Edited version of private ruling

Authorisation Number: 1011535090931

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Ruling

Subject: GST and the supply of services and data.

Question 1

Can consideration for a supply be provided or received by way of setting off mutual liabilities in accordance with the Memorandum of Understanding (MOU) between an Australian organisation (you) and an entity B?

Answer

Yes. In absence of the transfer of the money, consideration can be provided or received by ways of setting off mutual liabilities in accordance with the MOU between you and the entity B?

Question 2

Is the supply of the services by you to the entity B a taxable supply where the MOU enables both entities to offset their mutual liabilities?

Answer

Yes, the supply of the services by you to the entity B is a taxable supply where the MOU enables both entities to offset their mutual liabilities.

Question 3

Is the supply of the Data by the entity B to you a taxable supply where the MOU enables both entities to offset their mutual liabilities?

Answer

Yes, the supply of the Data by the entity B to you is a taxable supply where the MOU enables both entities to offset their mutual liabilities.

Relevant facts

You are an Australian organisation which is registered for GST.

You and the entity B wish to formalise the arrangement relating to your supply of services and the supply of the Data by the entity B.

The arrangement is made to offset the licence fee with your provision of services.

The entity B is also an Australian organisation which is registered for GST.

You have submitted a draft copy of MOU which states the terms and conditions of the arrangement between you and the entity B.

Under the MOU, the entity B will provide you with a licence to use all the Data of the entity B that is held by you. In return, you will provide your services to the entity B.

Under the MOU, for the provision of Data from the entity B will notionally charge the entity A an amount equal to its share of the Licence Fee calculated on the basis set out in the MOU.

You and the entity B acknowledge that provision of Data to you is made available instead of, in substitution for and as an offset against the notional Licence Fee set out in the MOU.

Under the MOU, if the supplier makes a taxable supply to the recipient, on receipt of a tax invoice from the supplier, the recipient will pay without setoff an additional amount to the supplier equal to the GST imposed on the supply in question.

Where a taxable supply by one party to another party under the MOU is consideration for a taxable supply by the other party in return, the parties must agree the same GST inclusive market value for their supplies set out in the MOU, and must each provide a tax invoice to the other for those supplies respectively.

Reasons for decision

Question 1

GST is payable on any taxable supply that you make. For a supply to be a taxable supply, the supply must satisfy all the conditions of section 9-5 of the A New Tax System Goods and Services Tax) Act 1999 (GST Act).

Under section 9-5 of the GST Act, you make a taxable supply if:

(a)    you make the supply for consideration; and

(b)   the supply is made in the course or furtherance of an enterprise that you carry on; and

(c)    the supply is connected with Australia; and

(d)   you are registered, or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

One of the conditions of a taxable supply in section 9-5 of the GST Act is that the entity makes the 'supply for consideration'.

There must be some nexus or connection between a particular supply and particular consideration which is provided for that supply.

Therefore, we need to determine whether you and the entity B make the supply to each other and in return receive the consideration for the supply.

From the information provided, under the MOU, you will provide various services to the entity B and the entity B will provide the Data to you. Therefore, you and the entity B make supplies to each other.

We now need to determine whether each party - you and the entity B receive the consideration for the supply.

Supply for consideration

The term consideration is defined in section 195-1 of the GST Act with reference to section 9-15 of the GST Act. Under Paragraph 9-15(1)(a) of the GST Act, 'consideration' includes any payment in connection with a supply of anything.

A supply is any form of supply and includes (but not limited to) a supply of goods and/or services, the provision of advice or information, and an entry into or release from an obligation to do anything, to refrain from an act or to tolerate an act or situation.

From the facts provided, for the supply of Data, the entity B charges you an amount equal to the licence fee calculated on the basis set out in the MOU. For the supply of your services, the provision of Data is made available to you instead of, in substitution for and as an offset against the licence fee.

Goods and Services Tax Determination GSTD 2004/4, provides guidance on whether consideration can be provided or received without transferring money. In the absence of the transfer of money, consideration can be provided or received by way of setting off mutual liabilities in accordance with the doctrine of set-off. A set-off can occur if each party has made a supply to the other and each party is required to pay the other for the supply made to it. A set-off can also occur, in certain circumstances, if one party makes a supply, such as rental premises or management services, to the other and the parties agree that payment is to be achieved by set-off. A liability can be discharged by means other than by transferring money or providing non-monetary consideration. It can be discharged by 'set-off'.

In the case of a set-off, the consideration is provided or received on the date that the set-off legally occurs. If this time is known to only one of the entities, the consideration is provided and received by the other entity when it is informed of the date of the set-off, or when that information is first made available to it (for example, electronically) in accordance with a prior arrangement.

Paragraph 11 of GSTD 2004/4 provides further guidance on the set off.

11. For the doctrine of set-off to apply there have to be mutual liabilities of amounts presently payable between two parties. If the liability of the first party to the second party is greater than that of the second to the first, the excess amount may be discharged by transferring money or providing non-monetary consideration. In addition, there must be a binding agreement between the parties to use the set-off method of payment of debts. The agreement must be to discharge the liabilities and may be express or implied. The agreement is the legal basis for discharging the liabilities between the parties.

The MOU between you and the entity B is an agreement between two parties to use the set off method. Under the MOU, you provide various services to the entity B and the entity B provides you the Data.

Under the MOU, you provide various services to the entity B and the entity B provides Data to you. Each party is required to pay the other party for the supply to it. You and entity B acknowledge that the payment in respect of your Services and Data is notional. You and the entity B are offsetting the licence fee for the Data with the provision of your services to the entity B.

Accordingly, you and entity B receives consideration for their supplies by way of setting off mutual liabilities and consideration is provided or received on the date that the set off legally occurs. Accordingly, the supply of your services to the entity B and the supply of Data by the entity B to you is for consideration and satisfy the requirement of paragraph 9-5(a) of the GST Act.

The supply of your services and the supply of Data by the entity B are taxable supplies if all the other conditions of section 9-5 of the GST Act are satisfied.

Question 2

Taxable supply

For a supply to be a taxable supply, the supply must satisfy all the conditions of section 9-5 of the GST Act.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

The supply of your services to the entity B, you satisfy all the requirements of paragraphs (a) to (d) of section 9-5 of the GST Act as:

(a) As discussed in reasons for decision issue 1, you supply the services to the entity B for consideration;

(b) You make the supply in the course or furtherance of your enterprise (business);

(c) the supply is connected with Australia (as a supply of services is connected with Australia where the services are supplied through an enterprise that you carry on in Australia); and

(d) you are registered for GST.

However, your supply of services is not taxable to the extent that it is GST-free or input taxed.

Based on the facts provided, the supply of your services to the entity B does not satisfy any of the input taxed or GST-free provisions under the GST Act.

To summarise, the supply of your services to the entity B satisfies all the requirements of section 9-5 of the GST Act and is taxable. You are liable for GST for the supply of your services in the period that the payments are considered to have occurred.

Attribution of GST payable and input tax credits

Section 29-5 of the GST Act provides that where you account on a non-cash basis the GST on a taxable supply is attributable to the tax period in which any of the consideration is received or an invoice is issued for the supply.

Paragraphs 18 and 19 of GSTD 2004/4 provide guidance on attribution of GST payable and input tax credits in the case of set-off. Paragraphs 18 and 19 of GSTD 2004/4 state:

18. In the case of a set-off, the consideration is provided or received on the date that the set-off legally occurs. If this time is known to only one of the entities, the consideration is provided and received by the other entity when it is informed of the date of the set-off, or when that information is first made available to it (for example, electronically) in accordance with a prior arrangement. In many cases, the date of the set-off would be the date on which the set-off is recorded in the books of the entities. But it is legally possible for the set-off to occur under the agreement between the parties before the parties make the relevant book entries. For example, if there is a written agreement providing for the set-off, it may determine that the set-off legally occurs immediately when both liabilities have been calculated regardless of when the parties make their book entries. Alternatively, there may be other documents or oral evidence as to when the parties agreed the set-off would occur. However, often the book entries will be the most important evidence.

19. This is the case even if the entries are recorded as having an earlier date of effect such as the end of an accounting or tax period or the end of a financial year. Unless there is evidence that the agreement to set off was made before the date the book entries were made, and that set-off legally occurred, it can be assumed that the agreement was made on the same day as the book entries were made.

From the facts provided, under the MOU, if the one party makes a supply to the other party, on the receipt of a tax invoice from the supplier, the recipient will pay without setoff an additional amount to the supplier equal to the GST imposed on the supply in question.

Our record shows that you account for GST on accrual basis and therefore, you are required to attribute GST payable in the period that an invoice is issued for the supply.

Question 3

The supply of Data by the entity B to you satisfies all the requirements of paragraphs (a) to (d) of section 9-5 of the GST Act as:

(a) As discussed in reasons for decision issue 1, the entity B supplies the Data to you for consideration;

(b) The entity B makes the supply in the course or furtherance of its enterprise;

(c) the supply is connected with Australia (as a supply of services is connected with Australia where the services are supplied through an enterprise that the entity B carries on in Australia); and

(d) the entity B is registered for GST.

However, the supply of Data is not taxable to the extent that it is GST-free or input taxed.

The supply of Data by the entity B to you does not satisfy any of the input taxed or GST-free provisions under the GST Act.

To summarise, the supply of Data by the entity B to you satisfies all the requirements of section 9-5 of the GST Act and is taxable. The entity B is liable for GST in the period that an invoice is issued for the supply.

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