Tax Brief 7 June 2004 GST-Free Supplies of Services to Non Residents Court Supports Commissioner s Draft Ruling Fiduciary Ltd & Ors v Morningstar Research Pty Ltd & Ors [2004] NSWSC 381 (11 May 2004) For professional advisors, the decision of Gzell J in the New South Wales Supreme Court in Fiduciary Ltd & Ors v Morningstar Research Pty Ltd & Ors [2004] NSWSC 381 may well be of greater interest in the course of administering their own practices than in the resolution of client issues. The case is not directly a GST case. Rather, it arose in relation to the quantification of a costs order after earlier proceedings were decided in favour of Morningstar. The Court, in deciding how much should be awarded by way of legal costs had to determine the issue of whether a foreign company, Morningstar Inc, was in Australia for the purposes of item 2 of the table in section 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 ( GST Act all references are to the GST Act unless otherwise noted). In resolving that issue in a manner supportive of the approach proposed by the Commissioner in draft GST ruling GSTR 2003/D9, Gzell J has provided significant guidance on the perennial question faced by advisors with non-resident clients do we need to include GST on this invoice?. The Facts The relevant facts are these: Morningstar Research, the first defendant, was an Australian company jointly owned by the second defendant Morningstar Inc (a US company), with the majority interest, and the first plaintiff (Fiduciary Ltd ( Fiduciary )). Morningstar Inc appointed four directors to the board of Morningstar Research the third to sixth defendants.
Fiduciary brought an action against the defendants for relief against conduct of Morningstar Research s operations which was allegedly oppressive under section 232 of the Corporations Act 2001. Two of the directors of Morningstar Research appointed by Morningstar Inc were in Australia in relation to the conduct of the case, as well as an employee of Morningstar Research whom Morningstar Inc wished to appoint as managing director of Morningstar Research.[1] That action was decided in favour of the defendants with an order that Fiduciary pay the defendants legal costs. Morningstar Inc is not an income tax resident of Australia. Its Australian solicitors charged their fees on a GST inclusive basis. The defendants sought an assessment of costs under section 202(1) of the Legal Profession Act 1987 (NSW) and the assessor determined that the costs should be GST-free in accordance with section 38-190(1) of the GST Act. The plaintiffs sought a review under the costs assessment review process set out in the Legal Profession Act 1987 (NSW). The Review Panel determined that Morningstar Inc s costs (ie fees for the solicitor s services) should have been determined on the GST inclusive basis on which they were rendered as by virtue of the presence in Australia of two of the directors and the employee of Morningstar Research in relation to the case, Morningstar Inc was in Australia for the purposes of item 2 of section 38-190(1) and GST was properly payable. Other than an acknowledgement that the two directors of Morningstar Research, nominated by Morningstar Inc, and its employee were physically present in Australia in relation to the interlocutory proceedings, no evidence was led as to their actual activities or their relationship with or ability to bind Morningstar Inc (bearing in mind that they were attending in their capacity as directors/employee of Morningstar Research). Fiduciary appealed that decision to the New South Wales Supreme Court on the basis that the review panel had erred in law and the matter was brought before Gzell J. It was stated by the barristers in the case that the defendants had declined the opportunity to seek a private ruling on the matter (although this would presumably need to be obtained by the solicitors) and that the ATO had declined to appear in this matter. The Issue While primarily an argument as to the quantum of costs under the Legal Profession Act 1987 (NSW), the question turned on the issue of whether the provision of services to Morningstar Inc by the Australian solicitors was: 2GST-Free Supplies of Services to Non Residents Court Supports Commissioner s Draft R
1 a taxable supply for GST purposes, in which case the costs should be assessed based on the GST inclusive invoices as rendered; or 2 a GST-free supply in accordance with item 2 of the table section 38-190(1), in which case the costs should be assessed on a GST exclusive basis? The parties agreed that Morningstar Inc was not an Australian resident and that the solicitor s services did not relate to goods or real property. As a result, the only point in issues was whether the presence of the directors and employee of Morningstar Research in Australia in relation to the earlier proceedings were sufficient for Morningstar Inc to be taken to be in Australia when they were provided such that the services could not be GST-free. The Decision Gzell J noted comments in GSTR 2000/31 (par 68) to the effect that in order for Morningstar Inc to not be in Australia for these purposes, it must not itself or via a representative acting on its behalf be in Australia in relation to the supply of the solicitor s services. In a passage sure to warm the heart of taxation advisors, Gzell J then concluded that notwithstanding the terms of section 37 of the Taxation Administration Act 1953 ( TAA ) on the effect of GST rulings, the Review Panel had erred in law in considering itself bound by the views expressed on this point by the ATO in GSTR 2000/31, which it considered to be binding notwithstanding the fact that those views had been altered in draft rulings GST 2002/D8 and subsequently GSTR 2003/D9. Gzell J cited with approval the Commissioner s comments in Income Tax Ruling IT 1 that: In using Taxation Rulings it should be recognised that they cannot supplant the terms of the law. It is now well established that statements or declarations by the Commissioner of Taxation or his officers do not have the effect of an estoppel against the operation of the taxation law. [2] He then proceeded to determine the question of whether Morningstar Inc was in Australia for these purposes by reference to a number of cases in relation to whether a company was subject to the jurisdictions of the courts. In his view (at paragraphs 29 and 30): When it comes to determining whether a corporation is or is not in Australia, there is no reason, in my view, for the body of law discussed above not to apply in the determination of that question. The concept of presence in a jurisdiction sufficient to subject a corporation to the jurisdiction of the courts has been developed by reference to activities of sufficient significance to make it appropriate that the corporation be amenable to the local jurisdiction. 3GST-Free Supplies of Services to Non Residents Court Supports Commissioner s Draft R
Citing a variety of previous decisions with approval[3], Gzell J particularly noted the following passages: the true test in such cases is whether the foreign corporation is conducting its own business at some fixed place within the jurisdiction, that being the only way in which a corporation can reside in this country. It can only so reside through its agent, not being a concrete entity itself; but, if it so resides by its agent, it must be considered for this purpose as itself residing within the jurisdiction [4]; the best test is to ascertain whether the business is carried on here and at a defined place [5]; First, it must be carrying on its business here and this it can do only by an agent and will not be doing unless the agent has authority on behalf of corporation to make contracts with persons in New South Wales binding on the corporation. Secondly, the business must be carried on at some fixed and definite place within the State. Thirdly, the business must have continued for sufficiently substantial period of time. [6] Gzell J then states that in GSTR 2002/D8 and GSTR 2003/D9 the Commissioner has correctly applied those principles to the question of whether a corporation is in Australia for the purposes of item 2 of the table in section 38-190(1) and goes on to note that a not dissimilar approach is adopted in the context of double taxation treaties and whether a taxpayer has a permanent establishment in a given jurisdiction. Having established this legal principle, Gzell J found that on the facts presented to him, the mere presence of the two directors and an employee of Morningstar Research in Australia was not sufficient for Morningstar Inc to be in Australia. Similarly because the solicitors were agents of independent status carrying on their own business, their engagement was not sufficient for Morningstar Inc to be said to be in Australia. Gzell J dismissed submissions that the mere carrying on of a business in Australia is sufficient for the corporation to be in Australia. It is necessary for that business to be conducted from a fixed place and for it to have been conducted for a sufficiently substantial period of time. He considered that this view was consistent with the fact that Parliament deliberately did not choose to use the term an enterprise carried on in Australia in section 38-190(1) and the modifications made to the definition of permanent establishment for the purposes of section 9-25(6) of the GST Act. Comments The interpretation of item 2 of the table in section 38-190(1) has been one of the more vexed questions facing GST advisors in relation to cross border services. Because of its general nature, this item more than any other in section 38-190(1) 4GST-Free Supplies of Services to Non Residents Court Supports Commissioner s Draft R
is the gateway through which GST-free status is accorded to such dealings (both in relation to client transactions and the provision of services by advisors). This decision is likely to prove of great benefit. Not only does it provide judicial guidance on the interpretation of this provision, but, importantly, it does so in a manner that is consistent with the approach adopted by the Commissioner (albeit in a draft ruling). It is reasonable to assume that a court would also approve of the related cases that the Commissioner cites in respect of whether non-corporate entities are in Australia. The decision in this case provides a consistent and fairly straightforward test (subject to the availability of information). Importantly, it means that similar factors need to be taken into account by a non-resident corporation when determining whether it is amenable to the jurisdiction of Australian courts, has a permanent establishment here for income tax purposes or is in in Australia for GST purposes. Although the tests are similar, the answers will not always be the same though that usually will be the case. It is surprising that further facts were not elicited by the plaintiffs on the relationship between the two directors and the employee of Morningstar Research on the one hand and Morningstar Inc on the other hand, even though it seems that Morningstar Inc bore the large part of the legal fees in the action. It is very unlikely that the presence in Australia of directors or employees of an Australian subsidiary or joint venture company will be enough to render the foreign parent company or foreign joint venturer present in Australia. There will need to be further facts establishing that the directors or employee are agents of the foreign company and satisfy the presence tests set out above in relation to the foreign company. The decision raises a number of interesting issues which were not in contention and were therefore not considered. The solicitors had as it turned out incorrectly charged a GST amount to Morningstar Inc. A review of the Australian Business Register indicates that Morningstar Inc is not GST registered so it presumably has not claimed an input tax credit. There is no evidence as to why the solicitors considered their clients to be in Australia and hence charged amounts on account of GST. Presumably they did so in reliance on the comments contained in GSTR 2000/31 (although as a point of principle, reliance on a ruling is of no relevance in this instance because section 37 of the Taxation Administration Act 1953 only has application if a taxpayer has relied on a ruling and has underpaid GST and the ruling is subsequently altered). It is also interesting that the impact of section 38-190(3) was not considered, particularly as, while the legal services were supplied to Morningstar Inc, they may have been provided to the directors whilst they were physically in Australia. 5GST-Free Supplies of Services to Non Residents Court Supports Commissioner s Draft R
Although beyond the scope of this decision, it would also be interesting from a practitioner s point of view as to how the solicitor s went about obtaining a refund of the overpaid GST through section 39 of the TAA, particularly in relation to satisfying the ATO that Morningstar Inc had been reimbursed. Assuming that the reimbursements have been made and the refunds obtained, no party should be out of pocket, for GST at least. Practitioners will no doubt welcome the clear statement of principle that this case provides (as well as the endorsement of GSTR 2003/D9). However, in practice, it will invariably be the case that the facts may not be so clear cut as they were in this case. Therein lies the challenge. 6GST-Free Supplies of Services to Non Residents Court Supports Commissioner s Draft R
This article written by Rhys Penning appeared in the July 2004 edition Vol 39 (1) of Taxation in Australia, the journal of the Taxation Institute of Australia. References: [1]It also appears that the President of the International Division of Morningstar Inc was in Australia for the hearing of the case but this is not discussed in the present case, Fiduciary v Morningstar [2001] NSWSC 1087. [2]While that statement refers to Taxation Rulings, it is also true for GST rulings which have even less weight given that they are issued under an administrative practice of the Commissioner per section 63 of the TAAand only have weight under section 37 of that Act. [3]Such as Actiesselskabet Dampskib Hercules v Grand Trunk Pacific Railway Co [1912] 1 KB 222, Okura & Co Ltd v Forsbacka Jernverks Aktiebolag [1914] 1 KB 715 at 718, Littauer Glove Corp v F W Millington (1920) Ltd (1928) 44 TLR 746, Sfeir & Co v National Insurance Co of New Zealand Ltd [1964] 1 Lloyd s Rep 330 and Vogel v Kohnstamn Ltd [1973] 1 QB 133 [4]Dunlop Pneumatic Tyre Co v Actien-Gesellschaft Fur Motor Und Motorfahrzeugbau Vorm Cudell & Co [1902] 1 KB 342 at 346-7 [5]Actiesselskabet Dampskib Hercules v Grand Trunk Pacific Railway Co [1912] 1 KB 222 at 227 [6]National Commercial Bank v Wimborne (1979) 11 NSWLR 156 at 165 These notes are in summary form designed to alert clients to tax developments of general interest. They are not comprehensive, they are not offered as advice and should not be used to formulate business or other fiscal decisions. Liability limited by a scheme approved under Professional Standards Legislation Greenwoods & Freehills Pty Limited (ABN 60 003 146 852) www.gf.com.au Sydney ANZ Tower, 161 Castlereagh Street, Sydney NSW 2000 Australia Ph +61 2 9225 5955, Fax +61 2 9221 6516 Melbourne 101 Collins Street, Melbourne VIC 3000, Australia Ph +61 3 9288 1881 Fax +61 3 9288 1828 Perth QV.1 Building, 250 St Georges Terrace, Perth WA 6000, Australia Ph +61 8 9211 7770 Fax +61 8 9211 7755 7GST-Free Supplies of Services to Non Residents Court Supports Commissioner s Draft R