Edited version of your private ruling

Authorisation Number: 1012571306819

Ruling

Subject: GST and goods installed or assembled in Australia

Question 1

Are any services performed by AB outside Australia in relation to the CD Contract and EF Contracts connected with Australia under section 9-25 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No.

Question 2

Is the stated basis for calculating GST under the CD Contract and EF Contracts fair and reasonable?

Answer

No.

Relevant facts and circumstances

AB is a non-resident entity that has entered into contracts with the Australian resident entities CD) (CD Contract) and GH (EF Contracts).

CD Contract

Under the CD Contract AB agrees to supply and deliver the Goods Delivered At Terminal (DAT) in Australia and to provide and complete Services, comprising:

· Pre-Work at CD's premises (Site); and afterwards

· Work at the Site.

Goods is defined to mean any products including materials or items delivered or to be delivered by AB to CD in execution of the Contract. The Goods were delivered as per contract with CD responsible for importing and clearance.

Services means any work performed or to be performed by the Contractor/Supplier under Contract to CD, other than on the basis of an employment contract consisting of something other than the creation of work of a tangible nature, the safekeeping of goods, the publication of work or the carriage (conveyance) and transportation of persons or goods.

The supply of Goods and Services together is referred to in the contract as 'Work', specifically meaning delivery of Goods, performance of Services, Commissioning of work and all other work performed under and/or in relation to the contract.

AB's supply of Services includes the design and fabrication of component parts which is done overseas prior to delivery in Australia. Various Services are also performed on-site including Site preparation, Site supervision and installing and assembling the Goods. These services are performed by AB employees in Australia and/or subcontractors.

Payments by CD to AB are made based on agreed milestones being:

1. Purchase Order acknowledgement/Contract Agreement;

2. Receipt of main materials to workshop;

3. Dispatch ex works;

4. Upon completion of Incoterm DAT obligations;

5. Completion of pre-works;

6. After mobilisation of employees to CD site for works; and

7. After successful completion of works.

In respect of the CD Contract the value of AB's supply of goods is not specified, nor is a value for the supply of services performed overseas. AB intends to apportion GST to the remainder of the total contract less the customs value of the goods imported under the contract. AB contends that the customs value of the goods imported under the contract is a fair and reasonable approximation of the value of the services performed overseas.

Project EF Contracts

AB entered into the GH Contract. Under the terms of the GH Contract, AB agreed to design, fabricate, supply and deliver goods package to GH. The contract outlines that the place for delivery of the goods is the Common User facility in Australia.

GH imported and cleared the goods. Payments made by GH to AB are made based on agreed milestones:

1. Down payment upon execution of the letter of award between the parties;

2. Upon supplier's order of goods;

3. Upon receipt of the castings at the supplier's factory premises;

4. Upon receipt of the goods at the supplier's factory premises

5. Upon delivery of the equipment to the supplier's nominated carrier at the specified overseas port; and

6. Upon delivery of the equipment at the Australian port CIF.

AB also entered into a contract (IJ Contract) with IJ, an Australia resident entity registered for GST. Under the terms of the IJ Contract AB agreed to supply services, comprising the supervision of installation and pre-commissioning of the goods to IJ.

Together the GH Contract and the IJ Contract are referred to as the EF Contracts.

In respect of the EF Contracts, using the same methodology as above, AB computes that the bulk of the value of the services are performed overseas and are therefore outside the scope of GST. However the supply of services comprising the supervision of installation and pre-commissioning of the GH goods is performed in situ in Australia and will be wholly connected with Australia; this equates with the remainder of the total value.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 section 156-15

A New Tax System (Goods and Services Tax) Act 1999 section 9-80

Reasons for decision

Question 1

Summary

The services performed by AB outside Australia in relation to the CD Contract and EF Contracts are not connected with Australia under section 9-25 of the GST Act.

Detailed reasoning

Goods

Under paragraph 9-25(3)(b) of the GST Act, if a supply of goods involves the goods being brought to Australia and the supplier installs or assembles the goods in Australia, the supply of the goods is connected with Australia. As you state, in the case of the CD Contract and EF Contracts, goods are either assembled or installed by AB in Australia. Therefore the supplies of goods made under these contracts are connected with Australia and subject to GST.

Services

You contend that AB supplies design and fabrication services that are not connected with Australia as they are not 'done' in Australia and they are separate progressive components of a larger supply. The Goods and Services Tax Ruling GSTR 2000/35, which deals with supplies made on a progressive or periodic basis, notes at paragraph 105:

105. Contracts for major capital works often involve construction over a lengthy period of time and result in progress payments being made upon agreed milestones being reached. Division 156 may or may not apply to supplies and acquisitions made under such contracts, depending on the terms of the contract.

GSTR 2000/35 notes that milestone payments may arise in the context of various contractual arrangements including where a supply of goods is followed by a supply of services such as installation. Paragraph 113 of GSTR 2000/35 states:

113. A contract may provide for milestone payments upon construction of an item or items and on supply of related services such as installation. Where property in the partly completed, or partly installed item or items passes at a time prior to completion of the contract the supply may be a progressive supply to which Division 156 applies. For example, where a contract for the supply and installation of a large centrifugal pump provides for title to pass on construction and the process of construction and installation takes several months to complete, the construction and installation is a progressive supply.

GSTR 2000/35 underscores that the supplies made under the CD Contract and the EF Contracts are periodic supplies of goods and services as they contain the required milestone payments and comprise of a supply of goods followed by a supply of services. Clause 20.2(b) of the EF Contracts indicates that property of the goods passed from AB prior to completion of the installation works in accordance with paragraph 113; i.e. unencumbered titled passed prior to shipment.

Similarly, Clause 17 of the CD Contract also indicates that that CD obtains title of the goods well before AB's supply of services is exhausted; CD becomes owner of the goods the moment the goods are stored on its behalf.

Further, the Goods and Services Tax Ruling GSTR 2000/31, which deals with the application of section 9-25 of the GST Act notes at paragraph 65 that a service is 'done' where the service is performed.

65. If the 'thing' being supplied is a service, the supply of that service is typically done where the service is performed. If the service is performed in Australia, the service is done in Australia and the supply of that service is connected with Australia under paragraph 9-25(5)(a). This is the case even if the recipient of the supply is outside Australia.

GSTR 2000/31 underscores that some supplies made under the CD Contract and EF Contracts are not connected with Australia. The contracts in part call for services that are specifically performed overseas rather than in situ, i.e. some of the design and fabrication and other services. These supplies will only be connected with Australia if performed in Australia.

Section 156-15 of the GST Act provides that:

· where a whole component of a progressive or periodic supply would not be connected with Australia if it were a separate supply,

· it can be treated as if it were a separate supply that is not connected with Australia.

Division 156 of the GST Act does not prescribe the breaking up into individual components of the residual 'connected with Australia' parts of the progressive or periodic supply.

Given the breadth of the supplies required of AB under the CD Contract and EF Contracts we consider that the actual supplies made are correctly dealt with under section 156-15 of the GST Act.

Therefore, while the CD Contract and the EF Contracts at a superficial level are for the installation of plant etc. in Australia, there is provision in the GST law to separate out components of the supplies for the purposes of section 9-25 of the GST Act. It follows that the services done by AB overseas can be fairly treated as not being connected with Australia.

Question 2

Summary

The stated basis for calculating GST under the CD Contract and EF Contracts is not fair and reasonable; the basis effectively excises the GST consequences of a taxable supply of goods.

Detailed reasoning

Division 156 of the GST Act does not prescribe attribution rules; rather it is presumed that the values of taxable and non-taxable components of a periodic or progressive supply are identifiable. However, the CD Contract does not lend itself to an easy attribution as part of the non-taxable costs are subsumed into the taxable cost of goods as the contract does not set out a value for the goods component or the services performed overseas.

For supplies that are partly taxable and partly GST-free or input taxed the value of the taxable part is calculated under section 9-80 of the GST Act. That section requires an apportionment. It is necessary to determine the proportion of the value of the actual supply that the taxable part represents.

Subsection 9-80(1) of the GST Act defines the value of the taxable part of the supply upon which GST is payable. The value of the taxable part is defined as the proportion of the value of the actual supply that the taxable supply represents. Subsection 9-80(2) of the GST Act sets out a formula for working out the value of the actual supply, however the proportion in section 9-80 cannot be determined in accordance with the formula in subsection 9-80(2) if two of the variables are 'unknowns'.

As held in Commissioner of Taxation v Luxottica Retail Australia Pty Ltd [2011] FCAFC 20; 2011 ATC 20-243; (2011) 79 ATR 768, the operation of section 9-80 of the GST Act is derived from its intent. It was held that the proportion 'must be determined by the decision maker taking into account the relevant circumstances of the particular case.' The Court added that 'in doing so the decision maker must reach a conclusion as to value and the relationship it has to the price of the supply in question.

In the case of the CD Contract, to use the customs value of the goods imported as the value of supplies not connected with Australia would have the consequence of rendering the actual taxable supply of goods valueless for the purposes of attributing GST. This outcome is contrary to the workings of section 156-15 of the GST Act which allowed the division of supplies into taxable and non-taxable components; the outcome effectively changes a supply that is connected with Australia and taxable at law into a wholly non-taxable supply.

The Commissioner does not consider that the proposed method of apportionment is fair and reasonable as the GST outcome for the taxable supply of goods is ignored. As the methodology for the EF Contracts is the same as for the CD Contract, it follows that the Commissioner does not accept it for that apportionment either.

The Commissioner would regard as fair and reasonable an apportionment method that includes a value assigned to the goods based on their actual value. That value would necessarily include a proportion of the costs incurred by AB's clients on services that are not connected with Australia; it is at the pre-installation phase that the taxable goods were created and became the property of AB's clients.

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