Edited version of your written advice

Authorisation Number: 1012826477112

Date of advice: 3 July 2015

Ruling

Subject: GST and reimbursement under a warranty arrangement

Question:

Is an Australian company (AusCo) making a taxable supply in relation to a reimbursement received by AusCo from an overseas company (OSCo)?

Advice/Answers:

No. AusCo is not making a taxable supply in relation to a reimbursement received by AusCo from OSCo.

Relevant facts and circumstances

AusCo is an Australian company that is registered for GST.

A non-resident company (NRCo) is a based overseas. NRCo is not registered for Australian GST. AusCo is 100% owned by NRCo.

Another overseas company (OSCo) is an overseas based manufacturer. OSCo is not registered for Australian GST. OSCo is the ultimate parent company of both NRCo and AusCo.

AusCo is a distributor of various goods. The products distributed by AusCo are manufactured in various countries around the world, including by OSCo in an overseas country.

AusCo acquires products for distribution in Australia from OSCo (and where relevant NRCo) on a FOB basis. That is, AusCo is the importer of record for all OSCo and NRCo products at the time they enter Australia.

AusCo sells products to various retailers. The retailers sell the products to the end users (customers).

All or substantially all of the group's dealings in Australia are undertaken by AusCo (or another entity in Australia).

Distribution Agreements

OSCo has entered into an agreement with NRCo for the distribution of its products in Australia (the OSCo Distribution Agreement).

Under the OSCo Distribution Agreement, NRCo shall, at NRCo's own expense, provide to purchasers and end users a parts and labour limited warranty with respect to products.

Similarly, NRCo is required to provide repair and other customer services free of charge to OSCo. Such repairs and customer service could include providing repair services to customers outside of the warranty period or terms.

OSCo is required to reimburse NRCo for expenses incurred in relation to certain 'excess failures' (the reimbursement). The excess failures are specifically defined in the OSCo Distribution Agreement as service incidents occurring within a specified period from the date of sale of a product affecting a specified percentage of a product category produced within a specified period and resulting from the same cause. This agreement also quantifies the payment of the reimbursement.

The OSCo Distribution Agreement contemplates binding other entities in the corporate group (which includes AusCo) to the terms of the OSCo Distribution Agreement. This is because the parties are all part of the same 100% owned corporate group. The OSCo Distribution Agreement is broad enough to bind AusCo. Further, it is the standing practice of OSCo to reimburse AusCo directly for expenses incurred in relation to any excess failure pursuant to the verbal understanding between the group that members should be responsible for dealing with warranties and any statutory obligations in their local jurisdictions.

NRCo also has a distribution agreement with AusCo for the distribution of all of the products in Australia (the NRCo Distribution Agreement). NRCo is referred to as the manufacturer, and AusCo is the distributor in this agreement.

Under the NRCo Distribution Agreement, NRCo has agreed that it will only sell its manufactured and distributed products in Australia to AusCo.

AusCo is, at AusCo's expense, required to provide a warranty to customers in relation to the products sold. The NRCo Distribution Agreement provides:

The Distributor [AusCo] shall warrant the products as free from defects initially for a period… and the Distributor shall be responsible for all costs, claims, losses or expenses suffered or incurred directly or as a result or consequence of the Distributor's warranty…. For the avoidance of doubt, the Distributor agrees that the Manufacturer shall not be liable in any way for any loss or damage of any kind (including consequential loss or damage) arising out of any warranty given or representation made by the Distributor in relation to the products.

AusCo is responsible for complying with all Australian rules and regulations in relation to the distribution of the products including all Australian consumer laws.

The Manufacturer's Warranty Card and warranty information to the end customers outline the warranty on the products, given by AusCo (as the warrantor).

Repair services

AusCo or an authorised repairer will, at AusCo's cost, repair/replace/rework (referred to as 'repair services') products that are under warranty, where a fault is identified, or where a recall notice is issued for an identified fault in a product.

AusCo has repair agreements with a number of third parties to carry out the repair services. The third parties are engaged and paid by AusCo for the repair services they undertake.

Where a product that is to be repaired requires parts to be replaced, they may be sourced from existing stock held by AusCo, OSCo, or third parties.

AusCo incurs various costs associated with the repair services.

At the time AusCo undertakes the repair services (or engages a third party to perform the repair services) the products may be owned by either:

• AusCo (AusCo's goods - such as where the goods may have been damaged in transit from OSCo to Australia, or a fault is identified prior to sale), or

• the consumer (customer's goods).

All products are in Australia at the time of the repair services and are undertaken at either:

• an AusCo warehouse (i.e. new products with title held by AusCo or recalled/returned products);

• the premises of the third party; or

• at an end consumer's premises (i.e. products already sold and installed).

AusCo will generally account for the cost of the repair services as an expense incurred in the conduct of its business.

Where the costs of the repair services exceed the pre-agreed threshold, AusCo will seek reimbursement from OSCo.

Where there are excess failures, AusCo will provide a work authorisation/quote to OSCo for the repair services relating to the excess failures.

The reimbursement is sought pursuant to the 'excess failure' clause in the OSCo Distribution Agreement.

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 38-190

Reasons for decision

At the time AusCo undertakes the repairs in relation to excess failures (or engages a third party to perform the repairs) the relevant products may be owned by either AusCo (such as good damaged in transit from OSCo to Australia, or identified as faulty prior to sale) or the consumer (customer's goods).

Reimbursement in relation to 'customer's goods' (that is, goods sold to a customer with a domestic warranty)

Under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), 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.

One of the requirements of a taxable supply is that the supply is made for consideration.

Goods and Services Tax Determination GSTD 2006/1 addresses the treatment of a payment from a non-resident car manufacturer to an Australian distributor in circumstances where the distributor, under its own warranty with a customer, repairs a customer's car or engages a third party to make the repairs. GSTD 2006/1 states:

5. Called variously, an 'offshore warranty chargeback arrangement', a 'cross border warranty arrangement', an 'overseas warranty charge', 'recharge', 'compensation', or 'reimbursement', the name given to such an arrangement between a non-resident manufacturer and an Australian distributor does not necessarily affect its characterisation. In this Determination we refer to a warranty given by a non-resident manufacturer as an offshore warranty.

6. Any warranty the Australian distributor may give to a customer who ultimately purchases a car is a separate warranty (the domestic warranty). Its terms may be similar to, and are commonly broader than, the terms of the offshore warranty. For example, the distributor may offer a warranty with a longer period of cover.

GSTD 2006/1 applies where the warranty from the car manufacturer:

• covers some or all of the cars (in this case, the goods) supplied by the manufacturer to the distributor;

• requires the Australian distributor to supply a warranty with the car (goods); and

• requires the non-resident manufacturer to pay the Australian distributor an amount in respect of the repairs effected under the Australian distributor's warranty.

It is appropriate to look at the 'whole facts of the case', where three or more parties are involved.

The facts indicate that OSCo (a non-resident manufacturer), NRCo (a non-resident entity) and AusCo are related entities. OSCo has entered into a distribution agreement with NRCo for the distribution of OSCo brand products in Australia. NRCo in turn has a distribution agreement with AusCo for the distribution of all of the products in Australia.

Under the OSCo Distribution Agreement, NRCo is required, at its own expense, to provide to purchasers and end users a warranty with respect to the products. In turn, under the NRCo Distribution Agreement AusCo is, at its own expense, required to provide a warranty to
end-customers in relation to the products sold.

OSCo is required to reimburse NRCo for expense incurred in relation to 'excess failures' (the reimbursement). As the parties and the OSCo Distribution Agreement contemplate binding other entities in the corporate group (which includes AusCo) to the terms of the OSCo Distribution Agreement, where the costs of the repair services exceed the pre-agreed threshold, AusCo will seek reimbursement directly from OSCo. Accordingly, OSCo reimburses AusCo directly for expenses related to excess failures (reimbursement).

The principles in GSTD 2006/1 are applicable to the facts outlined above.

GSTD 2006/1 further explains the relevant arrangement and the Commissioner's view, and states:

10. When repairs are made by the Australian distributor, or by its authorised repairer, there are obligations under two warranty arrangements that are relevant - the domestic warranty given by the distributor, and the offshore warranty given by the non-resident manufacturer. Under the offshore warranty, the non-resident manufacturer cannot make the repairs itself as it has no presence in Australia. In practice, neither the non-resident manufacturer nor the distributor expects or intends the non-resident manufacturer to undertake the repairs. The fact that the non-resident manufacturer requires the distributor to have in place a warranty under which the distributor is required to make repairs demonstrates this.

11. If the non-resident manufacturer, itself, engaged an entity such as a distributor or third party to make the repairs required under the offshore warranty, this entity would be making a supply of repair services to the manufacturer. However, the distributor repaired the car or has had the car repaired because it is required to do so on its own account under the domestic warranty. While the wording of the warranty agreement between the manufacturer and the distributor may suggest that the manufacturer is required to repair the car, the surrounding circumstances show that the manufacturer is not so required, and in any case cannot do so once it is carried out by the distributor. The manufacturer is required to pay to the distributor its costs (or some of its costs) for having the car repaired. By paying the distributor the agreed rate for a particular repair, the non-resident manufacturer meets its obligations under the warranty.

12. Circumstances surrounding a warranty's contractual arrangements, and the way these arrangements are carried out, may indicate that the repairs are something the distributor does on its own account. This would be indicated if these circumstances include:

• the non-resident manufacturer's inability to make the repairs itself;

• the distributor's obligation to make repairs under a separate warranty that it gave to the customer; and

• the intent of the parties to apply the warranty undertakings given by the non-resident manufacturer on the basis of the non-resident manufacturer having a payment obligation rather than a repair obligation, and the parties acting on this basis.

13. In these circumstances we consider that the arrangement is one where the non-resident manufacturer has undertaken an obligation to make a payment to the distributor at agreed rates if a certain event, being the need to repair the vehicle, occurs. This indicates that the payment is not consideration for a supply.

The arrangements between OSCo, NRCo, and AusCo are that AusCo is, at its own expense, required to provide a separate (domestic) warranty to customers in relation to the products sold in Australia. That is, AusCo or an authorised repairer will, at AusCo's cost, repair/replace/rework (refer to as 'repair services') products that are under warranty, where a fault is identified, or where a recall notice is issued for an identified fault in a product. This warranty is outlined on the Warranty Card (and information) provided to the end-customers. AusCo is also responsible for complying with all Australian rules and regulations in relation to the distribution of the products including all Australian consumer laws. AusCo will generally account for the cost of the repair services as an expense incurred in the conduct of its business. OSCo does not and is unable to make the repairs itself. In relation to the reimbursement, OSCo has a payment obligation rather than a repair obligation.

In accordance with GSTD 2006/1 (paragraph 13), in this circumstance we do not consider there to be a supply from the distributor to the non-resident manufacturer for which this payment is consideration. As the non-resident manufacturer has a payment obligation rather than a repair obligation there is no need for it to engage a repairer in Australia to carry out the repairs. This means that while the written agreements might indicate that the distributor has agreed to supply repair services to the non-resident manufacturer this is not the case: there is no intention for there to be a supply of repair services from the distributor to the manufacturer. The payment is made to satisfy the non-resident manufacturer's obligation under the offshore warranty to make the payment if repairs that fall within the terms of the warranty are necessary. While the amount of the payment is calculated with reference to the repairs carried out, this does not mean that there is a supply from the distributor to the non-resident manufacturer. It is just that the manufacturer's obligation is determined in advance under the offshore warranty arrangement.

Accordingly, we consider that there is no taxable supply and, hence, no GST payable in relation to the payment from the manufacturer (OSCo) to the distributor (AusCo).

Reimbursement in relation to AusCo's goods prior to sale to customers

In this circumstance, the goods are owned by AusCo and have not yet been sold to customers. The repairs are done by AusCo in accordance with the distribution agreements (considered to be the offshore warranty) between OSCo and/or NRCo, and AusCo. As the customers are not yet involved in the transaction, the repairs are not done by AusCo to satisfy its obligation under a domestic warranty with the customers.

There is a supply of repair services by AusCo to OSCo (or NRCo).

The supply of repair services to OSCo or NRCo is a taxable supply if all the requirements of section 9-5 of the GST Act are satisfied. The facts indicate that the requirements of paragraphs
9-5(a) to 9-5(d) of the GST Act are satisfied in relation to the repair services. However, the supply is not taxable to the extent that it is GST-free or input taxed.

Section 38-190 of the GST Act specifies when supplies of things, other than goods or real property, for consumption outside Australia are GST-free. Item 2 in the table in subsection 38-190(1) of the GST Act (Item 2) is relevant in this circumstance.

Under Item 2, a supply is GST-free where it is:

a supply that is made to 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 acquires the thing in *carrying on the non-residents *enterprise, but is not *registered or *required to be registered.

However, subsection 38-190(3) of the GST Act provides that a supply covered by item 2 is not GST-free if it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident; and the supply is provided, or the agreement requires it to be provided, to another entity in Australia.

Precondition - recipient not in Australia in relation to the supply

For the supply to be GST-free under Item 2 there is a condition that the recipient must not be in Australia in relation to the supply when the thing supplied is done. Goods and Services Tax Ruling GSTR 2004/7 discusses when an entity is not in Australia when the thing supplied is done.

The facts indicates that the supply of the repair services is made to a non-resident entity (OSCo or NRCo) which is not in Australia in relation to AusCo's supply, when the services are performed for the purposes of Item 2.

Paragraphs (a) or (b) of Item 2

Under paragraph (a) of Item 2, a supply of a thing that is made to a non-resident who is not in Australia when the thing supplied is done is GST-free if 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. Goods and Services Tax Ruling GSTR 2003/7 discusses the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods'.

The facts indicate that paragraph (a) of Item 2 is not satisfied as the repairs involve work physically performed on goods situated in Australia when the work is done.

Under paragraph (b) of Item 2, a supply is GST-free if the non-resident acquires the services in carrying on its enterprise (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. Where the supplier is not in a position to be aware of these circumstances, enquiries should be made of the non-resident.

The facts indicate that OSCo and/or NRCo acquire the repair services from AusCo for carrying on their business. OSCo and/or NRCo are not registered for GST in Australia. AusCo advises that all, or substantially all, of the group's dealings in Australia are undertaken by AusCo, and that AusCo is the importer of record for all goods imported into Australia. On this basis, neither OSCo nor NRCo would be making supplies connected with Australia, and would not be required to be registered for GST in Australia. Therefore, the requirements of paragraph (b) of Item 2 are satisfied.

Subsection 38-190(3) - provided to another entity

Having met the requirements of Item 2, it is necessary to consider subsections 38-190(2),
38-190(2A) and 38-190(3) of the GST Act.

Subsections 38-190(2) and 38-190(2A) of the GST Act are not applicable as AusCo's supply is not of a right or option. Further, the services are not in relation to making a supply of real property in Australia that would be input taxed.

Subsection 38-190(3) of the GST Act states that a supply covered by Item 2 in subsection
38-190(1) of the GST Act is not GST-free if it is a supply under an agreement entered into, directly or indirectly, with a non-resident and the supply is provided, or the agreement requires it to be provided, to another entity in Australia. Goods and Services Tax Ruling GSTR 2005/6 addresses this provision.

In this circumstance, the supply of the repair services is made and provided to OSCo and/or NRCo (non-resident entities). The goods have not yet been sold to the customers, and they are not involved in the transaction. The repairs are done on goods belonging to AusCo (such as where the goods may have been damaged in transit from OSCo to Australia, or a fault is identified prior to sale). The repairs are done in accordance with the agreements (warranty) between OSCo and/or NRCo, and AusCo.

AusCo's repair services are made, and provided, to OSCo or NRCo, and are not provided to another entity in Australia. Therefore, subsection 38-190(3) of the GST Act will exclude the supply from being GST-free.

Accordingly, the supply of repair services made and provided to OSCo and/or NRCo is GST-free under Item 2, and the reimbursement received by AusCo from OSCo in relation to AusCo's goods is not subject to GST.

In summary, AusCo is not making a taxable supply in relation to the reimbursement received from OSCo.

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