Edited version of your written advice

Authorisation Number: 1012825341640

Date of advice: 24 June 2015

Ruling

Subject: GST and registration

Question

Are you required to be registered for GST?

Answer

Yes, you are required to be registered for GST in Australia, where the GST turnover from the supply of transport connected with Australia is at or above $75,000.

Relevant facts and circumstances

You are a company incorporated in Country X. You are a resident of Country X for tax purposes and are not a resident of Australia for income tax purposes.

Your principal place of business is in Country X and you have no physical operational facilities in Australia.

You are a passenger transport provider in Country X, offering low-cost services to more destinations and routes with higher flight frequency within Country X.

You transport passengers to different parts of the world.

When a passenger makes a booking, you issue the passenger with a ticket containing a unique ticket number and an invoice.

The contract of carriage and the general terms and conditions and the regulations that you issue are governed by and construed in accordance with Country X law. Following are the important points:

(a) Bookings may be made directly on your website, your offices, through your authorised distributors and agents, or via your call centre.

(b) No contract for carriage is made in Australia and contracts are made online and accepted by you and do not take place in Australia.

(c) You will carry the passenger if:

1. he/she is named in the itinerary receipt

2. his/her booking is confirmed in the reservation system and

3. upon presentation of proof of identification and such valid travel documents as required by applicable law.

Reservations are valid only for the trips, dates and routes stated in the itinerary receipt.

(d) Fares must be paid in full prior to the issuance of the itinerary receipt and apply only to carriage from the origin to the destination. Fares are considered used and will be forfeited when a passenger is a no-show at the check-in counter or, following successful check-in, at the boarding gate.

(e) A seat is considered confirmed if

(i) the fare and all applicable taxes, fees and charges collected by you are paid in full by or for the passenger, and

(ii) you receive the payment directly or through its authorised agents and representatives.

(f) You may cancel a reservation or refuse the carriage of a passenger if:

(i) the payment is made or reasonably determined by you to probably have been made fraudulently or illegally or

(ii) the fare and other amounts due have not been paid in full and the passenger is unable to pay the balance upon request.

(g) You may contact passengers via e-mail, phone call or text message at the address and number provided by the passenger at the time of booking regarding schedule changes, discovery of fraudulent transactions, general correspondence or cancellation of itineraries.

(h) Travel times shown in the itinerary receipt are not guaranteed and may change between the date of reservation and the date of travel as circumstances warrant. You will exert reasonable efforts to notify the affected passengers of any change in or postponement of the travel schedule.

(i) You may cancel, terminate or delay any trip, or suspend the operation of a route at any time after a reservation has been made.

Your contention

You are not required to be registered for GST where you only provide international services to Australia as those supplies are disregarded in calculating GST turnover.

Following the High Court decision in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 (the Qantas case), your contract of carriage should be characterised as supplying rights to a further supply. That supply will not be included in the GST turnover for the purposes of Division 188 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as the supply of that right is only ever connected with Australia because of section 9-25(5)(c).

Relevant legislative provisions

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 Subsection 9-25(5).

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

A New Tax System (Goods and Services Tax) Act 1999 Section 188-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 188-10.

A New Tax System (Goods and Services Tax) Act 1999 Section 188-15.

A New Tax System (Goods and Services Tax) Act 1999 Section 188-20.

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

Section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) outlines who is required to be registered and it states:

You are required to be registered if:

(a) you are *carrying on an *enterprise; and

(b) your *GST turnover meets the *registration turnover threshold.

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

Currently, the registration turnover threshold is $75,000 (or $150,000 if you are a non--profit body).

Section 188-10 of the GST Act provides that your GST turnover meets the registration turnover threshold if:

• your current GST turnover is at or above $75,000, and the Commissioner is not satisfied that your projected GST turnover is below $75,000; or

• your projected GST turnover is at or above $75,000.

Subsection 188-15(1) of the GST Act provides that your current GST turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. Subsection 188-20(1) of the GST Act provides that your projected GST turnover is the sum of the values of all supplies made in a particular month plus the next 11 months.

However, certain supplies are excluded from the calculation of current and projected GST turnovers. These include:

• supplies that are input taxed

• supplies that are not for consideration

• supplies made from one member of the group to another member of the group, and

• supplies that are not made in connection with an enterprise that you carry on.

Additionally, subsections 188-15(3) and 188-20(3) of the GST Act provide that in working out your current and projected GST turnovers, disregard:

(a) any supply that is not connected with Australia

(b) any supply that is connected with Australia because of paragraph 9-25(5)(c) of the GST Act, and

(c) any supply (other than a supply covered by paragraph 9-25(5)(a) or 9-25(5)(b) of the GST Act):

(i) of a right or option to use commercial accommodation in Australia

(ii) that is not made in Australia, and

(iii) that is made through an enterprise that the supplier does not carry on in Australia.

As you are a non-resident, you will be required to be registered for GST if your GST turnover from supplies that are connected with Australia meets the registration turnover threshold of $75,000.

For the purposes of determining whether a supply is connected with Australia, section 9-25 of the GST Act makes a distinction between a supply of goods (subsection 9-25(1) to (3)), a supply of real property (subsection 9-25(4) and a supply of anything other than goods or real property (subsection 9-25(5).

In this case, you are not supplying goods or real property. Therefore, subsection 9-25(5) of the GST Act is relevant for consideration.

Subsection 9-25(5) of the GST Act provides that a supply of anything other than goods or real property is connected with Australia if:

(a) the thing is done in Australia (paragraph 9-25(5)(a))

(b) the supplier makes the supply through an enterprise that the supplier carries on in Australia (paragraph 9-25(5)(b)) or

(c) all of the following apply:

(i) neither paragraph 9-25(5)(a) nor (b) applies in respect of the thing

(ii) the thing is a right or option to acquire another thing and

(iii) the supply of the other thing would be connected with Australia (paragraph 9-25(5)(c)).

Goods and Services Tax Ruling GSTR 2000/31 discusses when a supply is connected with Australia.

Paragraph 9-25(5)(a) of the GST Act provides that a supply of anything other than goods or real property is connected with Australia if the thing is done in Australia.

'Thing' is defined in section 195-1 of the GST Act to mean anything that can be supplied or imported. It is the subject matter of the supply. Examples of things that can be supplied, that are not goods or real property are illustrated by reference to the meaning of supply in section 9-10. Things other than goods or real property that can be supplied include services (paragraph 9-10(2)(b)), a creation, grant, transfer, assignment or surrender of any right (paragraph 9-10(2)(e)) or any combination of these things(paragraph 9-10(2)(h)) .

Under paragraph 9-25(5)(a) of the GST Act the connection with Australia requires that the 'thing' being supplied is 'done' in Australia. The meaning of 'done' depends on the nature of the 'thing' being supplied. 'Done' can mean, for example, performed, executed, completed or finished depending on what is supplied.

Paragraph 9-25(5)(b) of the GST Act provides that a supply of a thing other than goods or real property is connected with Australia if the supplier carries on in Australia an enterprise by means of a permanent establishment and the supply is made through that permanent establishment. This requires that a connection be established between the permanent establishment and the supply.

Paragraph 9-25(5)(c) of the GST Act provides that where neither paragraph 9-25(5)(a)nor 9-25(5)(b) applies to the supply of a right or option to acquire another thing, the supply of the right or option is connected with Australia if the supply of the other things would be connected with Australia.

In the ruling request it was submitted that you are not a resident of Australia for income tax purposes and have no presence in Australia. On that basis, the supply that you make to a passenger would not be made through an enterprise that you carry on in Australia for the purposes of paragraph 9-25(5)(b) of the GST Act.

You are a transport provider. When a passenger makes a booking through your website or through travel agents, upon payment of the fares, the passenger's booking is confirmed and an itinerary receipt is provided listing the flight, date and route.

You rely on the High Court decision in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41 (the Qantas case) to argue that the contract of carriage should be characterised as supplying rights to a further supply.

The Qantas case considered whether an airline made a supply for consideration where the airline passenger does not take a booked flight and any payment made by the passenger is not refundable (or no refund is claimed).

The majority of the High Court found that the conditions of the carrier

'did not provide an unconditional promise to carry the passenger and baggage on a particular flight. They supplied something less than that. This was at least a promise to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline. This was a "taxable supply" for which the consideration, being the fare, was received'.

The Decision Impact Statement (DIS) for the Qantas case was issued by the Australian Taxation Office (ATO) on 9 November 2012. This outlines the ATO's response to this case, and forms part of the ATO view. In particular, the Commissioner considered that there is nothing in the High Court decision that was inconsistent in a material way with existing ATO views. It also provided that:

The Commissioner maintains the view, as recognised in his public rulings, that in many cases, the entry into contractual obligations and corresponding creation of rights should be construed, where relevant, as part of a composite supply that includes the performance of those obligations.

…

Even where goods or services contemplated by the contract are not supplied, it does not mean that the GST treatment of the transaction will necessarily be affected…

In the context of connection with Australia, there is a similar provision (paragraph 9-25(5)(c), though it may be noted that the question of whether there is a right to acquire another thing that is connected with Australia, only arises where the 'thing' is not done in Australia and the supply is not through an enterprise the supplier carries on in Australia.

GSTR 2009/3, which discusses cancellation fees, was amended to reflect the reasoning of the High Court in the Qantas case.

A key aspect of the decision in the Qantas case is that in cases where a payment is made on entry into a contract which secures rights (whether conditional or not) to a further supply, as outlined in GSTR 2009/3, the Commissioner considers that the payment will be consideration for a supply consisting at least of the provision of those rights (and entry into corresponding obligations), even if the further contemplated supply is not ultimately made.

GSTR 2009/3 provides examples that demonstrate the application of the principles outlined in paragraphs 17 to 89 of the Ruling and this includes airline ticketing arrangements:

176A. When an airline ticket is issued and the terms and conditions of the ticket are accepted by the customer, the supplier (usually the entity operating the airline service) enters into a contract with the customer.

176B. Accordingly, where a fare is paid to secure an airline ticket governed by contractually binding conditions of carriage in which the airline promises (subject to exceptions) to transport the passenger, it is considered that the airline makes a supply for consideration even if the passenger is subsequently a no-show.

176C. This is consistent with Qantas , where the majority of the High Court described clause 9.2 of the Qantas Conditions of Carriage as 'critical'. That clause commenced with the words: 'We will take all reasonable measures necessary to carry you and your baggage and to avoid delay in doing so.' The majority went on to say:

The Qantas conditions and the Jetstar conditions did not provide an unconditional promise to carry the passenger and baggage on a particular flight. They supplied something less than that. This was at least a promise to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline.

177. Even in cases where there is not a comparable obligation undertaken by an airline, an airline may enter into other obligations, or do other things, that could also constitute a supply. Tickets for domestic or international transport (travel) may be purchased directly from an airline or through a travel agent. In booking the travel, the airline or travel agent arranges travel and in doing so makes a facilitation supply to the customer. For example, the airline or travel agent:

• checks the availability of seats on flights;

• checks the range of air fares available;

• informs the customer about available seats and fares;

• makes the relevant booking or reservation;

• if payment is not made immediately, holds the booking pending payment;

• issues the ticket upon payment of the full price; and

• makes other arrangements to facilitate the travel.

178. Contractual obligations typically entered into include obligations relating to carrying a customer's baggage, paying refunds, providing credits and assisting the passenger to travel, for example, rebooking if there is a change in travel plans or on cancellation of flights.

As outlined above when an airline confirms the booking it does a number of 'things'.

Goods and Services Tax Ruling GSTR 2001/8 discusses mixed and composite supplies.

19. Where a transaction comprises a bundle of features and acts, it may be necessary to characterise what is supplied to determine whether a particular provision applies in whole or in part. The characterisation should be undertaken in a manner that is consistent with the object of the particular statutory provision in issue. For example, if a provision specifically requires different treatment of two components of a transaction, this will mean that the two components must necessarily be separately recognised. However, that does not mean that the two components need to be separately recognised for all purposes of the GST Act.

19A. An identification of the essential character of what is supplied may inform whether (and to which extent) a particular transaction falls within the terms of a specific statutory provision. You must consider all of the circumstances of the transaction to ascertain its essential character.

19B. Having regard to the essential character and with regard to the statutory provision in issue, you can then determine whether the transaction is a mixed supply because it has separately identifiable parts that the GST Act treats as taxable and non-taxable, or whether it is a composite supply because one part of the supply should be regarded as being the dominant part, with the other parts being integral, ancillary or incidental to that dominant part.

The distinction between parts that are separately identifiable and things that are integral, ancillary or incidental, is a question of fact and degree. In deciding whether a supply consists of more than one part we adopt a common sense and practical approach.

You argue that when a booking is confirmed what it is supplying is a right to acquire a further supply.

The word 'right' is not defined for GST purposes and has a broad meaning under the general law. A 'right' has been defined as 'generally, a benefit or claim entitling a person to be treated in a certain way'.

Goods and Services Tax Ruling GSTR 2003/8 examines the meaning of the expression 'supply that is made in relation to rights' in item 4 in the table in subsection 38-190(1) of the GST Act.

Paragraphs 64 to 72 of GSTR 2003/8 discuss supply that is the a creation, grant, transfer, assignment or surrender of any right (paragraph 9-10(2)(e).

65. Where a transaction comprises a bundle of features and acts, you must consider all of the circumstances of the transaction to ascertain its essential character. While many transactions involve rights being supplied, Category 1 only covers a supply if:

• the essential character or substance of the supply, or the dominant part of a composite supply, is one of rights; or

• the essential character of a separately identifiable part of the supply is one of rights.

66. Where rights are merely integral, ancillary or incidental to another dominant part of the supply, the supply is characterised by the dominant part.

70. Rights are created under executory contracts and although the creation of such rights is supported by valuable consideration, the supply may not be characterised as a supply that is made in relation to rights if, for example, those rights contribute to the supply as a whole but cannot be identified as the dominant part of the supply.

71. For example, under an agreement for the sale of goods, a right to the title to the goods may be created in return for consideration. In determining whether this is treated as a single supply or as separate supplies of goods and rights, it is useful to apply the indicators set out in GSTR 2001/8. Applying paragraph 59 of GSTR 2001/8, the rights are regarded as integral, ancillary or incidental to the dominant part of the supply. The supply is a supply of goods.

This approach to rights under executory contracts is consistent with the analysis of a supply of real property under a standard land contract in Goods and Services Tax Ruling 2000/28. The supply of an equitable interest in the land upon entry into the contract is ancillary to what is the substance of the transaction, namely the transfer of title and delivery of possession at settlement.

In this case, when confirming a booking, you do 'things' similar to the ones listed in paragraph 177 of GSTR 2009/3. This may include granting a right to the transport.

Applying the principles adapted in the above rulings, we consider that although a 'right to a further supply' is granted at the time of confirmation of the booking, the supply of this right is integral, ancillary or incidental to the dominant part of the supply being the air transport. Hence, the essential character of the supply that you make when you confirm a booking is the service of transporting passengers.

The supply of the air transport is partly done in Australia, with the passenger either arriving in Australia or departing from Australia. Hence, the supply is (partly) connected with Australia under paragraph 9-25(5)(a) of the GST Act.

As the supply is connected with Australia under paragraph 9-25(5)(a) of the GST Act, the requirement of sub-paragraph 9-25(5)(c)(i) is not satisfied. Hence, paragraph 9-25(5)(c) is not applicable.

As such the supply is not disregarded in working out the current and projected GST turnovers (subsections 188-15(3) and 188-20(3) of the GST).

Your supply of transport is partly connected with Australia. Consequently, where GST turnover from the supply of transport connected with Australia (under paragraph 9-25(5)(a)) is at or above $75,000, you are required to be registered for GST under section 23-5 of the GST Act.

Additional Comments:

We note that the Board of Taxation's review of GST cross-border transactions recommended to remove the requirement for non-residents to register if they only make GST-free supplies (Recommendation 9). To date no change has been enacted. Therefore, this issue is not considered in providing this private ruling.

The Commissioner does not have the discretion to waive the requirement to register if the entity is required to be registered.

GSTR 2001/8 provides methods and examples that may be used to work out how to apportion the consideration for a supply that contains separately identifiable taxable and non-taxable parts. The general principle provided in the ruling to use any reasonable method of apportionment that is supportable under the circumstances can be adopted to determine the extent to which the supply of the air transport is connected with Australia. Records must be retained to support the method of apportionment used.

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