Edited version of your written advice

Authorisation Number: 1012801823583

Ruling

Subject: GST and supplies and acquisitions

Question 1

Are the co-production contributions paid by entity B and entity C to entity A consideration for a taxable supply that A makes to B and C?

Answer

No.

Question 2

Is A entitled to input tax credits on payments made to suppliers in relation to the Project?

Answer

Under section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), A is entitled to an input tax credit equal to one third of the GST included in the price of an acquisition that it makes in relation to the Project.

Pursuant to section 57-10 of the GST Act, A will only be entitled to an input tax credit in respect of the other two thirds of the GST included in the price of an acquisition that it makes in relation to the Project, if B and/or C meet the requirements of section 11-5 of the GST Act in relation to their third of that acquisition.

Relevant facts and circumstances

A, B and C have entered into a contract (the Contract) for a collaborative development of a specified Project. The Project is to be produced and created in Australia.

B and C are not residents of Australia for income tax purposes and are not required to be registered for GST.

The Contract provides that the duties of the parties are as follows:

• Jointly financing the Project in accordance with the Contract

• Meet certain costs of the Project as specified in the Contract

• Undertaking the obligations only as specified in the Contract.

The Contract further provides:

• The executive producer of the Project is A and the co-production parties of the Project are B and C.

• The parties acknowledge that the production will take place in Australia, under the direction of A by a party chosen by A, in its absolute discretion.

• The parties acknowledge that they are obligated to jointly carry out the Project equally in close collaboration.

• The parties agree to form a steering committee. The committee will make decisions concerning the substance of all central planning implementation issues, including decisions regarding the cost and financing plan. A is entitled to make unilateral decisions concerning the joint production costs, provided that any decisions involving variations on expenditure of more than a specified percentage is approved by the committee.

• If any decision to be taken by the committee or any party will result in an increase in the contribution of any of the parties towards the Project, it must be approved unanimously by the committee.

• A is obligated to carry out the Project. A is responsible for meeting all expenses for the Project as detailed in the cost and financing plan with the exception of those mentioned as payable by B and C in the contract. A is also liable to undertake final billing and to account to the other parties in respect of all funds received in accordance with the cost and financing plan. A is responsible for observing the joint production costs, unless modified pursuant to the Contract or modified by the Committee. A must deal with the money required from B and C strictly in accordance with the terms of the Contract.

• B and C will account for a co-production contribution being one third of the joint production costs, in accordance with the cost and financing plan and within the time specified in the Contract.

• B and C acknowledge that GST is payable by A in connection with taxable supplies. The parties agree that this additional cost will be shared by the parties as specified in the cost and financing plan.

• B and C are entitled to deduct any expenses that they have already incurred, or are likely to incur, in respect of joint production costs and the specified budget from the co-production contributions, provided that the committee has approved the expenses.

• If not all the costs detailed in the Contract are expended, which means that a portion of the co-production contributions are unnecessary then A will return the surplus money to B and C in equal sums. That is, the Parties are entitled to choose not to incur the costs detailed in the Contract. However, such decision will require the unanimous consent of the committee.

• Immediately following the conclusion of the Project, A must provide evidence of the Project expenses paid by A to B and C in accordance with the Project, and such evidence must include details of the payment including evidence and date of payment and services covered by the invoice.

• The parties to the Contract will collaborate closely to perform public relations work with respect to the Project, particularly with regard to the branding for the Project.

• The Project will be undertaken as a co-production between the three parties and must be identified as such on all announcements with each party be given equal prominence.

• A will be obligated to make all specified materials available to B and C free of charge for their own purposes. B and C are likewise obligated to make specified materials available to A free of charge for its own purposes.

• The parties mutually grant the right of use of the project-related materials without any restrictions as to content, location, or time to all of the other Parties.

• The parties will jointly own the product when created.

• The parties will equally pay for the cost of storage of the product and disposal of the product. Estimated disposal costs are included within the joint production costs detailed in the Contract.

• The parties acknowledge that they are collaborating on this single Project and that the Contract does not create a partnership agreement.

• No party is entitled to assign the Contract without the written consent of the other parties, which can be granted or withheld in their absolute discretion.

• If the Project is not completed by a specified date, the Contract is terminated, subject to any payments to be made to A in respect of liability already incurred by A. That is, all obligations of the parties immediately cease except for any monetary obligations already incurred by A.

• If a party seeks to leave the Project the other parties will enter into a written agreement detailing the rights of the withdrawing party, including what credit, compensation and copyright ownership shall be shared with the withdrawing Party.

• If any party fails to carry out the Project it must honour its financial commitments as detailed either in the Contract, so that the Project can proceed (unless the committee chooses not to proceed with the Project, in which case A will reimburse all sums paid by a party except for any costs for which A has incurred liability.

• If the parties unanimously decide that they are unable to complete the Project, then the interests of the parties will be dealt with in accordance with a specified clause in the Contract. That is the parties will enter into a written agreement detailing the rights of the parties, including what credit, compensation and copyright ownership belongs to the parties, and the Contract will terminate.

The Contract provides that the project development costs is $X and the individual share of A, B and C is $Y being one third of the total project development costs.

A does not add any mark-up or service fee for its administration of the Project within Australia.

Relevant legislative provisions

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

A New Tax System (Good and Services Tax) Act 1999 section 9-10

A New Tax System (Good and Services Tax) Act 1999 section 9-15

A New Tax System (Good and Services Tax) Act 1999 section 11-5

A New Tax System (Good and Services Tax) Act 1999 section 11-15

A New Tax System (Good and Services Tax) Act 1999 section 57-10

Reasons for decision

Question 1

Summary

A is not making any supply to B and C for consideration. Consequently, A is not making a taxable supply under section 9-5 of the GST Act and is not liable to pay GST on the co-production contributions that it receives from B and C.

Detailed reasoning

Section 7-1 of the GST Act provides that GST is payable on taxable supplies and taxable importations.

Section 9-5 of the GST Act provides that:

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 term defined in section 195-1 of the GST Act)

Paragraph 9-5(a) of the GST Act requires that 'you make the supply for consideration'.

Section 9-10 of the GST Act provides that a supply is any form of supply whatsoever and it includes, amongst other things:

• a supply of goods

• a supply of services

• a creation, grant, transfer, assignment or surrender of any right

• an entry into, or release from, an obligation: to do anything, to refrain from an act, to tolerate an act or situation

'Consideration' is defined in subsection 9-15(1) of the GST Act to include:

(a) any payment, or any act or forbearance, in connection with a supply of anything; and

(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

It will not be sufficient for there to be a supply and a consideration. For the supply to be a taxable supply there must also be consideration and a sufficient nexus between the supply and the consideration.

A is required to carry out the Project and has been appointed as the executive producer of the Project. A's responsibilities include entry into contracts with suppliers as detailed in the cost of financing plan, meeting all expenses for the Project as detailed in the cost and financing plan and observing the joint production Costs. The Contract refers to B and C as co-production parties.

The Contract specifies that the parties acknowledge that they are collaborating on this single Project. Under the Contract the parties agreed to jointly finance the Project and acknowledged that they are obligated jointly to carry out the Project equally in close collaboration. The committee formed by the three parties makes decisions concerning the substance of all central planning implementation issues including decisions regarding the cost and financing plan. Each party has to account for a co-production contribution being one third of the joint production costs. B and C are required to pay their share of joint production costs to A. They are also entitled to deduct any expenses that they have already incurred, or are likely to incur, in respect of joint production costs, from the co-production contribution. The Contract requires A to return any unexpended money (surplus money) to the other parties.

We consider that the nature of the agreement between the parties does not support the view that the Project is created by A and then supplied to the other two parties. There is no indication in the Contract that A is to produce the product and then supply an interest in the finished product to the other parties. Rather, the Contract shows that all the three parties are jointly financing the Project and are liable for the production costs as outlined in the Contract. The Contract provides that the parties will jointly own the product when created. Further, the Contract, whilst not specifying the extent of the interest held by each party in the Project during its production, indicates that each party has certain rights and interests in the unfinished Project at any point in time. The Contract provides that where a party decides to leave the Project or the parties agree unanimously that they are unable to complete the Project, their interest will be dealt with under a specified clause in the Contract, under which the parties will enter into a written agreement detailing the rights, authorship credit, compensation and copyright ownership shared between the parties.

Accordingly, we consider that the co-production contributions paid to A are not consideration for a supply made by A to B and C as A is not making a supply of interest in the Project to the parties.

Further, it was provided that A does not add any mark-up or service fee for its administration of the Project within Australia. Therefore, A does not receive any consideration for the supply of its administration services.

As A is not making any supply to B and C for consideration the requirements of paragraph 9-5(a) of the GST Act is not met. Consequently, A is not making a taxable supply under section 9-5 of the GST Act and is not liable to pay GST on the co-production contributions that it receives from B and C.

Question 2

Summary

When A makes an acquisition in relation to the Project, A is making the acquisition partly in its own right as a principal and partly as an agent for B and C.

Under section 11-20 of the GST Act, A is entitled to an input tax credit equal to one third of the GST included in the price of an acquisition that it makes in relation to the Project.

Pursuant to section 57-10 of the GST Act, A will be entitled to an input tax credit in respect of the other two third of the GST included in the price of an acquisition that it makes in relation to the Project, if B and C meet the requirements of section 11-5 of the GST Act in relation to that acquisition.

Detailed reasoning

Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

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

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

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

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

Under paragraph 11-5(a) of the GST Act, an entity makes a creditable acquisition if the entity acquires a thing solely or partly for a creditable purpose.

For the purposes of paragraph 11-5(a) of the GST Act, firstly we must consider which entity is acquiring the goods and services for the purposes of the Project. In order to do that, we must determine whether A is making the acquisitions wholly in its own right as a principal; or partly in its own right as a principal and partly on behalf of B and C as their agent.

Goods and Services Tax Ruling GSTR 2000/37 deals with agency relationships and the application of the law.

Paragraph 45 of GSTR 2000/37 provides that a transaction is considered to be made by the principal through the agent, if the agent is authorised to undertake the transaction on behalf of the principal, thereby binding the principal to the legal effects of the transaction.

Paragraph 28 of GSTR 2000/37 outlines the factors that indicate that an agency relationship exists and states:

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.

Paragraph 29 of GSTR 2000/37 states:

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.

Where the principal makes a creditable acquisition through the agent, the principal is the entity that is entitled to the input tax credit under section 11-20 of the GST Act. This is consistent with the general law of agency. The acts of an agent are the acts of the principal, and the principal is bound to the legal effects of the transaction.

However, the general law agency principles are overridden in one special circumstance. Division 57 contains a special rule that makes resident agents acting for non-residents responsible for the GST consequences of supplies and acquisitions that the non-residents make through them.

Section 57-10 of the GST Act states:

(1) If a *non-resident makes a *creditable acquisition or *creditable importation through a *resident agent:

(a) the agent is entitled to the input tax credit on the acquisition or importation; and

(b) the non-resident is not entitled to the input tax credit on the acquisition or importation.

(2) This section has effect despite sections 11-20 and 15-15 (which are about who is entitled to input tax credits).

As stated above, the Contract provides that the parties are collaborating on this single Project. Under the Contract the parties have agreed to jointly finance the Project and are obligated to jointly carry out the Project equally. A is appointed as the executive producer and is responsible to carry out the Project. A is required to enter into contracts with suppliers and is responsible for meeting all the expenses for the Project as detailed in the cost and financing plan. B and C are required to account for a co-production contribution being one third of the joint product costs, in accordance with the costs and financing plan. As stated above, A is not supplying an interest in the Project or the product to the other two parties when the Project is completed. Rather the terms of the Contract indicate that throughout the term of the Project the parties are equally liable to finance the Project and have interests, rights and entitlements in the Project before its completion.

Accordingly, we are of the view that when A is making an acquisition in respect of the Project, the cost of which will be shared between the three parties, A is making the acquisition partly (one third) in its own right as a principal and partly (two third) as an agent on behalf of B and C.

A is entitled to an input tax credit under section 11-20 of the GST Act in respect of its own one third share of the acquisition provided all the requirements of section 11-5 of the GST Act are satisfied in relation to that portion of the acquisition.

For A to be entitled to claim an input tax credit on part of the acquisition that it makes on behalf of B and C under section 57-10 of the GST Act, that part of the acquisition must also be a creditable acquisition for B and C, that is, it must meet the requirements of section 11-5 of the GST Act.

One of the requirements of section 11-5 of the GST Act is that the recipient is registered or required to be registered (paragraph 11-5(d) of the GST Act).

B and C are not registered for GST and you advised that they are not required to be registered for GST. For A to be entitled to claim an input tax credit under section 57-10 of the GST Act in respect of the acquisitions that it makes on behalf of B and/or C, B and/or C must register for GST and backdate the date of effect of their registration to the date of the relevant acquisitions. Further, the acquisitions must meet all the other requirements of section 11-5 of the GST Act.

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