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Edited version of private advice

Authorisation Number: 1012634875817

Ruling

Subject: GST and acquisitions for the repair of a vessel

Question

Are the supplies made by the Australian contractors to the non-resident entity taxable supplies for the purpose of paragraphs 11-5(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice

For the purposes of paragraph 11-5(b) of the GST Act:

Relevant fact

You are a company located outside Australia and are not registered for the goods and services tax (GST). You do not carry on a trading activity in Australia.

You purchased a vessel and took possession of the vessel. The vessel was built in Australia and has always been in Australia. After the purchase the vessel has undergone major repairs in Australia to make it AMSA/SIMSA compliant and sea worthy prior to sailing from Australia.

You contracted Company X as project manager for the repair of the vessel after the purchase. The project manager is to make your vessel AMSA compliant. You have asked Company X to put together a team of small contractors to carry out various components of work on the vessel.

You advised that the contractors are contracted by you, do the work for you and report to Company X. The contractors invoice you directly and copy Company X in the invoice. As project manager Company X will approve or disapprove the invoices based on work performed and pays the contractors out of a trust account set up specifically for the project. All invoices have GST included in the price.

Company X advised that on the commencement of works each contractor was provided with a copy of the overall job list and later assigned particular jobs from that list. Company X has progressively provided additional work orders and instruction for additional repair works to the contractor as required.

The following forms the general agreement between all contractors engaged on this project:

All contractors are registered for GST. You have provided us a list of the supplies made by the contractors to you and from the lists you have acquired from the contractors services, goods, shed for the vessel, insurance policy and transport service.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 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 Subsection 38-190(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-190(3)

Reasons for decision

Under section 11-20 of the GST Act a GST registered entity is entitled to claim back the GST paid for any creditable acquisitions they have made.

Section 11-5 of the GST Act explains when a creditable acquisition is made. One of the requirements for a creditable acquisition is the supply of the thing to the entity from the supplier is a taxable supply (paragraph 11-5(b) of the GST Act).

Taxable supply

A supply is a taxable supply under section 9-5 of the GST Act if:

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

All of the above requirements must be satisfied for a supply to be a taxable supply under section 9-5 of the GST Act.

Characterisation of supplies made by contractors

Before we determine whether the supplies made by the contractors to you are taxable supplies for the purpose of paragraph 11-5(b) of the GST Act we need to determine the character of the supplies made by the contractors to you.

From the information received, you have acquired the following from the contractors:

We will now consider the GST status of each type of supplies you have acquired.

Supply of real property

Real property is defined in section 195-1 of the GST Act to include:

Accordingly, the supply of the shed for the vessel is a supply of commercial property for GST purposes.

From the information received, the supplier of the shed for the vessel satisfies all the requirements of section 9-5 of the GST Act as:

Accordingly, the supply of the real property to you is a taxable supply under section 9-5 of the GST Act.

Supply of right

For GST purposes a supply of insurance policy is a supply of right.

The supply of the insurance policy by the contractor satisfies the requirements in paragraph 9-5(a) to 9-5(d) of the GST Act as:

However, the supply of the right is not a taxable supply to the extent that it is GST-free or input taxed. The supply of the insurance policy is not input taxed.

GST-free supply

Relevant to the supply of the right is item 4 in the table in subsection 38-190(1) of the GST Act (item 4).

Under item 4 a supply that is made in relation to rights is GST-free if:

The insurance is for the duration of the repairs made to the vessel in Australia and therefore the right is for use in Australia. Accordingly the supply of the right is not GST-free under item 4.

The supply of the right is a taxable supply under section 9-5 of the GST Act.

Supply of goods

Section 195-1 of the GST Act defines 'goods' to mean any form of tangible personal property. A supply of goods can occur by way of sale, lease, hire and so on.

Based on the information received, the supplies of goods by the contractors satisfy the requirements in paragraph 9-5(a) to 9-5(d) of the GST Act as:

However, the supplies of the goods are not taxable supplies to the extent that they are GST-free or input taxed. There is no provision under the GST Act that makes the supply of these goods input taxed.

We will now consider the relevant subsections of 38-185 of the GST Act to determine if the supplies of goods satisfy the requirements of a GST-free supply of goods.

Items 1 and 2 in subsection 38-185(1) of the GST Act (items 1 and 2)

Subsection 38-185(1) of the GST Act is about exports of goods and lists the supplies of goods that are GST-free.

Under items 1 and 2, a supply of goods is GST-free where the supplier exports them from Australia and the export occurs before or within a 60 day period or such further period as the Commissioner allows.

Both items require, not only that there is an export of goods, but that the supplier is the entity that exports them.

Goods and Services Tax Ruling GSTR 2002/6 explains when a supply of goods is GST-free under items 1 and 2. Paragraph 22 of GSTR 2002/6 states:

Based on the information received, the contractors do not export the goods as they are not contracting any international carrier to transport the goods overseas. The supplies of goods in this instance are not GST-free under items 1 and 2.

Subsection 38-185(3) of the GST Act

Goods and Services Tax Ruling GSTR 2002/6 explains when a supply of goods is GST-free under subsection 38-185(3) of the GST Act.

Under subsection 38-185(3) of the GST Act, a supplier who has not exported the goods is treated as having exported them for the purposes of items 1 or 2 if the following conditions are met:

However, if the goods are reimported into Australia, the supply is not GST- free unless the reimportation is a taxable importation.

For the purposes of paragraph 38-185(3)(d) of the GST Act, activities such as packaging, wrapping, cleaning, disinfecting, dismantling or testing are considered necessary to prepare the goods for export, where it is not reasonable, given the nature of the goods, to export those goods without carrying out that activity.

Paragraph 38-185(3)(d) of the GST Act is satisfied where the goods, since their supply, have not been altered or used in any way except to the extent to prepare them for export. Any use of the goods which is essentially the same as the ultimate intended use of the goods is considered to be more usage than that necessary to prepare them for export.

Based on the information received, all the requirements in subsection 38-185(3) are not satisfied as:

The supplies of these goods to you are not GST-free under subsection 38-185(3) of the GST Act.

Item 5 in the table in subsection 38-185(1) of the GST Act (item 5)

Item 5 provides for GST-free supplies of stores or spare parts for use, sale or consumption on flights and voyages with a destination outside Australia.

Goods and Services Tax Ruling GSTR 2003/4 provides guidance on when a supply is GST-free under item 5.

Paragraphs 14 to 16 of GSTR 203/4 provide:

According to paragraph 32 of GSTR 2003/4, the goods must be for use, sale or consumption on board a ship to be stores or spare parts within the meaning of item 5

Further paragraph 51 of GSTR 2003/4 provides:

Accordingly, item 5 will only apply to those goods which the contractors supply to you which are intended for use or consumption on board a ship embarking on an international voyage.

Based on the information provided the contractors' supplies of goods are not to be taken on board the vessel for use as a spare part during the international voyage. The goods are either used or installed on the vessel by the contractors while repairing the vessel that is in Australia so that it could be seaworthy and exported from Australia. In this instance item 5 is not applicable.

Item 6 in the table in subsection 38-185(1) of the GST Act (item 6)

A supply of goods is GST-free under item 6 if all the requirements of the item are satisfied unless the supplier reimports the goods according to subsection 38-185(2) of the GST Act.

Item 6 is as follows:

Goods and Services Tax Ruling GSTR 2005/2 explains our view of the operation of item 6.

The requirements of item 6 are:

For the purposes of item 6, goods are from outside Australia if they arrive in Australia from a place outside Australia. This includes ships or aircraft and goods on board the ships or aircraft.

In your case item 6 is not applicable as your vessel is from a place in Australia.

Summary

The supplies of the goods by the contractors to you are taxable supplies under section 9-5 of the GST Act.

Supply of services

Based on the information received, the supplies of services by the contractors satisfy the requirements in paragraph 9-5(a) to 9-5(d) of the GST Act as:

However, the supplies of the services are not taxable supplies to the extent that they are GST-free or input taxed. There is no provision under the GST Act that makes the supply of these services input taxed.

GST-free supply

Relevant to the supply of services made by the contractors to you is item 2 in the table in subsection 38-190(1) of the GST Act (item2).

Under item 2 a supply of things other than goods or real property that is made to a non-resident who is not in Australia when the thing supplied is done is GST-free where:

Only one of the paragraphs needs to be satisfied for the supply to be GST-free.

However, a supply is GST-free under item 2 to the extent that it is not negated by subsections 38-190(2), 38-190(2A) and 38-190(3) of the GST Act.

Non-resident not in Australia

For a supply to be within the scope of Item 2, the supply must be made to a non-resident who is not in Australia when the thing supplied is done. The expression 'not in Australia' requires that the non-resident is not in Australia in relation to the supply.

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

Your company is not incorporated in Australia and you do not carry any business activities in Australia. Accordingly, you are not in Australia in relation to the supply when the contractors make their supplies to you.

Paragraph (a) of item 2

Under paragraph (a) of item 2, a supply of services that is made to a non-resident who is not in Australia when the thing supplied is done, is not GST-free if the supply is directly connected with real property situated in Australia or is a supply of work physically performed on goods situated in Australia when the work is done.

Goods and Services Tax Ruling GSTR 2003/7 provides guidance on when work is physically performed on goods. The following information is from GSTR 2003/7:

The purpose of the engaged contractors is to repair the vessel. In this instance the work done by the contractors for repairing the vessel are work performed on good which is located in Australia except for the transport service. Accordingly, the supplies of services by these contractors do not meet the requirements in paragraph (a) of item 2 and therefore not GST-free.

You have acquired transport service from a contractor for the transport of the main engines and generator from the worksite to Company D in Australia. In this instance, the supply of the transport services is not a supply of work performed on goods though it is directly connected with goods. The supply of the transport service by the contractor is GST-free under paragraph (a) to the extent that it is not negated by subsections 38-190(2), 38-190(2A) and 38-190(3) of the GST Act.

Paragraph (b) of item 2

Under paragraph (b) of Item 2, a supply of a thing other than goods or real property is GST-free if the non-resident acquires the services in carrying on their business and is neither registered nor required to be registered for GST.

The supplier must be satisfied, on reasonable grounds that the non-resident is not required to be registered for GST before they can treat their supply as GST-free under paragraph (b) of Item 2. The supplier can check the GST registration status of an entity that they deal with by checking the Australian business register at www.abr.gov.au

Where the supplier is not in a position to be aware of these circumstances, enquiries should be made of the non-resident. The Commissioner accepts that reasonable grounds to be satisfied, if the non-resident has provided a written statement, declaring that they are not required to be registered. This is only accepted where the supplier has no reason to believe the statement is not accurate.

The supplies of services that you acquire from the contractors are for the vessel which you have purchased for your business purposes. Currently you are not registered for GST and based on the information given you are not required to be registered for GST.

In this instance, the supplies of all services (including the supply of transport) made by the contractors to you are GST-free under paragraph (b) of item 2 to the extent they are not negated by subsections 38-190(2), 38-190(2A) and 38-190(3) of the GST Act.

However, if you choose to register for GST at any time the supplies of these services will no long be GST-free under this paragraph.

Subsection 38-190(2) of the GST Act

Subsection 38-190(2) of the GST Act provides that a supply covered by any of the items 1 to 5 in the table in subsection 38-190(1) of the GST Act 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.

Subsection 38-190(2) of the GST Act is not applicable as the supply of services made by the contractors are not supplies a right or option to acquire something the supply of which would be connected with Australia.

Subsection 38-190(2A) of the GST Act

Subsection 38-190(2A) of the GST Act provides that a supply covered by any of items 2 to 4 in the table in subsection 38-190(1) of the GST Act is not GST-free if the acquisition of the supply relates (whether directly or indirectly, or wholly or partly) to the making of a supply of real property situated in Australia that would be input taxed under Subdivision 40-B or 40-C.

Subsection 38-190(2A) of the GST Act is not applicable as the services provided by the contractors do not satisfy this subsection.

Subsection 38-190(3) of the GST Act

Subsection 38-190(3) of the GST Act provides that, without limiting subsection 38-190(2) or (2A), a supply covered by Item 2 is not GST-free if:

Subsection 38-190(3) only applies to a supply covered by item 2. If a supply satisfies the requirements of item 2 and is therefore ST-free, that supply is covered by item 2.

Subsection 38-190(3) of the GST Act, in contrast to item 2, focusses on the entity to which the supply is provided, not the entity (the non-resident) to which the supply is made. If the supply is provided or is required to be provided to another entity in Australia, subsection 38-190(3) of the GST Act negates the GST-free status that would otherwise apply to the supply covered by item 2. Although the non-resident recipient of the supply is not in Australia, consumption of the supply is considered to be in Australia because the supply is provided to an entity in Australia.

The term 'entity' is defined in subsection 184-1(1) of the GST Act and includes an individual company, partnership, corporate limited partnership or trust. An agent that is for example, an individual or company is also an entity as defined. However, the mere fact that the supply is made to an agent acting for a non-resident does not mean that the supply is provided (or is required to be provided) to another entity. It is a matter of determining to which entity the supply is provided. If all the agent does is to arrange on behalf of the non-resident, the supply is not provided to the agent.

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 of the GST Act, 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.

In the case of delivery or freight services where goods from one entity are addressed for delivery to another entity we accept that the delivery or freight services are provided to that addressee entity.

Based on the information provided, subsection 38-190(3) is not applicable to the supplies of services made by the contractors to you except for the supply of transport service.

Company D is the addressee to whom the goods are to be delivered when the transport service is done. In this instance, the supply of transport service is considered to be provided to Company D. Subsection 38-190(3) is applicable to the supply as the transport service is provided to another entity in Australia and therefore not GST-free under item 2. Accordingly, the supply of the transport service is a taxable supply.

Summary

The supply of services made by the contractors is GST-free under paragraph (b) of item 2 except for the supply of transport service which is a taxable supply by virtue of subsection 38-190(3) of the GST Act.


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