Edited version of your private ruling

Authorisation Number: 1012447196343

Ruling

Subject: GST implications in relation to the importation and exportation of goods

Questions

1. Does an Australian company (AUSCO) make a taxable importation of products (products) and is AUSCO liable for GST, when a non-resident company (NRCO) supplies or delivers products to AUSCO?

2. Does AUSCO make a creditable importation and is AUSCO entitled to claim input tax credits in relation to the importation of products that AUSCO acquires from NRCO?

3. Is the supply of products by AUSCO to an overseas company (OSCO) on ex-work terms GST-free under section 38-185 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

4. Is the supply of products by AUSCO to NRCO (where NRCO then exports the products) on ex-works terms GST-free under section 38-185 of the GST Act?

5. Is the processing fee charged by AUSCO to NRCO consideration for a taxable supply by AUSCO to NRCO, where:

(a) the processing fee is absorb in the price of the exported goods?

(b) the processing fee is invoiced separately?

Answers

1. Yes, AUSCO makes a taxable importation of products and is liable for GST when NRCO supplies or delivers products to AUSCO.

2. Yes, AUSCO makes a creditable importation and is entitled to claim input tax credits in respect of products supplied by NRCO to AUSCO on normal terms, but AUSCO does not make a creditable importation and is not entitled to claim input tax credits in respect of all of the products delivered by NRCO to AUSCO on consignment.

3. Yes, the supply of products by AUSCO to OSCO on ex-works terms is GST-free under section 38-185 of the GST Act provided AUSCO and OSCO satisfy all of the requirements of subsection 38-185(3) of the GST Act.

4. No, as there is not a supply of products by AUSCO to NRCO for the goods delivered on consignment (where NRCO then exports the products) the issue of whether such a supply is GST-free under section 38-185 of the GST Act does not arise.

5. No, the processing fee charges by AUSCO to NRCO is not consideration for a taxable supply, it is consideration for a supply that is GST-free pursuant to paragraph (a) of Item 2 in the table in subsection 38-190(1) of the GST Act.

Relevant facts and circumstances

The parties

An Australian company ('AUSCO') is registered for both GST and the deferred GST scheme in respect of GST payable on imported goods. AUSCO is a distributor of products in Australia. Most of the products distributed by AUSCO are sourced from overseas.

An overseas company ('OSCO') is a company incorporated outside Australia and a wholly-owned subsidiary of AUSCO. OSCO is neither registered nor required to be registered for GST in Australia.

For many years AUSCO has distributed certain products (products) in Australia. The products were supplied to AUSCO by another overseas company ('OSCO2'), a company incorporated outside Australia.

A non-resident company ('NRCO') is the manufacturer of the products. NRCO is a company incorporated outside Australia which has no presence in Australia and is neither registered for GST in Australia nor required to be so registered.

NRCO advised that NRCO does not have a fixed place of business in Australia, NRCO does not have a physical presence in Australia, AUSCO does not act as an agent on behalf of NRCO and does not have any authority to conclude contracts on behalf of NRCO, AUSCO does not manufacture or process goods or merchandise belonging to NRCO in Australia, and all sales by NRCO to NRCO's customers in the Asia Pacific region are concluded outside Australia.

NRCO recently terminated NRCO's distribution agreement with OSCO2 and commenced supplying the products directly to NRCO's customers, including AUSCO.

NRCO and AUSCO intend to record the new arrangement between NRCO and AUSCO in a Distribution Agreement, a draft of which (draft Agreement) was provided to the ATO.

Initial supply of products by NRCO to AUSCO:

By letter to the ATO dated {date} NRCO and AUSCO advised that each purchase order issued by AUSCO to NRCO for products indicates whether AUSCO wants NRCO to supply the products on normal terms or deliver them on consignment.

In a letter to NRCO and AUSCO dated {date} the ATO enclosed the ATO Fact Sheet GST and Consignment Sales. The Fact Sheet states:

If you sell goods on consignment, you have agreed to sell the goods without first buying the goods from the owner. Typically, your agreement specifies one of the following:

You agree to sell the goods on behalf of the owner as an agent

You agree to purchase the goods for an agreed price when you find a buyer.

The way GST applies to consignment sales you make depends on whether the sale is a 'sale or return' or an 'agency' sale.

'Sale or return' sales:

You are making a 'sale or return' sale where you purchase the goods from their owner when you find a buyer for those goods. This means you are selling the goods to the customer in your own right because you are purchasing the goods from the owner and selling them to the purchaser. If you make this type of sale and you are registered for GST, you are liable to pay GST on the full sale price of the goods.

It is likely that you are making 'sale or return' sales if any of the following apply:

· The amount you pay to the owner when a buyer is found is agreed in advance;

· Any amount you receive from the buyer that is over the agreed amount you have to pay the owner is yours to keep;

· You set the sale price of the goods;

· You don't have to tell the owner of the goods the final selling price or details of how much profit you made on the sale;

· You have to provide a warranty on the goods;

· You have to guarantee title to the goods;

You do not bear any commercial risk; that is, if the goods are not sold, you don't have to purchase them.

'Agency' sales:

You are making an agency sale when you sell consigned goods on behalf of the owner of the goods as their agent. Under these circumstances, you are not liable to pay GST to us on the sale; however, you must pay GST to us on the commission you receive. The owner of the goods is liable to pay GST on the sale if both of the following apply:

· they are registered for GST

· they make the sale in the course of running their business.

By letter dated {date} the ATO asked NRCO and AUSCO whether products delivered by NRCO to AUSCO on consignment were delivered on a 'sale or return' or 'agency' basis (taking into account the factors listed in the Fact Sheet) and whether AUSCO acted as NRCO's agent in relation to such products.

In a letter to the ATO dated {date} NRCO and AUSCO advised:

The purchase orders differentiate the [products] acquired on normal terms and on consignment.

The initial sale of the products by NRCO to [AUSCO] is on a 'sale or return' basis.

[AUSCO] does not act as agent in any capacity in relation to dealings with NRCO.

NRCO enters into the agreement with the Asia Pacific customers and agrees to supply them with the specified products. There is no relationship between [AUSCO] and the Asia Pacific customers.

In the ruling request NRCO and AUSCO stated:

[NRCO] invoices [AUSCO] for consignment stock once [AUSCO] has disposed of that stock.

The draft Agreement states:

Payment for the Products

Invoices for AUSCO stock will be payable within XX days.

Consignment stock sales/costs will be invoiced at the end of the month and payable within X days thereafter (see below for separate terms on consignment stock)

Supply of the Products

Notwithstanding delivery and the passing of risk, property in and title to the product shall remain with NRCO until NRCO has received payment of the full price therefore and for all other product supplied by NRCO to [AUSCO].

In the ruling request NRCO and AUSCO advised the relevant Incoterm for the supply or delivery of products by NRCO to AUSCO is CFR. The draft Agreement states:

The products supplied by NRCO to [AUSCO] shall be delivered Cost and Freight at a Port in Australia (Incoterm CFR) in accordance with the ICC-INCOTERMS 2010.

According to the International Chamber of Commerce website CFR in the INCOTERMS 2010 means:

Cost and Freight (CFR): seller clears the goods for export and delivers them when they are onboard the vessel at the port of shipment. Seller bears the cost of freight to the named port of destination. Buyer assumes all risks for goods from the time goods have been delivered on board the vessel at the port of shipment.

NRCO and AUSCO also advised that AUSCO is the 'importer of record for Customs purposes', is responsible for clearing the products through Customs, and is liable for all duty and GST. The draft Agreement states:

[AUSCO] is responsible for clearing all products through Customs.

All charges associated with duty and GST will be the responsibility of [AUSCO]. All other charges, including freight, will be passed on at cost. These charges will be itemised and included on the sales invoice or separately subject to [AUSCO] requests.

NRCO and AUSCO further advised in the ruling request:

While some [products] are supplied on consignment terms by [NRCO], the risks and rewards of ownership rest with [AUSCO] and [AUSCO] acts as principal in all respects.

'Re-supply' of products by AUSCO to NRCO and export of the products by NRCO to NRCO's

Asia-Pacific customers

In the ruling request NRCO and AUSCO advised that, after NRCO has supplied products to AUSCO, AUSCO may 're-supply' some of those products to NRCO so that NRCO can then sell the products to NRCO's customers in the Asia-Pacific region:

In addition to supplying its Australian customers, [AUSCO] may also re-supply [products] to NRCO who will export the [products] for sale within the Asia Pacific region.

[AUSCO] will invoice [NRCO] as a separate supply for the sale of the consignment stock in Australia which [NRCO] exports to its customers in the Asia Pacific region.

NRCO and AUSCO also made the following submission in the ruling request:

As contemplated by the Agreement, [NRCO] will make supplies of [products] to customers in the Asia Pacific region and may choose to source [these products] from the consignment stock held by [AUSCO]. In such instances, [AUSCO] will be entitled to charge [NRCO] a fee for processing and packing the [products] to enable [NRCO] to export the [products] from Australia.

For legal purposes only, [NRCO] retains title to the [products] until paid by [AUSCO]. However, for all other purposes, [AUSCO] enjoys all the rights and responsibilities of ownership and has unfettered dispositive power. Therefore, [AUSCO] will be making a supply to [NRCO] in Australia for [NRCO] to satisfy its orders with its overseas customers.

In an e-mail dated {date} NRCO and AUSCO advised that the Incoterm applied to the sale of products by NRCO to one of NRCO's Asia Pacific customers is CFR and that, accordingly, NRCO is the exporter from Australia.

The section of the draft Agreement relevant to sales by NRCO to NRCO's Asia Pacific customers states:

NRCO SALES IN THE ASIA PACIFIC REGION

NRCO will, from time to time, make sales of products in the Asia Pacific region (subject always to [AUSCO'] appointment under this document as NRCO's exclusive distributor for the resale of products in the territory).

When requested and where it otherwise has the stock available to do so, AUSCO will supply stock to NRCO for sales in the Asia Pacific region on the following terms:

(i) AUSCO will provide processing services to NRCO to assist NRCO in exporting the products from Australia to the Asia Pacific region;

(ii) AUSCO will supply the products at a price equal to the price at which NRCO originally supplied the products to NRCO [sic], plus an amount to reflect the cost of freight borne or to be borne by AUSCO in initially receiving the products to its warehouse, and in subsequently supplying the products for the purposes covered by this clause;

(iii) The products supplied by AUSCO to NRCO shall be sold ex works (Incoterm EXW) in accordance with the ICC INCOTERMS 2010;

(iv) NRCO will provide all necessary documentation and confirmations required under section
38-185(3) of the A New Tax System (Goods and Services Tax) Act 1999 Cth to ensure that the supply (as that term is defined in the GST Act) from AUSCO to NRCO will be GST-free (as that term is defined in the GST Act), including (a) confirmation that the products were goods entered by NRCO for export within the meaning of section 113 of the Customs Act 1901 (Cth); (B) confirmation that the products have not been altered by NRCO (except as necessary for export) since their supply by AUSCO; and (C) the provision of a copy of the bill of lading or seaway bill to confirm the export has taken place.

(vi) AUSCO shall invoice NRCO for the products supplied, with invoices payable within XX days of issue…

In addition, Appendix XX to the draft Agreement states:

[AUSCO] agrees to act as distribution centre for the products for other markets across Asia Pacific region.

All sales/orders shipped to other markets in the region to be processed, packed and shipped at a cost to NRCO of AUD$$ plus freight (cost of freight to be borne by market)

Supply of products by AUSCO to OSCO:

In the ruling request NRCO and AUSCO advised that, as from {date}, OSCO has been selling the products in a specific overseas country, that AUSCO sells the products to OSCO on ex-work terms at market rates, and that AUSCO and OSCO treat the sale of the products by AUSCO to OSCO as a GST-free export for Australian GST purposes. NRCO and AUSCO submitted that the requirements in subsection 38-185(3) of the GST Act are satisfied as follows:

· OSCO is neither registered nor required to be registered for Australian GST;

· OSCO exports the products from Australia within 60 days of paying any consideration or receiving an invoice (whichever is the earlier);

· The products are entered for export within the meaning of section 13 of the Customs Act 1901;

· Following the supply of the products by AUSCO to OSCO the products are not altered or used in any way, except to the extent (if any) necessary to prepare them for export; and

· AUSCO has sufficient documentary evidence (as provided by OSCO) to show that the products are exported.

The products sold by AUSCO to OSCO may be sourced from products either supplied to AUSCO by NRCO on normal terms or delivered by NRCO to AUSCO on consignment. AUSCO enters into agreements to supply the products to OSCO in AUSCO's own right.

Processing fee:

Subclause XX in the 'NRCO Sales in the Asia Pacific region' section of the draft Agreement obliges AUSCO to supply processing services to NRCO to assist NRCO in exporting products from Australia to NRCO's customers in the Asia Pacific region, and Appendix XX to the draft Agreement provides for AUSCO to charge NRCO AUD$$ plus freight (cost of freight to be borne by market) for those services.

The draft Agreement:

The draft Agreement between NRCO and AUSCO is to take effect from {date} once it is finalised.

In addition to the provisions of the draft Agreement already referred to above, the draft Agreement sets out the obligations of NRCO and AUSCO as follows:

NRCO's obligations:

NRCO appoints AUSCO as NRCO's exclusive distributor for the resale of certain products (as detailed in Appendix XX of the Agreement) in Australia and another country (territory) and AUSCO agrees to purchase the products for resale in the territory.

NRCO agrees not to supply the products to other users in the territory and confirms that NRCO has the authority to grant and guarantee AUSCO exclusivity in respect of the products.

NRCO agrees to sell the products to AUSCO at set prices, ex-works an overseas country (countries).

Invoices for products sold to AUSCO on normal terms are payable within XX days. Products delivered to AUSCO on consignment are invoiced at the end of the month and are payable within X days thereafter.

NRCO arranges for all freight and delivery of products from certain overseas countries to the destination specified by AUSCO. AUSCO reserves the right to control logistics and source its own freight and logistics providers.

AUSCO submits each purchase order to NRCO by fax or email under a unique order reference number or code. As soon as possible after receiving a purchase order NRCO tells AUSCO the time and date on which the products ordered should be available for despatch from overseas or any other factory address nominated by NRCO. The draft Agreement states:

Notwithstanding delivery and the passing of risk, property in and title to the product shall remain with NRCO until NRCO has received payment of the full price therefore and for all other product supplies by NRCO to [AUSCO].

NRCO is responsible for the proper packing and shipping of all orders to ensure that containers arrive with the products in first quality condition and is responsible for full replacement including freight and other charges of any products damaged as a result of inadequate packing and shipping.

NRCO agrees to indemnify AUSCO in the event of any claim made against AUSCO by any customer, purchaser, or other person in relation to or in connection with the product, including claims relating to defects in the quality of the product supplied by NRCO to AUSCO.

AUSCO' obligations:

AUSCO agrees to use all reasonable endeavours to promote and extend the sale of the products in the territory.

The parties acknowledge that AUSCO will order stock from NRCO at such times and in such quantities so as to allow AUSCO to maintain sufficient stock levels to fulfil its orders in the territory.

AUSCO agrees to provide a comprehensive sales and marketing service for the products.

AUSCO agrees to provide a quarterly update which will include a forecast of all potential sales activity for the current and upcoming months, mentioning probability of winning percentage (%). The forecasts are not binding for AUSCO and will be used by NRCO only for planning purposes.

The draft Agreement then deals with sales of products by NRCO to NRCO's customers in the Asia-Pacific region. The relevant terms of the draft Agreement have been set out above.

The draft Agreement continues for X years from the date of commencement, but may be terminated by either party by giving six months' notice.

Appendix XX to the draft Agreement states that it is planned to move to 100% consignment stock of certain type of goods within a timeframe to be agreed and sets out agreed levels of consignment stock. Appendix XX also states that for faster types for AUSCO will move to consignment 'as soon as possible' and be maintained at the levels listed, but slower types will remain the property of AUSCO and be purchased by AUSCO (although these types will be replaced by consignment stock within an agreed time frame).

Appendix XX to the draft Agreement states that AUSCO and NRCO agree that systems are to be put in place (but not form part of the Agreement) for:

(a) Order processing - to include lead times and reserving stock;

(b) Consignment stock processing; and

(c) Consignment stock replenishing system.

Terms of supply of products by NRCO to NRCO's Asia-Pacific customers:

As noted above, in an e-mail dated {date} NRCO advised that the Incoterm for the sale of products by NRCO to NRCO's Asia-Pacific customers will be CFR and that, accordingly, NRCO will be the exporter from Australia. As noted above, the International Chamber of Commerce website states that 'CFR' in the INCOTERMS 2010 means that NRCO (as seller) clears the products for export, delivers the products to the customer when the products are placed on board the vessel at the port of shipment, and bears the cost of freight of the products to the port of destination.

Other information

AUSCO's website indicates that AUSCO distributes a range of products on behalf of several manufacturers.

The Australian Business Register confirmed that NRCO does not have an Australian business number (ABN) and is not registered for GST.

Both AUSCO and NRCO requested private rulings in relation to their arrangements. This ruling addresses NRCO's issues, and a separate ruling will be issued to AUSCO.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 7-1

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

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10

A New Tax System (Goods and Services Tax) Act 1999 Section 9-25

A New Tax System (Goods and Services Tax) Act 1999 Section 13-5

A New Tax System (Goods and Services Tax) Act 1999 Section 15-5

A New Tax System (Goods and Services Tax) Act 1999 Section 15-10

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

A New Tax System (Goods and Services Tax) Act 1999 Section 29-5

A New Tax System (Goods and Services Tax) Act 1999 Section 33-15

A New Tax System (Goods and Services Tax) Act 1999 Section 38-185

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-185(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-185(3)

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

A New Tax System (Goods and Services Tax) Act 1999 Division 42

Income Tax Assessment Act 1936 Section 6

Sale of Goods Act 1923 (NSW) Section 23

Reasons for decisions

Question 1 - Does AUSCO make a taxable importation?

Subsection 7-1(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that GST is payable on taxable importations, section 13-15 of the GST Act states that an entity (you) must pay the GST payable on any taxable importation that you make, and subsection 13-5(1) of the GST Act states:

You make a taxable importation if:

(a) goods are imported; and

(b) you enter the goods for home consumption (within the meaning of the Customs Act 1901).

However, the importation is not a taxable importation to the extent that it is a *non-taxable importation.

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

'Import' is defined in section 195-1 of the GST Act to mean 'import goods into Australia'. Goods and Services Tax Ruling GSTR 2003/15 states:

29. Goods are typically imported into Australia when they are brought to Australia to be unloaded here. 'Imported' in this context has its ordinary meaning.

30. Imported goods are entered for home consumption, within the meaning of the Customs Act, by an 'owner', as defined in that Act, entering imported goods for home consumption. The imported goods are entered by lodging an import entry in the name of the 'owner'.

31. If you, as 'owner', lodge an import entry in your name, you enter imported goods for home consumption within the meaning of the Customs Act and you are liable to pay GST on that importation if the importation is a taxable importation.

The draft Agreement states:

NRCO will arrange for all freight and delivery of [products] from certain overseas countries to the destination specified by [AUSCO]

and:

The products supplied by NRCO to AUSCO shall be delivered Cost and Freight at a Port in Australia (Incoterm CFR) in accordance with the ICC-INCOTERMS 2010.

We therefore consider that the requirement in paragraph 13-5(1)(a) of the GST Act is satisfied as the products supplied or delivered by NRCO to AUSCO are brought to Australia to be unloaded here.

The second requirement for a taxable importation, as set out in paragraph 13-5(1)(b) of the GST Act, is specific to an entity, i.e. 'you' make a taxable importation of the imported goods if 'you' enter those goods for home consumption. Section 195-1 of the GST Act states that if a provision of the GST Act uses the expression 'you' it applies to entities generally and section 184-1 of the GST Act defines entity to include a body corporate.

Where goods are entered for home consumption, the 'owner' of the goods must pay any customs duty and GST to the Australian Customs and Border Protection Service (Customs) at the time of entry of the goods (or defer GST which is accounted directly to the ATO). There are certain situations where Customs entries are not required, such as low value importations for goods imported by post that have values not exceeding specified limits.

GSTR 2003/15 states:

98. The 'owner' of the goods for Customs purposes is not restricted to the legal owner. Section 4 of the Customs Act provides that the 'owner' can be:

... any person (other than an officer of Customs) being or holding himself out to be the owner, importer, exporter, consignee, agent, or person possessed of, or beneficially interested in, or having any control of, or power of disposition over the goods.

99. The wide meaning of 'owner' ensures that customs duty (and GST) can be collected on imported goods from the entity that enters the goods for home consumption, regardless of who imported the goods. The 'owner' is held responsible by Customs for the information contained in the import entry. The goods may not be released from Customs control until the GST has been paid.

Accordingly, the 'owner' includes the legal owner of the goods, importer, exporter, consignee, agent, or other person with an interest in, or control over, the goods. The 'owner' is broadly defined under the Customs Act to ensure that whichever entity is named as owner on the Customs entry is responsible for payment of duty and other responsibilities under that Act. It is the owner (as defined) that makes the taxable importation and is liable for GST.

GSTR 2003/15 also states:

31. If you, as 'owner', lodge an import entry in your name, you enter imported goods for home consumption within the meaning of the Customs Act and you are liable to pay GST on that importation if the importation is a taxable importation.

Further, subsection 33-15(1) of the GST Act explains how and when the liability for GST on taxable importations is payable, and states the amounts of GST on taxable importations are to be paid by the 'importer'. GSTR 2003/15 state:

110. GST on taxable importations is payable by the 'importer' to Customs at the same time and place, and in the same manner, as the customs duty on the goods is payable (or would be payable if the goods were subject to customs duty).

111. 'Importer' in this context does not mean the entity that actually brings the goods, or causes them to be brought, into Australia. The liability for GST falls on the entity that makes the taxable importation. Importer, in this context, therefore, simply means the entity that makes the taxable importation and is therefore liable to pay the GST on the taxable importation. That entity is typically, but need not be, the same entity that brings the goods, or causes the goods to be brought, into Australia.

In the ruling request, AUSCO and NRCO advised that AUSCO is the importer of record and is responsible for clearing the products through Customs in Australia (i.e. AUSCO completes the Customs formalities) and paying all charges associated with duty and GST and NRCO. AUSCO confirmed in a letter that AUSCO does not act as an agent of NRCO. The draft Agreement states:

[AUSCO] is responsible for clearing all products through Customs.

We therefore consider that AUSCO satisfies paragraph 13-5(b) of the GST Act.

The importation of products into Australia is not a non-taxable importation under Division 42 of the GST Act (which complements several of the existing concessional items in Schedule 4 to the Customs Tariff Act 1995 (Cth)).

Accordingly, where products are supplied by NRCO to AUSCO on normal terms or delivered on consignment arrive at the Port in Australia and are entered for home consumption by AUSCO, AUSCO makes a taxable importation.

Question 2 - Does AUSCO make a creditable importation?

Subsection 7-1(2) of the GST Act states that entitlements to input tax credits arise on creditable importations. Section 15-5 of the GST Act states that an entity (you) make a creditable importation if:

(a) you import goods solely or partly for a creditable purpose; and

(b) the importation is a taxable importation; and

(c) you are registered or required to be registered.

The requirements in paragraphs 15-5(b) and 15-5(c) of the GST Act are satisfied as the importation of products supplied or delivered by NRCO to AUSCO is a taxable importation (as confirmed in Issue 1 above), and AUSCO is registered for GST.

What remains to be determined is whether the requirement in paragraph 15-5(a) of the GST Act is satisfied.

Meaning of 'you import goods'

For the purposes of the first limb of paragraph 15-5(a) of GST Act it is necessary to identify the entity that imports the goods. GSTR 2003/15 states:

49. The entity that imports goods within the meaning of Division 15, in the context of a taxable importation under Division 13, is the entity that:

(a) causes the goods to be brought to Australia for application to its own purposes after importation, whether by way of supply, use, or otherwise; and

(b) completes the customs formalities for the entry of the goods

We note that in the context of a taxable importation under section 13-5 of the GST Act (as covered in Question 1 above), the importation process includes the physical importation of the goods and the clearance through Customs by an entry for home consumption. Whereas the words 'you import goods' in their context in paragraph 15-5(a) of the GST Act include causing the goods to be brought to Australia for your own purposes, and also completing the Customs' formalities.

In relation to the requirement in paragraph 49(b) of GSTR 2003/15 that the entity that imports the goods also completes the Customs formalities GSTR 2003/15 states:

50 An entity completes the customs formalities where the entity makes a taxable importation by entering the imported goods for home consumption. An entity either enters goods itself, including through an employee, engages a customs broker, or appoints an agent to enter goods on the entity's behalf (in which case the agent is likely to engage a customs broker).

55. In respect of a single importation, more than one party may cause goods to be brought to Australia for application to their purposes. One entity may send the goods to Australia to supply them, and another entity may request or arrange for the goods to be sent so that it can acquire them to use or resell. Where this is the case, the importing entity is the one that finalises the importation process by completing the customs formalities. That is, the entity that enters the goods for home consumption is the entity that imports the goods in these circumstances.

In the present case NRCO and AUSCO advised in the ruling request that AUSCO will be the 'importer of record for Customs purposes' and the draft Agreement states:

[AUSCO] is responsible for clearing all products through Customs.

Consequently we consider that AUSCO is the entity which satisfies the requirement in paragraph 49(b) of GSTR 2003/15.

A footnote to paragraph 49 of GSTR 2003/15 states:

It is necessary, therefore, to ensure that the entity seeking to claim the input tax credit has caused the goods to be brought to Australia for application to its purpose and is also the entity that makes the taxable importation. If one entity causes the goods to be brought to Australia for application to its purposes, and another entity makes the taxable importation, neither entity is entitled to an input tax credit for the GST paid on the importation. (This is discussed further in the Explanation section at paragraphs 166 to 176).

This means that, as AUSCO completes Customs formalities for entry of the products into Australia, AUSCO must also be the entity which causes the products to be brought to Australia for application to AUSCO's purposes after importation in order for AUSCO to satisfy paragraph 15-5(a) of the GST Act and make a creditable importation.

In relation to the requirement in paragraph 49(a) of GSTR 2003/15 that the entity causes the goods to be brought to Australia, the Ruling section of GSTR 2003/15 states:

50 The entity that causes goods to be brought to Australia is identified by looking to the purpose for which the goods are brought here. The entity whose purpose it is to apply the goods by way of supply, use or other application to its purposes after importation is the entity that causes the goods to be brought to Australia.

51. An entity causes goods to be brought to Australia to apply them to its own purposes by way of supply, use or other application where, for example, it:

(i). arranges for goods that it owns to be sent to Australia so that it can use them in Australia;

(ii). places an order with a foreign supplier for goods, for use as trading stock, to be sent to Australia;

(iii). sends or arranges for goods to be sent to Australia to sell, lease or hire them in Australia; or

(iv). sends or arranges for goods to be sent to Australia for the entity to retain as a collector's piece or for investment.

52. Goods are commonly applied to the purpose of an entity when used in a manner consistent with their design or nature, or for the purpose for which the goods are intended to be, or capable of being, used. For example, an item of mining equipment is applied by the entity that uses the equipment for mining. An entity that transports the equipment to Australia and/or provides storage does not apply it in a manner consistent with its design or the purpose for which it is intended to be used. The transporting entity does not cause the equipment to be brought to Australia in this context, even though it is responsible for the physical transporting of the equipment.

53. The importing entity commonly acquires the ability to apply goods to its own purposes by giving consideration commensurate with the value of the goods, where an entity buys the goods, or commensurate with the value of the rights obtained in respect of the goods, where an entity rents or hires goods. Typically, the entity that imports the goods buys them from an overseas source and either uses or consumes the goods in Australia, or re-sells them.

The ATO Fact Sheet Claiming GST credits for goods you import also state:

You have caused goods to be brought to Australia if the goods were brought to Australia for application to your own purposes after importation.

You use goods for your own purposes if you sell, lease or hire the goods, use the goods as trading stock or use the goods in the manner consistent with their design or nature.

AUSCO and NRCO advised that the purchase orders raised by AUSCO differentiate between products supplied by NRCO to AUSCO on 'normal terms' and products delivered on 'consignment terms' and the draft Agreement makes a corresponding distinction between 'AUSCO stock' and 'consignment stock':

Invoices for AUSCO stock will be payable within XX days.

Consignment stock sales/costs will be invoiced at the end of the month and payable within X days thereafter (see below for separate terms on consignment stock)

By letter dated {date} AUSCO and NRCO confirmed that products delivered by NRCO to AUSCO on consignment are delivered on a sale or return basis, and that AUSCO does not act as NRCO's agent. The draft Agreement states:

Notwithstanding delivery and the passing of risk, property in and title to the products shall remain with NRCO until NRCO has received payment of the full price therefore and for all other products supplied by NRCO to [AUSCO].

The draft Agreement also states:

Consignment stock sales/costs will be invoiced at the end of the month and payable within X days thereafter (see below for separate terms on consignment stock).

and sets out those separate terms as follows:

NRCO SALES IN THE ASIA PACIFIC REGION

NRCO will, from time to time, make sales of products in the Asia Pacific region …When requested and where it otherwise has the stock available to do so, AUSCO will supply stock to NRCO for sales in the Asia Pacific region on the following terms:

(i) AUSCO will provide processing services to NRCO to assist NRCO in exporting the products from Australia to the Asia Pacific region;

(ii) AUSCO will supply the products at a price equal to the price at which NRCO originally supplied the products to NRCO [sic], plus an amount to reflect the cost of freight borne or to be borne by AUSCO in initially receiving the products to its warehouse, and in subsequently supplying the products for the purposes covered by this clause;

(iv) NRCO will provide all necessary documentation and confirmations required under section
38-185(3) of the A New Tax System (Goods and Services Tax) Act 1999 Cth to ensure that the supply (as that term is defined in the GST Act) from AUSCO to NRCO will be GST-free…

(vi) AUSCO shall invoice NRCO for the products supplied, with invoices payable within XX days of issue…

In addition, Appendix XX to the draft Agreement states that AUSCO agrees to act as distribution centre for the products for other markets across Asia Pacific region, sets a price for products shipped to that region to be processed, shipped and packed and provides for systems to be put in place for order processing, consignment stock processing and a consignment stock replenishing system.

Given the confirmation by NRCO and AUSCO that products delivered by NRCO to AUSCO on consignment are delivered on a sale or return basis we consider that, notwithstanding the portion of the SALES IN THE ASIA PACIFIC REGION which states:

When requested and where it otherwise has the stock available to do so, AUSCO will supply stock to NRCO for sales in the Asia Pacific region on the following terms:

(ii) AUSCO will supply the products at a price equal to the price at which NRCO originally supplied the products…

AUSCO does not make a supply back to NRCO of products originally delivered by NRCO to AUSCO on consignment.

Where NRCO has delivered products to AUSCO on consignment and AUSCO has not found a buyer by the time NRCO requests that products in order that NRCO may sell that products to a customer of NRCO in the Asia Pacific region, property in and title to that products remains with NRCO, per the draft Agreement:

Notwithstanding delivery and the passing of risk, property in and title to the products shall remain with NRCO until NRCO has received payment of the full price therefore and for all other products supplied by NRCO to AUSCO.

which makes it unnecessary for AUSCO to supply those products back to NRCO.

Legislation governing the sale of goods contains rules as to when property passes to the buyer when goods are delivered on 'sale or return' terms, for example, section 23 of the Sale of Goods Act 1923 (NSW):

23 Rules for ascertaining intention

Unless a different intention appears, the following are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer.

Rule 4. Where goods are delivered to the buyer on approval or on 'sale or return' or other similar terms, the property therein passes to the buyer:

(a) when the buyer signifies approval or acceptance to the seller, or does any other act adopting the transaction,

(b) if the buyer does not signify approval or acceptance to the seller, but retains the goods without giving notice of rejection, then if a time has been fixed for the return of the goods, on the expiration of such time, and if no time has been fixed, on the expiration of a reasonable time. What is a reasonable time is a question of fact.

The clause in the draft Agreement set out above suggests that NRCO and AUSCO do not have a different intention as to when property passes in relation to products supplied by NRCO to AUSCO on consignment.

In addition, the ATO's Fact Sheet GST and Consignment Sales indicates that the ATO considers that, for GST purposes, NRCO does not make a supply to AUSCO when NRCO delivers products to AUSCO on consignment and that NRCO makes such a supply only if AUSCO subsequently finds a buyer for those products and then purchases those products from NRCO. If NRCO does not make a supply of products to AUSCO when those products are delivered to AUSCO on consignment, AUSCO cannot make a supply of those products back to NRCO in the manner suggested in the ruling request. The Fact Sheet states:

Typically, your agreement specifies one of the following:

You agree to sell the goods on behalf of the owner as an agent

You agree to purchase the goods for an agreed price when you find a buyer.

How does GST apply to goods sold on consignment?

The way GST applies to consignment sales you make depends on whether the sale is a 'sale or return' or an 'agency' sale.

'Sale or return' sales

You are making a 'sale or return' sale when you purchase the goods from their owner when you find a buyer for those goods. This means you are selling the goods in your own right because you are purchasing the goods from the owner and selling them to the purchaser. If you make this type of sale and you are registered for GST, you are liable to pay GST on the full sale price of the goods.

The view expressed in the Fact sheet is confirmed in Goods and Services Tax Ruling GSTR 2000/29 which analyses arrangements for delivery of goods on sale or return terms into two supplies and confirms that one of those supplies (i.e. the supply of those goods by sale), 'occurs when the goods are accepted or on-sold' and is attributed in accordance with the basic attribution rules in Division 29 of the GST Act:

239. For attribution purposes, there are two separate supplies made under arrangements for the supply of goods on approval, or on 'sale or return' terms:

· a supply of a right to display the goods for sale, for which no consideration is paid; and

· a supply of goods by way of sale, which occurs when the goods are accepted or on-sold.

240. Under these arrangements (unlike the bailment fee in floor plan arrangements) the supply of rights to display goods for sale is not for consideration and therefore will not constitute a taxable supply.

241. The subsequent supply of goods by the manufacturer or wholesaler (and the acquisition of goods by the retailer) will be for consideration. The basic attribution rules will apply to that transaction as it is a taxable supply.

242. The retailer may return the goods to the supplier before the agreed acceptance period (if any) expires, having decided not to accept them. The return of the goods to the supplier where the original supply was not for consideration does not have any GST consequences.

As we do not consider that AUSCO makes a supply back to NRCO of products delivered by NRCO to AUSCO on consignment, we consider that the issue of whether AUSCO 'causes the goods to be brought to Australia for application to its own purposes after importation' as required by paragraph 49(a) of GSTR 2003/15 must be addressed in relation to the following scenarios:

i. NRCO supplies products to AUSCO on 'normal terms', i.e. AUSCO obtains an order for products from one of AUSCO' customers, AUSCO raises a purchase order for those products on normal terms, AUSCO clears the products through Customs, AUSCO sells the products to AUSCO' customer and AUSCO pays the invoice issued by NRCO to AUSCO within XX day;

ii. NRCO delivers products to AUSCO on consignment, i.e. pursuant to AUSCO' obligation under Appendix XX to the draft Agreement to maintain agreed levels of consignment stock AUSCO raises a purchase order for products on consignment terms, AUSCO clears the products through Customs, AUSCO obtains an order for the products from one of AUSCO's customers, AUSCO purchases the products from NRCO and on-sells the products to AUSCO' customer; and

iii. NRCO delivers products to AUSCO on consignment, i.e. pursuant to AUSCO' obligation under Appendix XX to the draft Agreement to maintain agreed levels of consignment stock AUSCO raises a purchase order for products on consignment terms, AUSCO clears the products through Customs, NRCO obtains an order for the products from one of NRCO's Asia Pacific customers, and AUSCO then supplies processing, packing and shipping services to NRCO in accordance with Appendix XX to the draft Agreement to assist NRCO in exporting the products from Australia to NRCO's Asia Pacific customer.

In the ruling request NRCO and AUSCO submitted that, for the purposes of paragraph 15-5(a) of the GST Act, i.e.

You make a creditable importation if:

(a) you import the goods solely or partly for a creditable purpose;

AUSCO causes the products to be brought to Australia:

[AUSCO] is the entity causing the [products] to be brought to Australia as it places the purchase orders for the [products] directly with [NRCO].

This submission appears to be made in respect of products supplied by NRCO to AUSCO on normal terms or delivered by NRCO to AUSCO on consignment and to rely on paragraph 51(ii) of GSTR 2003/15:

51. An entity causes goods to be brought to Australia to apply them to its own purposes by way of supply, use or other application where, for example, it:

(ii) places an order with a foreign supplier for goods, for use as trading stock, to be sent to Australia;

In our view in scenario 1 above AUSCO satisfies paragraph 15-5(a) of the GST Act, i.e. AUSCO imports the products solely or partly for a creditable purpose. The test, as set out in paragraph 50 of GSTR 2003/15 is to identify:

…the entity whose purpose it is to apply the goods by way of supply, use or other application to its purposes after importation

and paragraph 53 of GSTR 2003/15 states that an entity commonly acquires the ability to apply the goods to its own purposes where an entity buys the goods, and

Typically, the entity that imports the goods buys them from an overseas source and either uses or consumes the goods in Australia, or re-sells them.

In scenario 1 AUSCO obtains an order for products from one of AUSCO' customers, AUSCO issues a purchase order to NRCO indicating that AUSCO wishes to acquire the products on normal terms, AUSCO acquires the products from NRCO on normal terms (i.e. pays the invoice issued by NRCO to AUSCO within XX days), and AUSCO sells those products to AUSCO's customer. In scenario 1 AUSCO is the entity whose purpose it is to apply the products by way of supply to AUSCO' purposes after importation, per the test in paragraph 50 of GSTR 2003/15. Scenario 1 also falls within paragraph 51(ii) of GSTR 2003/15 as AUSCO buys the products from an overseas source and re-sells them.

Scenarios 2 and 3 involve products delivered by NRCO to AUSCO on consignment. The issue of whether goods delivered to an entity on consignment can be treated as trading stock by that entity for income tax purposes is discussed in Taxation Ruling IT 2472 which states (Para 6) that:

…where a sale to the consignee is contemplated the commercial realities of the arrangements should be given due recognition.

IT 2472 was issued in May 1988 following the decision of the High Court in FCT v Sutton Motors (Chullora) Wholesale Pty Ltd (1985) 157 CLR 277 (Sutton) where it was held that stock delivered to the taxpayer on consignment had to be accounted for as stock on hand at the end of the relevant income tax year.

In Sutton the taxpayer acted as the wholesaler for the Sutton group of companies - the taxpayer obtained delivery of (but not title to) new vehicles from General Motors Acceptance Corporation (GMAC) and then purchased those vehicles the day after another Sutton group company sold the vehicle to a customer (whereupon the taxpayer would purchase the vehicle from GMAC and immediately sell it to the other Sutton group company at the same price and the other Sutton group company would discharge the taxpayer's liability for sales tax). The taxpayer sought a deduction in respect of vehicles held by the taxpayer at the beginning of the relevant income year on the basis that the vehicles were 'trading stock on hand' in relation to a business.

The Federal Court held that the vehicles were trading stock on hand (Federal Commissioner of Taxation v Sutton Motors (Chullora) Wholesale Pty Ltd [1983] FCA 107) and a majority of the High Court (Gibbs CJ, Wilson, Deane, Dawson JJ) dismissed the Federal Commissioner of Taxation's appeal.

The judgment of the majority of the High Court discussed the meaning of 'trading stock' (Para 4):

That denotation is of goods held by a trader in such goods for sale or exchange in the ordinary course of his trade. When used in relation to 'a business' as the term is used in the Act generally, that central meaning comprehends the goods held on hand in the business for the purpose of sale or exchange in the ordinary course of trade. The fact that particular goods may not have been paid for or may not be owned by the trader does not preclude their being trading stock on hand in relation to his business if, notwithstanding the lack of payment or ownership, they are legitimately held in the possession of the trader as or as part of the body of stock to be sold or exchanged in the ordinary course of the trade of that business.

The majority of the High Court rejected the Federal Commissioner of Taxation's submission that the vehicles could not be trading stock because the taxpayer had not made any payment in relation to them and was neither the owner of the vehicles nor under any legally enforceable obligation to buy them (Para 6):

We are unable to accept that argument. The relevant vehicles were, at the commencement of the tax year, plainly in the possession and at the risk of the Suttons Group. They were held by the Group for the purpose, and only for the purpose, of being offered for sale in the ordinary course of the composite business which that Group, looked at as a whole, carried on. They represented the stock which the Group held to offer for sale and to sell in the course of that overall business and which it had become entitled to, and commercially though not legally obliged to, purchase from G.M.H. at G.M.H.'s wholesale price at the time it took delivery. If the Group's overall business from the original acquisition of possession of vehicles under the floor plan arrangement to the ultimate retail sale of them to the public be viewed as a composite whole, it appears to us that the relevant motor vehicles were, at the commencement of the tax year, the trading stock on hand in relation to that business within the traditional and central meaning of the term "trading stock". In the courts below it would appear not to have been seriously disputed that the taxpayer had been carrying on business as a wholesaler and that the relevant vehicles had been held in the possession of the taxpayer to sell to Suttons Motors in the ordinary course of that wholesale business. On that approach, it was but a short and obvious step to divide the composite business of the Suttons Group into its component "wholesale" and "retail" businesses and to conclude that the motor vehicles were, for the purposes of s.82D(1), trading stock which the taxpayer held, at the commencement of the tax year, in relation to its wholesale business.

In IT 2472 the ATO acknowledged (Para 5) that it would be anomalous to require an entity to account for the value of stock delivered on consignment at the end of the income year without obtaining a deduction in the same income for the purchase of that stock. IT 2472 distinguishes between delivery of goods to an agent for sale by the agent on behalf of the consignor as principal (in which case the goods never become part of the consignee's trading stock) and delivery of goods on 'on approval' or 'on sale or return' terms and states:

9. On the other hand, where goods are delivered to the consignee 'on approval' or 'on sale or return' and a sale to the consignee is contemplated, it could well be that, like the Sutton Motors case, the consignee is effectively committed to the ultimate purchase of the particular goods from the time of their delivery.

10. The purpose of the delivery of the goods on consignment must be ascertained according to the facts of each particular case. However, it may generally be accepted that consignments involving the sale of goods to the consignee require the approach adopted in the Suttons Motors case. Deductions should therefore be allowed to the consignee for the cost of the goods as at the date of delivery and the goods should be included as trading stock on hand of the consignee.

Applying the reasoning in Sutton and the tests set out in paragraph 9 of IT 2472 to NRCO and AUSCO and to scenarios 2 and 3, we consider that where products are ordered by AUSCO on consignment, a sale of those products to AUSCO is not always 'contemplated' and that AUSCO is not always 'effectively committed to the ultimate purchase of those products from the time of their delivery'. We consider this to be the case because:

Following NRCO's decision to terminate NRCO's distribution agreement with OSCO2 and for NRCO to commence selling products directly to NRCO's customers in the Asia Pacific region (subject to AUSCO' appointment as exclusive distributor in Australia and another overseas country), we would expect a significant volume of products to be delivered by NRCO to AUSCO on consignment so that NRCO can service NRCO's Asia Pacific customers without it ever being 'contemplated' that AUSCO would purchase those products and without AUSCO being 'effectively committed' to the purchase of those products 'from the time of their delivery'.

We consider it very unlikely that NRCO and AUSCO would 'contemplate' the purchase by AUSCO of certain types of products referred to in Appendix XX to the draft Agreement which are delivered to AUSCO on consignment, given that AUSCO agrees to purchase all 'slower types' on normal terms, but to 'move to 100% consignment stock within a timeframe to be agreed' and maintain agreed stock levels. Ultimately this would result in AUSCO issuing purchase orders for the delivery by NRCO to AUSCO on consignment of 'slower types' in order to discharge AUSCO' obligation to maintain the agreed stock levels rather than because the purchase of those 'slower types' by AUSCO is 'contemplated'.

IT 2472 also requires that recognition be given to 'the commercial realities of the arrangements' (Para 6). We consider that the commercial realities of the arrangement between NRCO and AUSCO differ from those in Sutton. In Sutton the majority of the High Court held in respect of the vehicles (Para 6):

They were held by the Group for the purpose, and only for the purpose of being offered for sale in the ordinary course of the composite business which that Group, looked at as a whole, carried on.

The same cannot be said of all of the products delivered by NRCO to AUSCO on consignment as the draft Agreement specifically contemplates that NRCO will sell a portion of those products to NRCO's Asia Pacific customers, and (in Appendix XX) obliges AUSCO to act as a centre for distribution of the products across the Asia Pacific region.

We acknowledge that Goods and Services Tax Advice GSTA TPP 053, which deals with the importation of consignment stock, states:

If the importer is registered for GST, it can claim a GST credit for GST paid on the importation in the same tax period as the importation occurs.

The issue addressed in GSTA TPP 053 is whether the GST payable under section 13-5 of the GST Act on the taxable importation of consignment stock (e.g. imported books) becomes payable only when ownership passes to the vendor under the attribution rules in Division 29 of the GST Act. The ATO ruled that GST payable under section 13-5 of the GST Act is payable when goods delivered on consignment are entered for home consumption (regardless of the fact that the entity which enters those goods for home consumption is not the legal owner of the goods at that time) and that the attribution rules in Division 29 of the GST Act have no application to GST payable on a taxable importation. GSTA TPP 053 focuses on when GST payable under section 13-5 of the GST Act becomes payable. Although GSTA TPP 053 states that the 'importer can' claim a credit for GST paid on importation, GSTA TPP 053 does not address the requirements of section 15-5 of the GST Act in detail.

For the reasons set out above we do not accept, in relation to all products delivered by NRCO to AUSCO on consignment, the submission made in the ruling request that AUSCO causes the products to be brought to Australia in the manner described in paragraph 51(ii) of GSTR 2003/15 (i.e. places an order with a foreign supplier for goods, for use as trading stock, to be sent to Australia). Nor do we consider that the delivery of products by NRCO to AUSCO on consignment falls within any of the other examples in paragraph 51 of GSTR 2003/15. We also note the distinction made in paragraph 52 of GSTR 2003/15 as to how goods are or are not commonly applied to the purpose of an entity:

Goods are commonly applied to the purpose of an entity when used in a manner consistent with their design or nature, or for the purpose for which the goods are intended to be, or capable of being, used. For example, an item of mining equipment is applied by the entity that uses the equipment for mining. An entity that transports the equipment to Australia and/or provides storage does not apply it in a manner consistent with its design or the purpose for which it is intended to be used. The transporting entity does not cause the equipment to be brought to Australia in this context, even though it is responsible for the physical transporting of the equipment.

Applying that distinction to scenarios 2 and 3, we consider that where products are delivered by NRCO to AUSCO on consignment, AUSCO does not apply all of those products in a manner consistent with the purpose for which those products are intended to be used (i.e. for re-sale to a customer). Instead AUSCO is obliged by the draft Agreement to clear those products through Customs, pay duty and GST, and to provide packing, processing and shipping services to NRCO to assist NRCO in exporting the products from Australia.

For the reasons set out above we consider that where products are delivered by NRCO to AUSCO on consignment (i.e. scenarios 2 and 3) AUSCO is not always the entity which 'imports goods' for the purpose of paragraph 15-5(a) of the GST Act. As AUSCO 'will be the importer of record for Customs purposes' (per the ruling request), in cases where AUSCO does not 'import the goods' in relation to products delivered to AUSCO on consignment neither NRCO nor AUSCO makes a creditable importation, as discussed in paragraph 166 of GSTR 2003/15:

166. The entity that imports goods for the purposes of Division 15 must both cause the goods to be brought to Australia and enter the goods for home consumption. Where an entity, other than the entity that causes the goods to be brought to Australia, makes the taxable importation by attending to the customs formalities in its own right, neither entity makes a creditable importation. This is because the entity that causes the goods to be brought to Australia does not complete the customs formalities and pay the GST, and the entity that completes the customs formalities and pays the GST does not cause the goods to be brought to Australia.

Creditable purpose

The second requirement in paragraph 15-5(a) of the GST Act is that the importing entity imports the goods for a creditable purpose. Subsections 15-10(1) and 15-10(2) of the GST Act state:

1. You import goods for a creditable purpose to the extent that you import the goods in *carrying on your *enterprise.

2. However, you do not import the goods for a creditable purpose to the extent that:

(a) the importation relates to making supplies that would be *input taxed; or

(b) the importation is of a private or domestic nature.

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

In the scenario in which we are satisfied that AUSCO imports products for the purposes of paragraph 15-5(a) (i.e. scenario 1 as set out above) we are satisfied that AUSCO does so solely or partly for a creditable purpose (i.e. in carrying on AUSCO' enterprise of acquiring products for the purpose of selling that products to AUSCO' customers) and that the import of the products does not relate to making input taxed supplies and is not of a private or domestic nature.

To summarise, AUSCO makes a creditable importation and is entitled to claim input tax credits in respect of products supplied by NRCO to AUSCO on normal terms (scenario 1), but AUSCO does not make a creditable importation and is not entitled to claim input tax credits in respect of all of the products delivered by NRCO to AUSCO on consignment (scenarios 2 and 3).

Question 3 - Is the supply and export of products by AUSCO to OSCO GST-free?

NRCO and AUSCO advised in the ruling request that AUSCO will sell products to OSCO 'ex works', that OSCO will therefore export the products from Australia, and that OSCO is neither registered for GST in Australia nor required to be so registered. We have confirmed that OSCO does not have an ABN.

According to the Incoterms 2000 annexed to Goods and Services Tax Ruling GSTR 2002/6
'ex works' obliges the seller to place the goods at the disposal of the buyer at the seller's premises.

NRCO and AUSCO submitted in the ruling request that, assuming that the requirements in subsection 38-185(3) of the GST Act are satisfied, the supply of products by AUSCO to OSCO on ex works terms will be GST-free.

Item 1 in the table in subsection 38-185(1) of the GST Act (Item 1) states:

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

GSTR 2002/6 states (Para 22):

The requirement that the supplier is the entity that exports the goods is satisfied where either:

(a) the supplier contracts at the supplier's own expense with an international carrier for the transportation of the goods to a destination outside Australia; or

(b) the supplier is responsible for delivering the goods to the operator of a ship or aircraft who, or that, has been engaged by another party to transport those goods to a destination outside Australia; or

(c) the requirements of subsection 38-185(3) are met (see paragraphs 67 to 81).

and (Para 125):

Where a supplier is only responsible for delivery of the goods at a place inside Australia and to a person in Australia who, or that, is not a ship or airline operator, the supplier is not considered to be the exporter. This is the case under an Ex-works (EXW) or Free Carrier (FCA) contract of sale where the supplier is only required to deliver the goods either at the supplier's own premises, or to a carrier, other than a ship or aircraft operator, named by the buyer. The named carrier may be an agent of the buyer, a freight forwarder, consolidator, or any other third party who, or that, is not a ship or airline operator contracted to carry the goods to an overseas destination. If the supplier is not the exporter, the supply is not GST-free under item 1 or 2 unless the requirements of subsection 38-185(3) are met…

This means that, in terms of paragraph 22 of GSTR 2002/6, where AUSCO supplies products to OSCO on ex works terms, that supply cannot satisfy paragraph 22(a) or 22(b) of GSTR 2002/6 and is GST-free only if the requirements of subsection 38-185(3) of GST Act are met.

Subsection 38-185(3) of the GST Act

Subsection 38-185(3) of the GST Act expands the scope of Item 1, and states that a supplier of goods is treated as having exported the goods from Australia for the purposes of Item 1 in subsection 38-185(1) if the following conditions are met:

(a) before the goods are exported, the supplier supplies them to an entity that is not registered or required to be registered; and

(b) that entity exports the goods from Australia; and

(c) the goods have been rendered for export within the meaning of section 113 of the Customs Act 1901; and

(d) since their supply to that entity, the goods have not been altered or used in any way, except to the extent (if any) necessary to prepare them for export; and

(e) the supplier has sufficient documentary evidence to show that the goods were exported.

(Note that paragraph 38-185(3) (f) of the GST Act relates to the tourist refund scheme and is not applicable in the present case).

In the ruling request NRCO and AUSCO confirmed that AUSCO and OSCO will ensure the requirements in subsection 38-185(3) of the GST Act will be satisfied as follows:

· OSCO is neither registered nor required to be registered for GST;

· OSCO will export the products from Australia within 60 days of paying consideration or receiving an invoice (whichever is the earlier);

· The products will be entered for export within the meaning of section 13 of the Customs Act 1901;

· Following the supply of the products by AUSCO to OSCO, the products will not be altered or used in any way, except to the extent (if any) necessary to prepare them for export; and

· AUSCO will have sufficient documentary evidence (as provided by OSCO) to show that the products are exported.

In relation to the requirement that the supplier (i.e. AUSCO) holds sufficient documentary evidence to show that the products were exported, GSTR 2002/6 states (Para 283) that this requires the supplier to hold commercial documents in relation to the supply (which identify the supplier, the recipient, the goods and the payment arrangements) which clearly link to transport documents (e.g. bill of lading, sea waybill, air waybill, house bill, consignment note, certificate of shipment, or proof of delivery).

Provided that these requirements are satisfied, the supply of products by AUSCO to OSCO on ex-works terms is GST-free under section 38-185 of the GST Act.

Question 4 - Is the re-supply and export of products by AUSCO to NRCO GST-free?

As noted in Question 2, NRCO and AUSCO made the following submission in the ruling request in respect of products delivered by NRCO to AUSCO on consignment:

For legal purposes only, [NRCO] retains title to the [products] until paid by [AUSCO]. However, for all other purposes, [AUSCO] enjoys all the rights and responsibilities of ownership and has unfettered dispositive power. Therefore, [AUSCO] will be making a supply to [NRCO] in Australia for [NRCO] to satisfy its orders with its overseas customers.

NRCO and AUSCO advised that this supply of products by AUSCO to NRCO would be on ex-works terms (per subclause XX in the 'NRCO Sales in the Asia Pacific Region' section of the draft Agreement) and that NRCO would then export the products from Australia to NRCO's Asia Pacific customer (and NRCO and AUSCO subsequently confirmed that the Incoterm for the sale of products by NRCO to NRCO's Asia-Pacific customers will be CFR and that, accordingly, NRCO will be the exporter from Australia). NRCO and AUSCO sought a ruling confirming that the supply of products by AUSCO to NRCO is GST-free pursuant to subsection 38-185(3) of the GST Act.

For the reasons set out above in Question 2, we do not consider that AUSCO makes a supply to NRCO of products previously delivered by NRCO to AUSCO on consignment when NRCO subsequently supplies those products to one of NRCO's Asia Pacific customers. The view that AUSCO makes such a supply to NRCO is not supported by either the rules in sale of goods legislation as to when property passes in relation to goods delivered on sale or return terms, the view expressed in the Fact Sheet GST and Consignment Sales that, for GST purposes, a supply is not made when goods are delivered on consignment, or GSTR 2000/29.

In our view when products delivered by NRCO to AUSCO on consignment are subsequently sold by NRCO to one of NRCO's Asia Pacific customers, NRCO makes a supply of products to that customer which may be connected with Australia pursuant to subsection 9-25(2) of the GST Act (i.e. a supply of goods that involves the goods being removed from Australia). Consequently the issue arises of whether NRCO could eventually exceed the $75,000 registration turnover threshold and be obliged to register for GST in Australia. If that occurred, the issue for NRCO to assess would be whether the supply of the products by NRCO to NRCO's Asia Pacific customer is
GST-free pursuant to Item 1 in the table in subsection 38-185(1) of the GST Act.

Question 5 - Are processing services GST-free?

In the ruling request NRCO and AUSCO advised:

As contemplated by the Agreement [NRCO] will make supplies of [products] to customers in the Asia Pacific region and may choose to source [these products] from the consignment [products] held by [AUSCO]. In such instances, [AUSCO] will be entitled to charge [NRCO] a fee for processing and packing the [products] to enable [NRCO] to export the [products] from Australia.

NRCO and AUSCO submitted that any such processing fee is GST-free where that fee is absorbed into the cost of the products and is not separately invoiced but is taxable where that fee is separately invoiced and identifiable.

This submission appears to be predicated on the idea discussed in Question 4 that AUSCO makes a GST-free 're-supply' to NRCO of products previously delivered to AUSCO by NRCO on consignment. For the reasons set out above in Question 4, we consider that AUSCO does not make a 're-supply' to NRCO of products previously delivered by NRCO to AUSCO on consignment. Consequently, for the purposes of Question 5, we consider whether the supply by AUSCO to NRCO of processing services is GST-free where that supply is separately invoiced and identifiable.

GST is payable on a taxable supply under section 9-5 of the GST Act, which 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.

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

The supply of processing services by AUSCO to NRCO satisfies the requirements of paragraph 9-5(a) to 9-5(d) of the GST Act because AUSCO makes that supply to NRCO in return for a processing fee; the supply is made in the course of AUSCO's enterprise; the supply is connected with Australia (as the services are performed in Australia or provided through an enterprise in Australia); and AUSCO is registered for GST.

However, a supply is not a taxable supply to the extent that it is GST-free or input taxed. There are no provisions in the GST legislation in which the supply of the processing services by AUSCO to NRCO are input taxed. What remains to be determined is whether the supply of processing services is GST-free.

GST-free supply

Subsection 38-190(1) of the GST Act specifies circumstances in which a supply of things other than goods or real property for consumption outside Australia is GST-free. Item 2 in the table in subsection 38-190(1) of the GST Act (Item 2) refers to the following GST-free supply:

a supply that is made to a *non-resident who is not in Australia when the thing supplied is done; and

(a) the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with *real property situated in Australia; or

(b) the *non-resident acquires the thing in *carrying on the non-residents *enterprise, but is not "registered or "required to be registered.

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

Recipient who is a non-resident

For a supply to be GST-free under Item 2 the recipient must be a 'non-resident'. 'Recipient' is defined in section 195-1 of the GST Act in relation to a supply as the entity to which the supply is made. NRCO is the recipient of the supply of processing services made by AUSCO.

'Non-resident' is defined in section 195-1 of the GST Act as an entity that is not an 'Australian resident'. 'Australian resident' is defined in section 195-1 as a person who is a resident of Australia for the purpose of the Income Tax Assessment Act 1936 (ITAA). NRCO and AUSCO advised in the ruling request that NRCO is a company incorporated in Ireland with no taxable presence in Australia. Section 6 of the ITAA states that a company which is not incorporated in Australia is a resident of Australia if that company 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. Based on the advice in the ruling request that NRCO does not have a fixed place of business or any other form of physical presence in Australia, that AUSCO neither acts as agent for NRCO nor has authority to conclude contracts on NRCO's behalf, and all sales by NRCO to customers in the Asia Pacific region are concluded outside of Australia we consider it unlikely that NRCO has its central management or control in Australia or its voting power controlled by Australian resident shareholders.

Not in Australia when the thing supplied is done

For the supply to be GST-free under Item 2 NRCO must not be 'not in Australia when the thing supplied is done'. Goods and Services Tax Ruling GSTR 2004/7 states:

31. The requirement that the non-resident in item 2, or the recipient in item 3, is not in Australia when the thing supplied is done is a requirement, in our view, that the non-resident or recipient is not in Australia in relation to the supply when the thing supplied is done.

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.

and that it would be reasonable for a supplier to conclude that a non-resident company is in Australia if that company is registered with ASIC or has an Australian permanent establishment for income tax purposes (Para 38).

In the present case NRCO and AUSCO confirmed in the ruling request that NRCO does not carry on business at or through a fixed and definite place of NRCO's own in Australia. NRCO and AUSCO also submit that AUSCO does not act as an agent on behalf of NRCO, that AUSCO does not have any authority to conclude contracts on NRCO's behalf, and that NRCO's sales of products to NRCO's Asia Pacific customers are concluded outside Australia. In addition, AUSCO's website indicates that AUSCO distributes a range of products on behalf of several manufacturers, which suggests that AUSCO carries on AUSCO' own business and that NRCO is merely one of AUSCO' customers. Applying the distinction made in paragraph 278 of GSTR 2004/7:

The key issue in this kind of situation is whether the non-resident company is itself carrying on business in Australia through a duly appointed agent, or whether the business being conducted is the agent's own business, the non-resident company merely being one of its customers.

and on the basis of these facts, we do not consider that NRCO is in Australia for the purposes of Item 2.

Alternatively, even if a company is determined to be in Australia, it may not be in Australia in relation to the supply and so can still satisfy the 'not in Australia' requirement in Item 2 (Para 347 of GSTR 2004/7). For supplies of services made by an entity (such as an agent) to a non-resident company, the non-resident company will not be in Australia in relation to the supply of those agency or other services. This is because the entity (such as an agent) does not make the non-resident company in Australia in relation to the supplies that it makes itself to the company (Paras 374 to 376 of GSTR 2004/7).

GSTR 2004/7 states (Para 199) that if the thing done is a service, 'when the thing supplied is done' refers to the period of time when the service is performed.

Accordingly, the requirement that NRCO is not in Australia (in relation to AUSCO's supply of processing services) when the thing supplied is done is satisfied.

Paragraphs (a) and (b) of Item 2

Paragraph (a) of Item 2 requires that the supply is neither a supply of work physically performed on goods situated in Australia nor directly connected with real property situated in Australia when the work is done.

Goods and Services Tax Ruling GSTR 2003/7 states that 'a supply of work physically performed on goods' in paragraph (a) of Item 2 replaced the words 'a supply directly connected with goods' with the intention of allowing a wider range of services to be GST-free (Para 56), and:

57. The range of supplies that are directly connected with goods includes supplies of work physically performed on goods. That is, a supply of work physically performed on goods is always directly connected with goods. However, not all supplies directly connected with goods are also supplies of work physically performed on goods. A supply of work physically performed on goods requires a much closer connection with the goods: it requires a physical intervention with the goods. For example, a supply of legal services in preparing an agreement for the lease of goods is directly connected with goods but it is not a supply of work physically performed on goods as there is no physical intervention with the goods.

58. A supply is a supply of work physically performed on goods where something is done deliberately to the goods to change them or to otherwise affect them in some physical way. The repair of goods is an example of work that is physically performed on goods.

59. In contrast, where activities do not change or affect goods in a physical way, there is no supply of work physically performed on goods. For example, a supply of transporting goods is not work physically performed on goods because the supply only changes the location of the goods, not the goods themselves.

In the present case we consider that the supply of processing and related services by AUSCO to NRCO is analogous to a supply of transporting goods and is not a supply of work physically performed on goods situated in Australia for the purposes of paragraph (a) in Item 2.

Paragraph (b) of Item 2 states that a supply is GST-free if the non-resident acquires the thing in carrying the non-resident's enterprise but the non-resident is neither registered nor required to be registered for GST. We have searched the Australian Business Register and confirmed that NRCO currently does not have an ABN and is not registered for GST. However, as noted in Question 4, NRCO may be obliged to register for GST in Australia as a result of making supplies of products to NRCO's Asia Pacific customers.

We therefore consider that the supply of processing services by NRCO to AUSCO is GST-free pursuant to paragraph (a) in Item 2.

Subsections 38-190(2), (2A) and (3)

Having met the requirements of Item 2, it is necessary to consider subsections 38-190(2), 38-190(2A) and 38-190(3) of the GST Act.

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

Goods and Services Tax Ruling GSTR 2003/8 explains subsection 38-190(2) of the GST Act as follows (Paras 143-144):

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.

Without subsection 38-190(2), the supply of a thing that is connected with Australia, and not otherwise GST-free, could occur without GST being payable, if all of the consideration were to be provided for the granting of a right or option to acquire the thing, notwithstanding that when the thing itself is supplied it may be consumed in Australia.

The Consolidated Explanatory Memorandum to the GST Act provides the following example of a supply to which subsection 38-190(2) of the GST Act applies (Para 5.90):

An Australian based hotel chain supplies rights to accommodation in Australian hotels to a New Zealand travel agency. The travel agency supplies accommodation vouchers to New Zealand tourists who may use the vouchers to obtain accommodation at the Australian hotels. The supply of the accommodation to the tourists is a supply that is connected with Australia. See 3.11 the supply to the travel agency of the rights to the accommodation is therefore not GST-free.

The supply of the processing services by AUSCO to NRCO does not involve a supply of a right or option of the type discussed in the Consolidated Explanatory Memorandum and we consider that subsection 38-190(2) of the GST Act does not apply to the supply of processing services by AUSCO to NRCO.

Subsection 38-190(2A) of the GST Act states that a supply covered by Items 2 to 4 in subsection 38-190(1) of the GST Act is not GST-free if the acquisition of the supply relates to the making of a supply of real property in Australia that would be wholly or partly input taxed. In our view the acquisition of the supply of processing services relates to the supply by NRCO of products to NRCO's Asia Pacific customers, a supply which would not be wholly or partly input taxed, and subsection 38-190(2A) of the GST Act does not apply to the supply of processing services by AUSCO to NRCO.

Subsection 38-190(3) of the GST Act states that a supply covered by Item 2 in subsection

38-190(1) of the GST Act is not GST-free if it is a supply under an agreement entered into, directly or indirectly, with a non-resident and the supply is provided, or the agreement requires it to be provided, to another entity in Australia. Paragraph 38-190(3)(a) of the GST Act is satisfied as the supply of processing services by AUSCO to NRCO is, or will be, a supply under an agreement entered into with a non-resident (i.e. NRCO). Paragraph 38-190(3)(b) of the GST Act, however, is not satisfied as the supply of processing services is not provided, or required by the draft Agreement to be provided, to another entity in Australia. Goods and Services Tax Ruling GSTR 2005/6 states:

59. The word 'provided' is used in subsection 38-190(3) to contrast with the term 'made' in item 2. In the context of section 38-190, the contrasting words indicate that if a non-resident contracts for a supply to be provided to another entity, the place of consumption should be determined with regard to the entity to which the supply is provided, not the entity to which the supply is made.

60. The example in the Explanatory Memorandum accompanying the Bill that introduced subsection 38-190(3) illustrates this. In that example, non-resident parents contract for the supply of education services to be provided to their children in Australia. The contractual flow of the services is to the parents, while the actual flow of the services is to the children. The supply is made to the parents (non-residents) and provided to another entity, each child, in Australia.

61. Thus the expression 'provided to another entity' means, in our view, that in the performance of a service (or in the doing of some thing), the actual flow of that supply is, in whole or part, to an entity that is not the non-resident entity with which the supplier made the agreement for the supply. The contractual flow is to one entity (the non-resident recipient) and the actual flow of the supply is to another entity.

We do not consider that there is an actual flow of the processing services supplied by AUSCO to another entity (i.e. other than NRCO). Even if NRCO's Asia Pacific customer benefits from the processing services supplied by AUSCO, that customer is not located in Australia.

For the reasons set out above we consider that the processing services supplied by AUSCO to NRCO are GST-free pursuant to paragraph (a) in Item 2 and that subsections 38-190(2), (2A) and (3) of the GST Act do not apply to that supply.

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