Edited version of your written advice

Authorisation Number: 1012795309976

Ruling

Subject: GST and facilitation of an export

Question 1

For the purposes of Division 57 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) is A acting as a resident agent for D?

Answer

No.

Question 2

Will the supplies made in return for the funding provided by D under the Memorandum of Understanding (MOU) be GST-free under item 2 or 3 of subsection 38-190 of the GST Act (item 2) (item 3)?

Answer

The supplies will be GST-free under item 3.

Question 2

As the nature of the manufacturing process will possibly delay the export of the last piece of equipment beyond the 60 day exemption as outlined in section 38-185 of the GST Act, can the exporting entity request an extension beyond the 60 days?

Answer

Yes, please see response in 'Reasons for decision'.

Relevant facts and circumstances

In 20XX D entered into a Project Arrangement (PA) pursuant to the MOU with A.

The objective of the PA is to enable cooperation between the two parties for the acquisition and verification testing of equipment in Australia for delivery to D.

A will act as an Agent in Australia for D. This will include oversight of the production, testing and approval of equipment in Australia. As an agent, A will enter into a contract with X for the provision of the equipment to D. The payment under this contract will be conducted on an instalment basis with the last instalment due upon the final delivery of the piece of equipment.

Under clause 2 of the Statement of Work for the contract with X, X is responsible for the construction and testing of the equipment in Australia. X is responsible for the delivery of the equipment to D once completed and approved by A.

A will facilitate the transfer of the equipment to D's governing entity under the PA.

To minimise risk to the A's governing body, D will transfer the full contracted amount upfront to A. The funds will be paid into a special account, which is owned and operated by A and is included in its financial statements. A will use the funds to pay X for the milestone payments as agreed under the contract. A has the authority to withdraw funds from the special account where X has met previously agreed milestones.

In addition to the procurement costs for the equipment, D has agreed to fund some other unique estimated costs. The estimate is based on a cost model presented and agreed with the D's governing body and includes such activities as contracted project management personnel, travel, freight, test and evaluation facilities. It is noted that these costs are 'D's governing body's funds' with any uncommitted funding to be returned on completion of the project.

Due to the large number of units that will be produced and the lead times involved in manufacturing the equipment it is highly unlikely that the equipment will be exported by X within the 60 day exemption period as prescribed in section 38-185 of the GST Act.

D's governing body is not registered for GST and does not hold an ABN.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 section 57-1

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

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

Reasons for decision

Question 1

Summary

For the purposes of Division 57 of the GST Act, A is not acting as a resident agent for D. We cannot establish whether D is 'required to be registered' for GST which in this instance is the prerequisite for Division 57 to apply. Furthermore the relationship between A and D is a business to business relationship rather than one of agency.

Detailed reasoning

Division 57 of the GST Act deals with the reassignment of GST liabilities and entitlements from non-residents to their resident agents. Essentially, if the non-resident makes a taxable supply through the resident agent, the resident agent assumes the GST liability. Similarly, if the non-resident makes a creditable acquisition through the resident agent, it is the resident agent that has the resultant entitlement to an input tax credit.

You have stated that the D's governing body is not registered for GST and furthermore you do not know whether it is 'required to be registered' for GST. Until the US Government satisfies either the 'registered for GST' or 'required to be registered for GST' criteria it cannot have GST liabilities or entitlements. It follows that Division 57 of the GST Act cannot be applied in the absence an underlying GST liability and/or entitlement of a non-resident entity.

Agent to principal or business to business?

The factors that determine whether an arrangement amounts to agency are listed in paragraphs 28 and 29 of the Goods and Services Tax Public Ruling GSTR 2000/37:

28. In most cases, any relevant documentation about the business relationship, the description used by the parties and the conduct of the parties establish the existence of an agency relationship. Therefore, the following factors may show that you are an agent under an agency relationship, although no single factor (by itself) is determinative:

• any description of you as an agent, having authority to act for another party, in an agreement (expressed or implied) between you and the other party;

• any exercise of the authority that you are given to enter into legal relations with a third party;

• whether you bear any significant commercial risk;

• whether you act in your own name;

• whether you are remunerated for your services by way of commissions and whether you are entitled to keep any part of your remuneration secret from another party; and

• whether you decide the price of things that you might sell to third parties.

29. In some situations, these factors may be difficult to establish. For example, situations may arise where:

• the existence of a principal is disclosed but not named; or

• the existence of a principal is not disclosed to third parties.

However, documents used by the parties and the conduct of the parties may still indicate the existence of an agency relationship.

In part the MOU defines the relationship between A and D as one of cooperative participants and creates no financial interdependencies between the parties that one might expect between an agent and principal.

The participants are designated as the 'host' and 'parent' - the parent is required to bear certain defined costs. The MOU does however foreshadow that one participant can contract on behalf of another.

As for commercial risk, the MOU notes that costs are to be shared '…. in the same proportions as costs are shared in the PA'. Broadly, under the MOU one party can seek to enter into an agreement to have the other party carry out tasks or projects for it. The MOU alone does not establish that an agency exists; rather it sets up a framework for cooperative dealings between two parties.

The PA also, to some extent defines the relationship between the parties. The PA is entered into under the framework of the MOU and essentially maps out the specific project related roles that both parties are required to fulfil. For example the PA requires that A:

• makes available personnel for design, engineering and testing;

• award a contract (specifically A will contract for and deliver …);

• provide test assets; and

• provide evaluation.

These specific tasks indicate that A is contracting with X on its own behalf as required under its agreement with D rather than being an agent. Clause 7.1 of the PA does differ, stating that A '… will contract on behalf of D', although clause 7.3 contradicts this by seeking to enforce to bind A into entering into its contract with contractors in a specific way and enforcing certain terms and conditions.

As with the MOU it is considered that the PA does not establish the existence of agency, rather it is the constituent document for two contracting businesses, outlining their respective roles, terms and conditions that apply to dealings between the parties and tasks under the contract.

The contract with X notes in the recitals that 'A's governing body has agreed to transfer … equipment .. and associated supplies and services to the D's governing body …'. X is well aware that its work will ultimately be made available to someone other than A, however the contract, in no way, gives D rights over X as one would expect if D was principal contracting through an agent.

On the contrary, the A's governing body solely is awarded all recipient's rights under the contract including termination rights and the sole right to recover money. If A was contracting as an agent it would be expected that it would be obvious that both A and D held these rights.

On balance the relationship between A and D is seen as a business to business relationship with A in a well-defined subcontractor's role in providing oversight, etc. services to D for delivery by X of equipment.

Question 2

Summary

The supplies made in return for the funding provided by D under the MOU will be GST-free under item 3.

Detailed reasoning

Item 2 and item 3 allow for GST-free supplies of things other than goods or real property. While D will acquire goods under the arrangements in place, A is facilitating the supply rather than making it. Under the contract, it is X that is contractually required to make a supply of goods with the goods being provided to D.

The supply that A makes in return for D's funding differs, it may be classified as facilitation or oversight and has the characteristics of a service. Item 2 allows for a GST-free supply if the recipient is:

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 acquired the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered.

Whilst it is most likely that D is a non-resident, this fact is not established in the information provided. As item 2 has a prerequisite of non-residency we will proceed to item 3. Item 3 allows for a GST-free supply if the recipient is not in Australia when the thing supplied is done and the effective use or enjoyment of which takes place outside Australia. A supply is disqualified from this GST-free treatment if it is a supply of work physically performed on goods situated in Australia when the thing supplied is done, or a supply directly connected with real property situated in Australia.

You have advised that the project in Australia is overseen by A and that there are no personnel of D in Australia in respect of the project. Therefore as A's supply to D is one of services made directly to D overseas, it is considered GST-free under item 3.

Question 3

Summary

Given that the nature of the manufacturing process may delay the export of the last piece of equipment the Commissioner will consider requests from the supplier (X) requesting an extension beyond the 60 days outlined in section 38-185 of the GST Act.

Detailed reasoning

Under the contract X is both the supplier and exporter of goods. The Commissioner will consider requests for extension of time to export made by a supplier of goods. To be approved the request should demonstrate that there are physical, practical or commercial reasons that reasonably explain the delay in meeting the specified time period to export.

While not wishing to limit the reasoning in any future application we note the significant testing and evaluation of equipment that will be required before any equipment can be exported. We also note that X is required to rectify defects, etc. In acknowledging that these contractual requirements may extend the time required to export the goods, the Commissioner would consider specific requests of this nature.

Requests from the supplier will be dealt with on their merits.

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