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Ruling

Subject: GST and input tax credits

Question

If you register for GST, would you be entitled to input tax credits for the acquisition of the rights to access an international IP private network from a specified Australian entity (the Australian supplier)?

Answer

No.

Relevant facts and circumstances

You are a company based in a specified overseas country (your country).

You are not a resident of Australia for income tax purposes. You are not registered for GST in Australia.

You do not carry on a business in Australia at or through a fixed and definite place of your own or through an agent. You are not registered with the Australian Securities and Investments Commission (ASIC). You do not have a permanent establishment in Australia.

You are provided with the rights to access an international IP private network by the Australian supplier.

The Australian supplier is a resident of Australia for Australian income tax purposes and is registered for GST.

The service is delivered from the Australian supplier's POP (Point of Presence) in Australia to you. On the network equipment in the Australian supplier's POP, one port has been allocated to you. To enable you to access this port, the Australian supplier has established a connection from their POP in Australia to your office where the traffic can flow between your office in your country and the port in the Australian supplier's POP, and from there traffic flows on to your group of company's global network.

There is no restriction on the direction that the information may flow. The information also flows from your group of company's global network to your office in your country from the port in the Australian supplier's POP.

The Australian supplier provides you with a hub/port and the supply is for data connection only. As the hub has network capacity configuration, the service that the Australian supplier provides can be used to transmit voice and data. However, you are currently engaging another party to provide data transmission service between you and the Australian supplier.

You have provided a copy of the relevant agreement.

The Australian supplier provides you with a fixed charge service and the invoice amount does not fluctuate every month. The Australian supplier charges 10% GST on the supply that it makes to you.

As your parent company does not have a finance department in your country, invoices for you are processed through your parent company's Australian subsidiary in Australian (Australian subsidiary) even though the service is delivered to you. Both you and the Australian subsidiary pay the invoices to the Australian supplier for the services provided to each of you.

You and the Australian subsidiary are separate entities.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15.

A New Tax System (Goods and Services Tax) Act 1999 Section 11-20.

A New Tax System (Goods and Services Tax) Act 1999 Section 38-190.

Reasons for decision

Input tax credit

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act sets out the requirements of a creditable acquisition. This section states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

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

(* denotes a term defined in section 195-1 of the GST Act)

Paragraph 11-5(a) of the GST Act requires that the thing acquired is acquired for a 'creditable purpose'.

Subsection 11-15(1) of the GST Act provides that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, pursuant to subsection 11-15(2) of the GST Act, you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed or the acquisition is of a private or domestic nature.

In your case, the acquisition meets the requirements of paragraphs 11-5(a) of the GST Act because you make the acquisition from the Australian supplier in carrying on your enterprise.

The requirement of paragraph 11-5(c) of the GST Act is satisfied as you provide and are liable to provide consideration for the supply.

You would meet the requirements of paragraph 11-5(d) of the GST Act if you register or become required to be registered for GST.

What is left to consider is whether the requirement of paragraph 11-5(b) of the GST Act is met. Paragraph 11-5(b) of the GST Act requires that the supply of the thing to you is a taxable supply.

Taxable supply

Whether or not a supply is a taxable supply depends on the supplier's circumstances. A supplier will make a taxable supply if the supply meets all of the requirements of section 9-5 of the GST Act.

Section 9-5 of the GST Act states:

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.

Based on the information that you have provided, the supply meets the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act. This is because the Australian supplier makes the supply for consideration, the supply is made in the course or furtherance of an enterprise that the Australian supplier carries on, the supply is connected with Australia and the Australian supplier is registered for GST.

The supply that the Australian supplier makes to you is not input taxed under any provision of the GST Act or under a provision of another Act. Therefore, what is left to consider is whether the supply is GST-free.

GST-free supply

Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free if it is GST-free under Division 38 of the GST Act or under a provision of another Act.

Under section 38-190 of the GST Act, certain supplies of things other than goods or real property, for consumption outside of Australia, are GST-free.

The table in subsection 38-190(1) of the GST Act comprises five items which set out supplies of things other than goods or real property that are GST-free.

Item 4 in the table in subsection 38-190(1) of the GST Act (Item 4) is relevant for consideration. Under Item 4 a supply that is made in relation to a right may be GST-free if:

· the right is for use outside Australia, or

· the supply is to an entity that is not an Australian resident and is outside Australia when the thing supplied is done.

Goods and Services Tax Ruling GSTR 2003/8 deals with supply of rights for use outside Australia and examines what types of supplies are capable of being covered by Item 4.

Paragraphs 98 to 100 of GSTR 2003/8 state:

Supply of capacity in an international telecommunication network

98. Telecommunication carriers (telcos) arrange telecommunication networks for clients' exclusive use. These networks have various names such as leased lines, international private circuits, indefeasible rights to use (IRUs), and global networks. To establish these networks, telcos acquire the right to access capacity in various telecommunication cables throughout the world and supply capacity to their clients.

99. In Overseas Telecommunications Commission (Australia) v. FCT ³⁵ Lockhart J had to decide whether, under the relevant IRU agreement, Overseas Telecommunications Commission (OTC) granted a right to use a cable to another party (STA) or whether there was an undertaking by OTC to provide telecommunication services to STA. This question would determine whether OTC was entitled to income tax deductions for investment allowance purposes. Lockhart J held the effect of the relevant IRU agreement was that OTC granted a right to STA. This was the substance of the transaction.

100. This case supports our view that the supply of this type of capacity in an international telecommunication network is a supply of a right.

Issue 1 of the Telecommunications Industry Liaison Group - issues register, deals with a supply of capacity in an international telecommunication network and in addition to restating paragraph 98 of GSTR 2003/8 it states:

Nature of the arrangement

… A network may comprise a fixed line between two or more points such as from a place in Sydney to a place in London, together with local links to the client's place of business. A network may comprise a global circuit, such as Sydney to Auckland to New York to London to Sydney. Alternatively, capacity may be made available through a satellite network rather than a fixed line.

… Clients will use network capacity to transmit voice and data information between sites. Generally clients are charged on a time basis for access to capacity, not on the basis of their actual usage.

You advised that the Australian supplier provides you with a hub/port and the supply is for data connection only. As the hub has network capacity configuration, the service that the Australian supplier provides can be used to transmit voice and data. However, you are currently engaging another party to provide data transmission service between you and the Australian supplier. Further, the Australian supplier provides you with a fixed charge service and the invoice amount does not fluctuate every month.

Based on the information that you have provided, the supply made by the Australian supplier to you is a supply of a network capacity and therefore a supply that is made in relation to a right.

Goods and Services Tax Ruling GSTR 2004/7 explains, amongst other things, when a supply is made to 'an entity that is not an Australian resident' and is 'outside Australia when the thing supplied is done' for the purposes of Item 4.

Non-resident

Section 195-1 of the GST Act provides that for GST purpose 'non-resident' means an entity that is not an Australian resident and 'Australian resident' means a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

Accordingly, a supply that is made to an entity is a supply to a non-resident for GST purposes if the entity is not a resident of Australia for income tax purposes.

Subsection 6(1) of ITAA 1936 provides that a company is a resident of Australia for income tax purposes if:

· the company is incorporated in Australia, or

· if not incorporated in Australia, it carries on business in Australia and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

You advised that you are not a resident of Australia for income tax purposes. Therefore, you are a non-resident for GST purposes.

Outside Australia in relation to the supply

Paragraphs 37 and 38 of GSTR 2004/7 explain when a non-resident company is considered to be in Australia. These paragraphs state:

37. A non-resident company is in Australia if that company carries on business (or in the case of a company that does not carry on business, carries on its activities) in Australia:

(a) at or through a fixed and definite place of its own for a sufficiently substantial period of time; or

(b) through an agent at a fixed and definite place for a sufficiently substantial period of time.

38. We consider that it would be reasonable for a supplier to conclude that a non-resident company is in Australia if:

· the company is registered with ASIC; or

· the company has a permanent establishment in Australia for income tax purposes.

You advised that you do not carry on a business in Australia at or through a fixed and definite place of your own or through an agent, you are not registered with ASIC and do not have a permanent establishment in Australia.

You stated that as your parent company does not have a finance department in your country, invoices for you are processed at the Australian subsidiary's office in Australia even though the service is delivered to you. Both you and the Australia subsidiary pay the invoices to the Australian supplier. You and the Australian subsidiary are separate entities.

Based on the information provided, we consider that the involvement of the Australian subsidiary with the supply that the Australian supplier makes to you is minor. The involvement of the Australian subsidiary is limited to processing and payment of invoices as your parent company does not have a finance department in your country. Therefore, we consider that you are outside Australia for the purposes of paragraph (b) of Item 4.

In summary as you are not an Australian resident and are outside Australia when the thing supplied is done, the supply is covered under Item 4.

However, subsection 38-190(2) of the GST Act limits the scope of Item 4.

Limitation of Item 4

Under subsection 38-190(2) of the GST Act, a supply covered by any of items 1 to 5 in the table in subsection 38-190(1) of the GST Act is not GST-free if it is a supply of a right or option to acquire something the supply of which would be connected with Australia and would not be GST-free.

GSTR 2003/8 also examines the operation of subsection 38-190(2) of the GST Act. Paragraph 143 of GSTR 2003/8 states:

143. Subsection 38-190(2) is designed to ensure that the supply of a right or option is not GST-free if the right or option can be redeemed for the supply of something else, the supply of which would be a taxable supply. A supply to which subsection 38-190(2) applies is not GST-free even if item 4 or another item in the table in subsection 38190(1) would otherwise apply.

At paragraph 150, GSTR 2003/8 states:

150. Subsection 38-190(2) uses the composite expression 'supply of a right or option to acquire something'. If the drafter had intended that the expression should cover all of the ways that a right may be supplied as contemplated by paragraph 9-10(2)(e), it is to be expected that the phrase 'supply that is made in relation to rights' used in item 4 would also have been used in subsection 38-190(2). Since it was not, we take the view that the expression takes its ordinary meaning. As such, it is apt to cover a supply of a right or option to acquire something by way of grant or creation of the right or option or transfer or assignment of the right or option, but does not extend to a surrender of a right or option to acquire something.

In your case, the supply made by the Australian supplier to you is not a supply of a right to acquire something else the supply of which would be a taxable supply. The supply made by the Australian supplier to you is therefore GST-free under Item 4.

Conclusion

As the supply made by the Australian supplier to you does not meet all the requirements of section 9-5 of the GST Act the supply is not a taxable supply.

Consequently the requirement of paragraph 11-5(b) of the GST Act is not met. You are not therefore entitled to an input tax credit under section 11-20 of the GST Act as your acquisition from the Australian supplier does not meet all the requirements of section 11-5 of the GST Act (even if you become registered or required to be registered for GST).

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