House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan MP

Chapter 1 - GST and cross-border transport supplies

Outline of chapter

1.1 Schedule 1 to this Bill amends the A New Tax System (Goods and Services Tax) Act 1999 ( GST Act) to:

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shift the liability to pay goods and services tax (GST) on the Australian transport leg of the international transport of imported goods from transport service suppliers to the importer of the goods in some situations. This reduces compliance costs for Australian transporters and non-residents;

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make the GST treatment of exports of postal and containerised non-postal goods more consistent and reduce GST compliance costs for transporters; and

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make subcontracted Australian transport services that form part of the Australian leg of an outbound or inbound international transport service GST-free when made to a

non-resident not in Australia. This reduces compliance costs for Australian transporters and non-residents.

Context of amendments

GST treatment of the inbound transportation of goods

1.2 Under the current law, the supply of transport services for goods transported from overseas to Australia by transport providers is GST-free up to the 'place of consignment' (the port or airport of final destination). However, the Australian leg of the inbound transport of goods from the 'place of consignment' is taxable for both prime transport providers and subcontractors.

1.3 The inbound international transport of goods is generally supplied by a prime contractor that contracts to provide the whole of the international transport to the 'place of consignment', including, where supplied, the Australian leg. If the prime contractor is a non-resident, the Australian leg of the transport services would in most cases be subcontracted to an Australian transporter.

1.4 The GST law currently has a different meaning for the place of consignment for postal and non-postal goods. As a result, for postal goods, GST-free treatment applies for international transport services up to the place where the goods are addressed in Australia. In contrast, for non-postal goods, GST-free treatment for such transport services only applies up to the port or airport of final destination in Australia (item 5 in the table in section 38-355 of the GST Act).

1.5 The different treatment for postal and non-postal items results in distortions between the two forms of supplies. In addition, non-resident transporters without a presence in Australia that transport non-postal goods within Australia using resident subcontractors need to register for GST to obtain input tax credits. As a consequence they become liable for GST on their supplies that are done in Australia. If such non-residents do not register for GST then any GST included in the price of their subcontracted services will be embedded in the cost of services they provide, resulting in the cascading of the GST.

GST treatment of the outbound transportation of goods

1.6 Under the current law the international and Australian legs of an outbound international transport service provided by the prime transport supplier is generally GST-free from the place of containerisation (see below) of the goods, where the supplier undertakes both legs of the transport service (item 5 in the table in section 38-355 of the GST Act). In contrast, that part of the transport service from the exporter's address to the point where the goods are packed in a shipping container (containerisation) is taxable, except in specific circumstances. For example, the pre-containerised leg can be GST-free for the prime contractor, as well as another transport supplier if the supplier of the transport knows that the Australian leg of transport is being provided to another entity outside of Australia, such as the recipient of the goods under an export sales contract. In these circumstances, the Commissioner of Taxation currently treats the Australian leg of the transport of the goods from their place of origin in Australia to their last place in Australia before export as GST-free. This reflects the operation of item 3 of subsection 38-190(1) and the application of subsection 38-190(4) of the GST Act.

1.7 The current law causes difficulties for Australian transport subcontractors in establishing the correct GST treatment and imposes compliance costs when they transport mixed loads, with some goods qualifying for GST-free treatment and some being subject to GST. The current law also does not always allow the Australian leg of transport services supplied to non-residents for the export of goods from Australia to be GST-free, with the result that embedded GST is incurred by non-residents that do not register for GST.

1.8 In the 2009-10 Budget, the Government announced that it would amend the GST law to reduce GST compliance costs for businesses involved in the Australian leg of international transport of exported and imported goods, with effect from 1 July 2010.

1.9 The purpose of these amendments is to provide certainty for industry and reduce the number of non-resident entities without a presence in Australia being liable for GST or incurring GST on their acquisitions that is likely to cascade through the supply of any goods or services they make.

Summary of new law

1.10 These amendments to the GST law make the transport of goods by transport subcontractors within Australia, that forms part of the international transport of those goods by another entity to Australia, GST-free in specific circumstances. Supplies of international transport services are treated as GST-free where they are made to a non-resident that is not in Australia. However, the supply is subject to GST if it is made to a resident or a non-resident that is in Australia. This reduces compliance costs for Australian transporters and affected non-residents.

1.11 These amendments also make the transport of goods by subcontractors within Australia, that forms part of the international transport of those goods by another entity from Australia, GST-free where the supply is made to a non-resident that is not in Australia. However, the supply is subject to GST if it is made to a resident or a non-resident that is in Australia. This reduces compliance costs for Australian transporters and affected non-residents.

1.12 The amendments to the GST law also expand the scope of GST-free supplies of international transport made under an agreement that brings the goods to or from Australia. This is done by:

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for exported non-postal goods, extending GST-free treatment to the last point of collection of goods prior to containerisation ('place of export') under the agreement that takes the goods out of Australia; and

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for imported non-postal goods, extending GST-free treatment to the place of delivery of those goods as determined under the primary agreement (see paragraphs 1.18 and 1.19) for the international transport of the goods to Australia ('place of consignment'). For the international transport of goods to Australia that are not under a transport or supply of goods agreement, the 'place of consignment' is unchanged, for example, self transport.

1.13 In certain circumstances, the liability for GST on the Australian leg of the international transport of imported goods is shifted from transport service suppliers to the importer of the goods. This is achieved by adding the importer's cost from the primary agreement for the Australian leg of the international transport of those goods to the 'value of the taxable importation' used to calculate the GST liability on importation.

1.14 The amendments also provide GST-free treatment for loading, handling and other services (including customs clearance services) in certain circumstances that facilitate the international transport of goods. However, these other services will not be GST-free if they are done to facilitate the transport of goods that is performed after the place of consignment or prior to the 'place of export'.

Comparison of key features of the new law and current law

Detailed explanation of new law

Australian transport supply leg of an importation

1.15 The transport of goods within Australia that forms part of the international transport of those goods by another entity to Australia is GST-free where the supply is made to a non-resident that is not in Australia. The supply remains taxable if it is made to a resident or non-resident that is in Australia ^[1] . The supply of the international transport from outside of Australia to the port or airport of final destination in Australia continues to be GST-free but GST-free treatment may extend beyond this point if the place of consignment includes any further leg of Australian transport . [Schedule 1, item 9, subsection 38-355(2)]

1.16 The cost of the Australian leg of international transport made by the primary transport supplier and other relevant services are included in the value of taxable importations by the following means:

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the services that facilitate the international transport of goods and loading and handling, that are not already reflected in the cost of international transport or the customs value of the goods, are included in the value of taxable importations [Schedule 1, item 1, paragraph 13-20(2)(ba)]; and

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the value of taxable importations includes the amount paid or payable for the international transport of goods to their place of consignment in Australia under the primary agreement (see paragraphs 1.18 to 1.19). The 'place of consignment' for non-postal items is extended to the place to which the goods are delivered under the primary agreement for the international transport of the goods [Schedule 1, item 13, definition of 'place of consignment' in section 195-1].

1.17 The inclusion of the amount paid or payable for certain Australian legs of international transport in the value of taxable importations results in GST on the Australian transport of imported goods being collected at a single point at the border. This approach avoids the need to impose the GST potentially at multiple points in a chain of supplies which involve both resident and non-resident entities. Removing the liability for some non-residents to pay GST will help to prevent embedded tax for prime transport providers who are not registered for GST.

1.18 The primary agreement for the importation of goods refers to the agreement under which goods are delivered into Australia under the contract for the supply of the goods or where a local entity brings the goods to Australia, the primary agreement is the agreement for the transport of the goods to Australia.

1.19 If goods from outside Australia are supplied to a local purchaser on 'delivered duty paid', 'delivered duty unpaid' or under 'cost, insurance and freight' terms, the primary agreement will be the supply agreement for the sale of the goods to the local purchaser. In contrast, the primary agreement under terms of trade involving 'free on board' will generally be the agreement between a transport company and a local importer in which the goods are transported from a foreign port or airport to the local importer . [Schedule 1, item 13, definition of 'place of consignment' in section 195-1]

1.20 The place where an Australian transport supplier delivers goods in Australia is the place of consignment for inbound goods from overseas if they can show that this is the final place in Australia to which the goods are required to be transported under the contract or arrangement for the international transport of the goods.

Example 1.1: A non-resident seller agrees to deliver goods to Australia

A Swiss bicycle store sells and agrees to deliver several bicycle frames to a buyer in Horsham, Victoria. Global Transporters, a non-resident that has no presence in Australia, is contracted by the Swiss seller to transport the frames to Horsham, which is the place of consignment. The services that are performed within Australia are subcontracted by Global Transporters to Freight Forwarder.

Under the new definition of place of consignment in section 195-1 of the GST Act, the supply by Global Transporters of transport of the frames from Melbourne to Horsham is GST-free as:

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Horsham is the place of consignment for the purposes of the international transport of the frames; and

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Global Transporters contracts with the Swiss seller to provide both the international and the Australian leg of the transport to Horsham.

The transport supply by Freight Forwarder to Global Transporters is GST-free as the supply forms part of the international transport of the frames and is made to a non-resident who is not in Australia when the supply of the transport is done.

Example 1.2: A resident buyer takes delivery of goods outside Australia

An Australian market store holder, Susan, purchases a shipment of imitation jewellery from Indonesia on free on board terms. Under these terms the non-resident seller has agreed to deliver the jewellery on board a vessel at a named port in Indonesia. Susan must provide the seller with details of the name of the ship, and when to deliver the jewellery to that ship. Susan assumes all risk of loss or damage from the time the goods have passed the ship's rail at the port of shipment in Indonesia.

Susan contracts with a non-resident shipping company through its agent in Australia to deliver the goods to Port Botany in Sydney. Susan also has a separate contract with an Australian freight forwarder to collect the jewellery at Port Botany, and deliver the jewellery to her house at Temora, New South Wales.

Susan's contract with the non-resident shipping company to deliver the goods to Port Botany in Sydney is the relevant international transport agreement (primary agreement) under which the jewellery is brought to Australia and therefore it is this agreement that determines the place of consignment. The place of consignment is Port Botany, the place that Susan, the importer, has agreed to take delivery of the goods, as this is the place to which the goods are delivered under the contract for the delivery of goods to Australia (primary agreement).

The supply of international transport by the shipping company to Susan is GST-free.

The freight forwarder's supply of transport services is subject to GST. This reflects that the transport services occur after the place of consignment at Port Botany.

Australian transport leg of an export transport supply

1.21 The transport of goods by transport subcontractors within Australia that forms part of the international transport of those goods by another entity from Australia is GST-free if made to a non-resident that is not in Australia. However, the supply is subject to GST where it is made to a resident or a non-resident that is in Australia at the time the supply is made . [Schedule 1, item 5, subsection 38-355(1); items 6 and 7, item 5 in the table in subsection 38-355(1); item 9, subsection 38-355(2)]

1.22 These amendments also ensure that section 38-355 of the GST Act is the primary provision that makes supplies of international transport GST-free. Item 3 of subsection 38-190(1) of the GST Act will not apply to the transport of goods to or from Australia and other supplies that are related to that transport supply. The amendments achieve this by ensuring that subsection 38-190(4) of the GST Act has no application to supplies of transport of goods within Australia that are part of, or are connected with, the international transport of the goods. This includes all transport from the point of origin in Australia to the point at which goods depart from Australia as well as the costs of insuring, loading, handing and arranging transport of those goods . [Schedule 1, item 4, subsection 38-190(5)]

1.23 Where transport suppliers provide both the Australian and international legs of international transport then the transport supply is GST-free . [Schedule 1, item 9, paragraph 38-355(2)(b)]

1.24 Treating the Australian leg of international transport as taxable for transport subcontractors in all circumstances when supplied to an Australian entity or a non-resident entity with a presence in Australia reduces compliance costs for GST-registered subcontractor transport entities. This is achieved by allowing them to apply the same GST treatment to all transported goods, regardless of whether the goods are for Australian delivery or export or whether the entity to which the goods are ultimately being provided to is outside of Australia. This is important because transport subcontractors may carry a range of goods that are for final delivery both in Australia and overseas and they may not be aware of the final destination of some goods.

1.25 The amendments broadly align the tax treatment of the pre-containerisation leg of a non-postal export supply with the treatment of a postal export supply. This ensures consistent tax treatment of the pre-and post-containerisation legs of a non-postal supply of containerised goods as both are GST-free where they form part of a single international transport supply . [Schedule 1, item 14, definition of 'place of export' in section 195-1; item 4, subsection 38-190(5)]

1.26 For non-postal goods the 'place of export' definition is amended to ensure that the last leg in which the goods are collected from a location prior to being packed in a freight container is GST-free for certain suppliers [Schedule 1, item 14, definition of 'place of export' in section 195-1]. This reflects that goods will usually be collected from an earlier location for packing in a freight container. If the goods have been manufactured at the place of packing (that is, at a factory), then international transport from this location continues to be GST-free for certain suppliers.

Example 1.3: Outbound removalist

Stan is registered for GST and operates an international removalist company which undertakes both the Australian and international legs of international removals.

Stan has been engaged by Jessica, who is moving overseas, to transport her household items to London and to supply insurance for the transport of the goods. Stan collects Jessica's goods and moves the goods in a truck to his depot where they are placed in a container.

The place of export is now the place the goods are collected by Stan (Jessica's residence) as opposed to where the goods are placed in a container. Stan's entire international transport supply is now GST-free.

Example 1.4: Outbound sale of goods

A buyer in India orders goods from an Australian-based manufacturer (manufacturer). The goods are transported by Local Transporters under a contract with the manufacturer to a place where they will be collected by the transport supplier who will transport the goods from Australia. The manufacturer contracts with a separate transport supplier, Global Transporter, to move the goods from the place the goods were delivered to by Local Transporters, and then to transport the goods to India in a container.

Under the definition of 'place of export', the place of export is the place Global Transporter collects the goods as determined under the agreement that takes the goods from Australia.

The supply by Local Transporters which occurs prior to the place of export does not form part of international transport and therefore cannot be GST-free under item 5 of subsection 38-355(1). Additionally this supply is not GST-free under item 3 in the table in subsection 38-190(1) because of the effect of subsection 38-190(5).

The supply by Global Transporter, is GST-free under item 5 in the table in subsection 38-355(1) of the GST Act as subsection 38-355(2) does not restrict the application of this item under these circumstances.

Loading, handling and other services

1.27 These amendments also ensure that other services that facilitate the international transport of goods, such as loading, handling and other services, can qualify for GST-free treatment [Schedule 1, item 8, item 5A in the table in subsection 38-355(1)]. For example, supplies of fumigation services that are carried out to facilitate the international transport of goods are

1.28 GST-free for inbound and outbound movement of goods when:

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supplied by the transporter that brings the goods to or from Australia; or

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supplied by another party to a non-resident that is not in Australia.

1.29 The GST treatment of loading, handing and other services reflects the intention that GST-free treatment should extend to not only international transport but also necessary related services to prevent embedded tax arising for non-residents.

1.30 As a result of the inclusion of specific provisions to address the GST treatment of loading, handling and other services, there is a consequential amendment to remove references to loading and handling from the definition of 'international transport' . [Schedule 1, item 12, definition of 'international transport' in section 195-1]

1.31 The amendments ensure that any existing determinations that set out the amount paid or payable for certain transport or insurance continue to apply despite the extension of the determination-making power to include loading, handling and similar services . [Schedule 1, item 3, paragraphs 13-20(3)(b) and (c); item 15]

Application and transitional provisions

1.32 These amendments apply on and from 1 July 2010. In particular, the amendments apply to:

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supplies made on or after 1 July 2010; and

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taxable importations made on or after 1 July 2010.

[Schedule 1, subitem 16(1)]

1.33 The amendments also apply to relevant services performed after 1 July 2010 concerning imported goods that have not given rise to a taxable importation prior to 1 July 2010. This will include imported goods held in Australia immediately prior to 1 July 2010 that have not yet given rise to a taxable importation because, for example, they have not yet been entered for home consumption . [Schedule 1, subitem 16(1)]

1.34 However, the transitional provision ensures the amendments do not apply to a supply of services that occurs on or after 1 July 2010 to the extent the services relate to a taxable importation of goods made prior to 1 July 2010. This transitional provision ensures symmetry of treatment between importations and supplies made in relation to those importations . [Schedule 1, subitem 16(2)]

Consequential amendments

1.35 The changes to the place of export and place of consignment made by the amendments have a consequential impact on the GST treatment that applies to:

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insuring the international transport of goods to and from Australia; and

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arranging the international transport of goods to and from Australia.

[Schedule 1, item 13, definition of 'place of consignment' in section 195-1 and item 14, definition of 'place of export' in section 195-1]

1.36 There is a consequential amendment to ensure that the amount paid or payable for loading, handling and related services that is included in the value of taxable importations can be converted to Australian currency . [Schedule 1, item 2, subsection 13-20(2A)

1.37 The amendments also make a consequential amendment to ensure that the amount paid or payable for loading, handling and related services is included in the value of taxable importations for goods that were exported for repair or renovation and that the amount can be converted to Australian currency . [Schedule 1, item 10, paragraph 117-5(1)(ba), and item 11, subsection 117-5(1A)]