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  • Demurrage: Contract of sale

    What is demurrage?

    Demurrage is the rate or amount payable to a shipowner by a charterer for failure to load or discharge a ship within the time allowed.

    GST on demurrage

    Where an Australian supplier makes payment to an overseas customer for demurrage under a free on board FOB contract, the overseas entity surrenders the right to recover money from the Australian supplier. The surrender of the right (a supply) happens upon acceptance of the consideration (the penalty for time delay).

    The supply (of the surrender of the right by the offshore entity) would not be connected with Australia under paragraph 9-25(5)(a) of the GST Act, if the acceptance takes place outside Australia (which is usually the case). On the basis that the supplier does not make the supply through a permanent establishment in Australia, the supply would not be connected with Australia under paragraph 9-25(5)(b) of the GST Act.

    FOB: free on board- a price quoted for goods including placing them on board ship. Delivery is complete when the goods are on board. (Latimer. P. Australian Business Law. 13th edition CCH Australia. 1994).

    Example

    If an Australia supplier sells goods FOB, and is a day late in loading those goods aboard ship, the overseas entity will be entitled to receive an agreed amount, stipulated in their sales contract for the delay. This payment will be GST-free.

      Last modified: 01 Sep 2015QC 16450