the ITZ, Jo Co determines that its intention about its employees carrying on its enterprise through the Sydney office satisfies the ‘intention’ limb of the 183 day test. As such, Jo Co carries on its enterprise in the ITZ for the entire time that its employees are in Australia for the purposes of the GST law.

Example 2.2: 183 day rule – effect of intentions

Following on from the above example, assume Jo Co’s original intention about its employees being based at the office of Smith Co changed after two months (for example, if it was decided that they would only stay for five months instead of the original seven, and would not remain in the ITZ after those five months). In these circumstances the 183 day rule would apply to Jo Co for the first two months during which it was intended that its employees would carry on an enterprise for more than 183 days. The rule would not apply to the final three months after Jo Co’s intention changed.

If the intention had always been that the employees would only be based at the office of Smith Co for five months and would not be present in the ITZ after that period elapsed, the 183 day rule would not apply for any part of the period.

Alternatively, if Jo Co had originally intended that its employees would be based at the office of Smith Co for five months but during that period decided to extend their stay to more than 183 days, the 183 day rule would apply from the time its intentions about its employees being present for longer than 183 days occurred. If it was not intended that the employees be present for longer than 183 days until the time the 183 day threshold was reached, Jo Co would be taken to be carrying on an enterprise from the 184th day on the basis that it had carried on an enterprise in the ITZ through a place for more than 183 days.

Example 2.1 is relatively straightforward. Example 2.2 appears useful in seeking to explain whether, and when, Jo Co would be considered to be carrying on an enterprise in Australia but only in relation to the 183 day test. In this regard, we refer to the three variations as follows:

1. Example 2.2A – original intention to stay 7 months, but this changed after 2 months to a total duration of only 5 months;
2. Example 2.2B – original intention to stay 5 months, and this does not change; and
3. Example 2.2C – original intention to stay 5 months, and this is extended for a further 2 months.

In all variations of Example 2.2, it appears that Jo Co’s employees would be based only at the office of SmithCo, which would appear to be a ‘fixed place’. Given the comments at 2.41, even though Jo Co’s original intention in Examples 2.2B and 2.2C above is for the employees to only be in Australia for five months, as they are only spending this time at the office of Smith Co this would appear to be a ‘fixed place’. As such, Jo Co may not be carrying on an enterprise in Australia under the 183 day test, but would be under the fixed place test. We note, this conclusion may be different where Jo Co’s employees are in Australia in relation to a number of different customers and would not meet the fixed place test, in which case the 183 day test and the intention rule appears to have more relevance.

To extend Examples 2.1 and 2 2 and to determine how this may apply in practice, let’s assume Jo Co calculates the fees it charges to Australian customers based on A$500 (excluding GST) per employee per day (and assuming each employee works on average 20 days per calendar month).

Under Example 2.1 Jo Co is carrying on an enterprise in Australia from day 1. Jo Co’s expected supplies connected with Australia would be in the order of A$280,000 (7 months x 20 days per month x 4 employees x $500 GST-exclusive per day). Accordingly, Jo Co would be required to be GST registered.

Under Example 2.2A the conclusion is that Jo Co is only treated under the 183 day test as carrying on an enterprise in Australia for the first two months, and that Jo Co would not be carrying on an enterprise in Australia for the next three months. However, as all supplies are things done in Australia they would nonetheless still be connected with Australia (under s. 9-25(5)(a)). Jo Co’s expected supplies connected with Australia would be in the order of A$200,000 (5 months x 20 days per month x 4 employees x $500 GST-exclusive per day). Accordingly, Jo Co would be required to be GST registered.

Under Example 2.2B the conclusion again is that Jo Co is not considered to be carrying on an enterprise in Australia under the 183 day test. Even if we assume that Jo Co also does not meet the fixed place test, as all supplies are things done in Australia they would nonetheless be connected with Australia (under s. 9-25(5)(a)). Jo Co’s expected supplies connected with Australia would be in the order of A$200,000 (5 months x 20 days per month x 4 employees x $500 GST-exclusive per day). Accordingly, Jo Co would be required to be GST registered.

The conclusion under Example 2.2C would be the same as for Example 2.2B.

While in this article we have highlighted the new rules regarding whether an entity is considered to be carrying on an enterprise in Australia per new s.9-27, when applying the rules we need to be mindful of all relevant tests – in this case all tests which determine whether supplies are connected with Australia.

Comparison to DTAs

While the above analysis indicates whether supplies are connected with Australia and ultimately whether an entity making such supplies needs to register for GST, does this also mean that the non-resident is now exposed to Australian income tax?

We have set out below some general comments on the application of Australia’s DTAs with the UK and USA in the context of Examples 2.1 and 2.2 above, to see whether Jo Co would be subject to income tax on the supplies made.

a. Australia-UK DTA

Article 5, paragraph 1 of the Australia-UK DTA states:

‘For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.’

On the assumptions that Jo Co’s employees being based only at the office of Smith Co would be a ‘fixed place’ then Jo Co’s activities would be a PE under the DTA. This would be the case for each of the Examples at 2.1, 2.2A, 2.2B and 2.2C.

If, however, Jo Co is not considered to have a fixed place in Australia, Jo Co would not be considered to have a PE in Australia under Article 5, paragraph 1 of the Australia-UK DTA. Accordingly, the remaining paragraphs of Article 5 would need to be considered.

Article 5, paragraph 2 sets out specific places considered to be a PE, especially a place of management, a branch, an office, a factory, a workshop, a mine, oil or gas well, quarry, farm, etc. Assuming the presence of Jo Co’s employees do not comprise an office, or a place of management, or workshop, none of these would apply.

Article 5, paragraph 3 deems certain things to comprise a PE, such as a building or construction site, or maintaining substantial equipment for rental, but only if the project/activity lasts more than 12 months. Again, on the facts in the examples, none of these would apply.

Other paragraphs in Article 5 provide for specific exclusions.

Based on the definition of PE in the DTA, and in the absence of Jo Co being treated as having a fixed place in Australia, it appears that the activities of the employees in Australia in each of the examples do not appear to be sufficient to cause Jo Co to have a PE in Australia according to the Australia-UK DTA.
Therefore, while Jo Co would be required to be GST-registered, it appears Jo Co would not be subject to income tax in Australia on those activities.

b. Australia-USA DTA

Article 5(1) of the Australia-USA DTA states:

‘For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.’

Again, on the assumptions that Jo Co’s employees being based only at the office of Smith Co would be a ‘fixed place’ then Jo Co’s activities would be a PE under the DTA. This would be the case for each of the Examples at 2.1, 2.2A, 2.2B and 2.2C.

If, however, Jo Co is not considered to have a fixed place in Australia, Jo Co would not be considered to have a PE in Australia under Article 5(1) of the Australia-USA DTA. Accordingly, the remaining paragraphs of Article 5 would need to be considered.

Article 5(2) sets out specific places considered to be a PE, especially a place of management, a branch, an office, a factory, a workshop, a mine, oil or gas well, quarry, farm, a building or construction site which exists for more than 9 months, or installation or drilling rig or ship that operates for an aggregate period of more than 6 months in any 24 month period. Assuming the presence of Jo Co’s employees do not comprise an office, or a place of management, or workshop, none of these would apply.

Article 5(4) deems certain things to comprise a PE, such as maintaining substantial equipment for rental in Australia for more than 12 months, or engages in supervisory activities in Australia for more than 9 months in any 24 months period in connection with a building or construction site. Article 5(4) also deems an enterprise to have a PE in Australia if it carries on business in Australia through a person (other an agent of independent status), who has authority to conclude contracts on behalf of that enterprise and habitually exercises that authority in Australia.

Other paragraphs in Article 5 provide for specific exclusions.

If any of the employees in Australia has authority to conclude contracts on behalf of Jo Co and habitually exercises that authority in Australia, then Jo Co would have a PE in Australia under the Australia-USA DTA. However, based on the Examples above, and assuming that no employee have such authority, the activities of the employee in Australia would not appear to be sufficient to cause Jo Co to have a PE in Australia according to the Australia-USA DTA.

Accordingly, while Jo Co would be required to be GST-registered, it appears Jo Co would not be subject to income tax in Australia on those activities.

Concluding Remarks

The analysis above illustrates the new concepts to determine whether an entity may be considered to be carrying on an enterprise for Australian GST purposes. However, when determining whether an entity is making supplies (other than goods or real property) connected with Australia all relevant provisions of s.9-25(5) need to be considered. Notwithstanding that the supplies may not be made in carrying on an enterprise in Australia, they may still be things done in Australia and therefore connected with Australia.

Further, while an entity making supplies connected with Australia may also be required to be GST-registered in Australia it does not necessarily follow that the non-resident will also be treated as having a PE in Australia (for DTA purposes).

Note: Unless stated otherwise legislative references in this article of the to A New Tax System (Goods and Services Tax) Act 1999. We note that the examples referred to may be limited in scope and based on assumptions and that care should be taken to consider the facts and circumstances of each case. We also note that we have only referred to two of Australia’s DTAs and each DTA should be reviewed.