Edited version of private ruling

Authorisation Number: 1011766878750

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Ruling

Subject: GST and telecommunications supply

Question 1

Does the assignment by A of its existing subscriber contracts to supply the Product to Australian subscribers through the Carrier's platform to B meet the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

A supply made by a registered entity for no consideration will generally not meet the requirements of section 9-5 of the GST Act. If the supply is made by is an associate of the recipient, the transaction may be drawn into the GST system under Division 72 of the GST Act.

Question 2

Will B's supplies through the Carrier's platform to existing and new Australian subscribers meet the requirements of section 9-5 of the GST Act?

Answer

Yes, B's supplies through the Carrier's platform to all Australian subscribers will meet the requirements of section 9-5 of the GST Act.

Question 3

What are the implications of Division 165 of the GST Act to the proposed arrangement, should the Commissioner deem it necessary?

Answer

Given our responses in questions 1 and 2, the Commissioner does not consider it necessary to rule on the implications of Division 165 to the proposed arrangement.

Division 165 of the GST Act applies to schemes where the dominant purpose or principal effect is to give an entity a GST benefit. The arrangement that you have sought a ruling on appears designed to make otherwise taxable supplies non-taxable while at the same time maintaining entitlement to input tax credits for acquisitions related to the supplies (eg in respect of marketing activities undertaken by A). The proposed arrangement does not have any other significant practical or commercial effect on the supplies between D/A/B entities as a group and their Australian customers. A cursory examination of the arrangement in light of Division 165 would suggest that, were the proposed supplies in question 2 found to be not connected with Australia, a more detailed consideration of Division 165 would be called for.

Relevant facts and circumstances

D has interests in internationally broadcast products that are available in a number of countries on a subscription basis to residential and commercial customers via satellite, cable, broadband and mobile distribution. D's product's are produced in and 'played out' of an overseas location.

D is an overseas registered company and is the ultimate holding company of A.

The Product is supplied in Australia by A. Australian customers receive the Product through the Carrier and various other platforms.

The ownership of A is to be transferred to B, a wholly owned subsidiary of D. You state that B is a company based overseas that does not have an ABN, is not registered for GST and is not currently required to be registered.

In accordance with Australian law (Access Agreement), the Carrier is required to make a specified amount of its broadcasting capacity available to other service providers. The Access Agreement allows the Product to be received through the Carrier's platform. A is currently the 'access seeker' relevant to the Access Agreement; B will become the access seeker following the assignment of subscriber contracts.

Historically, Australian subscribers receiving the Product through the Carrier have done so by contracting for access directly with A for an agreed period. The Carrier simply provided and charged A for use of its platform.

Australian customers can subscribe to the Product online or by telephone. To register customers seeking to subscribe by telephone, A utilises the services of a call centre overseas. Prior to this A used the services of an Australian based call centre.

A does not perform any installations, repairs or maintenance for residential subscribers. The Product channel is delivered from overseas to Australia via fibre-optic cable (except where the subscriber receives the channel online). The D/A/B group leases use of the fibre-optic cable from E, the independent third party owner of the fibre-optic cable. Upon reaching Australia, the signal is delivered to the Carrier for onward delivery to subscribers.

The D/A/B group is currently in the process of restructuring its Australian operations. Under the restructure, existing contracts between A and Australian subscribers to receive the Product through the Carrier's platform will be reassigned to B, for nil consideration. There is currently no documentation available in relation to the assignment of A's customers to B. Apart from the existing subscriber contracts and access seeker status per the Access Agreement, nothing else will be transferred by A to B. Subscribers will be notified of the migration of their subscription contracts from A to B. This notification will include assuring subscribers that the service B will deliver will meet the same high standards and level of consumer protection that is currently being provided.

After the restructure, new contracts for Australian subscriptions to the Product through the Carrier's platform will be executed outside Australia directly between B and the Australian subscriber. The extent of A's activities following the restructure will be limited to marketing activities, and sales activities relating to the other ways (i.e. online and platforms other than the Carrier) that the Product can be received by Australian subscribers.

A will also provide marketing and other consultancy services to B in relation to promotion and development of its product to residential subscribers on the Carrier platform and other potential platforms. These services will be provided in exchange for an arm's length fee, under commercial terms. In all other respects (i.e. production, 'playing-out', delivery method (fibre-optic cable) and call centre arrangement), the supply of the television coverage to Australian subscribers through the Carrier's platform will remain the same.

Since the introduction of GST, A has been aware that the supply of the Product to Australian subscribers through the Carrier's platform is connected with Australia under section 9-25(5)(b) of the GST Act.

The Product Carrier and Content Subscription Terms and Conditions is the existing agreement that applies to Australian customers subscribing to the Product. An agreement for new subscribers to the Product made by B after the ownership of A is transferred to B is expected to be substantially similar. The subscription terms and conditions do not expansively describe the supply or supplies that Entity X undertakes to make to its subscriber.

The subscription terms and conditions state:

In consideration for A initially making its Product and its other delivery service ("the Services") available to you, you agree to pay Entity X the one-time registration fee notified to you at the time that you subscribe. The registration fee is additional to your applicable subscription fees described below.

Subscribers pay a one off registration fee and a subscription fee which may be either month-to-month, annually paid monthly or annually paid in advance. The subscriber grants A a deduction authority from a nominated credit card.

Subscribers acknowledge that continuation of the supply of the Product is dependant upon them maintaining their (pre-existing) Carrier subscription. Subscribers are required to grant the Carrier or its representatives access to premises and permission to do all things and acts in relation to the installation, maintenance, use or removal of equipment. In addition, the subscriber's subscription agreement with the Carrier relevantly outlines the terms and conditions of the prerequisite Carrier subscription.

The Carrier Residential Subscription Agreement sets out the terms and conditions on which the Carrier provides its subscription television service. Most relevantly, the Carrier equipment and infrastructure is required to be installed at the address of the home of the subscriber.

The Access Agreement sets out the terms including price on which the Carrier provides and A/B acquires the 'Service'.

The Carrier was not obliged to enter into the Access Agreement unless B had already arranged for the carriage of the Product to the Network Termination Point. This carriage is contracted to E, see above.

The Access Agreement requires that B and the Carrier must promptly supply to each other such information and assistance as the other may reasonably request to enable it to perform its obligations under the Access Agreement.

Reasons for decision

Question 1

Summary

Where no consideration will be paid or is payable for a supply, the supply fails to meet the requirement in paragraph 9-5(a) of the GST Act that a taxable supply is a supply made for consideration. However, if the supplier and the recipient are associates for GST purposes, Division 72 of the GST Act potentially draws the proposed transaction into the GST system.

Detailed reasoning

Section 9-5 of the GST Act states:

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.

You have stated consideration will not be provided, nor will it be payable for the assignment of A's existing subscriber contracts to supply the Product to Australian subscribers through the Carrier's platform to B. Where consideration is not paid and is not payable, the requirement that 'you make the supply for consideration' in paragraph 9-5(a) of the GST Act is not met.

B is a wholly owned subsidiary of D. Division 72 of the GST Act ensures that some supplies made for no consideration between associates are drawn into the GST system. For GST purposes an associate of a company is defined in subsection 318(2) of the Income Tax Assessment Act 1936 which states in part:

For the purposes of this Part, the following are associates of a company (in this subsection called the "primary entity"):

…..

(a) another company (in this paragraph called the "controlled company") where:

i. the controlled company is sufficiently influenced by:

o the primary entity; or

o another entity that is an associate of the primary entity because of another paragraph of this subsection; or

o a company that is an associate of the primary entity because of another application of this paragraph; or

o 2 or more entities covered by the preceding sub-subparagraphs; or

ii. a majority voting interest in the controlled company is held by:

o the primary entity; or

o the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection; or

o the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection;

(b) any other entity that, if a third entity that is an associate of the primary entity because of paragraph (d) of this subsection were the primary entity, would be an associate of that third entity because of subsection (1), because of another paragraph of this subsection or because of subsection (3).

Generally, wholly owned subsidiaries are associates for GST purposes. Where this is so, A's supply to B may be a taxable supply due to the effect of section 72-5 of the GST Act, unless it is GST-free or input taxed. Section 72-5 states:

(1) The fact that a supply to your *associate is without *consideration, does not stop the supply being a *taxable supply if:
(a) your associate is not *registered or *required to be registered; or
(b) your associate acquires the thing supplied otherwise than solely for a *creditable purpose.
(2) This section has effect despite paragraph 9-5(a) (which would otherwise require a taxable supply to be for consideration).
(3) However, this section does not apply to any supply that is constituted by an insured entity settling a claim under an *insurance policy or by an entity (other than an *operator) settling a claim under a *compulsory third party scheme.

As we consider, in Question 2, that B's supplies are connected with Australia and are taxable, neither paragraphs (a) or (b) of subsection 72-5(1) appear to be satisfied ie B will be required to be registered as it presumably will exceed the registration turnover threshold and the acquisition it makes from A will be for a creditable purpose. Accordingly Division 72 will not bring the assignment within the GST system.

On the alternative view (which we do not accept) that B's supplies are not connected with Australia and B is not required to be registered, Division 72 modifies paragraph 9-5(a). However, the supply may still be GST-free.

You assert (italicised below) that even if consideration is payable, the assignment would be GST-free under items 2 and 4(b) of section 38-190(1) on the basis that:

· The supply is made to a non-resident that has no presence in Australia and B will acquire the assignment in carrying on its enterprise but is not registered or required to be registered for GST (ie item 2(b); or

· The supply is made in relation to rights to an entity that is not an Australian resident (B) and is outside Australia when the assignment occurs (ie item 4(b).

Without examining your assertion that B is a non-resident who is not in Australia, we consider that the test contained wholly within paragraph (a) of item 2 is satisfied, ie the assignment 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. This supply will therefore meet the requirements of item 2(a) in subsection 38-190(1) if B is a non-resident not in Australia at the time of the supply.

We do not consider that item 2(b) can be satisfied because the requirement that B is not required to be registered (on the presumption that the registration turnover threshold will be exceeded) cannot be met.

We do not consider that item 4 can be satisfied because (although not necessary to consider in detail here) the supply cannot be characterised as a supply of rights or a supply in relation to rights.

Question 2

Summary

The supplies of the Product to Australian subscribers meet the requirements of section 9-5 of the GST Act. Importantly, these supplies are considered to be connected with Australia as they are 'done' in Australia.

Detailed reasoning

Characterisation of the supply as a telecommunications supply

In order to ascertain whether B's supplies through the Carrier's platform to Australian subscribers meet the requirements of section 9-5 of the GST Act, it is necessary to settle what the supply is. In your letter of 10 March 2011 you contend that the supply made is one of television coverage that is in turn characterised as a telecommunication supply. In your letter of 29 April 2011 you state 'whilst we consider that the definition of a telecommunication supply under section 85-10 of the GST Act is sufficiently broad to encompass the supply in question, D will nevertheless accept the ATO's view on this issue, being that the supply does not constitute a telecommunication supply for GST purposes'. While this element of characterisation of the supply is now agreed, we reiterate our explanation earlier provided as to why the supply is not a telecommunication supply.

Section 85-10 of the GST Act gives the meaning of telecommunication supply; it states:

A telecommunication supply is a supply relating to the transmission, emission or reception of signals, writing, images, sounds or information of any kind by wire, radio, optical or other electromagnetic systems. It includes:

(a) the related transfer or assignment of the right to use capacity for such transmission, emission or reception; and

(b) provision of access to global information networks.

According to the Explanatory Memorandum to the ANTS (Indirect Tax and Consequential Amendments) Bill (No 2) 1999, the Bill that introduced this definition of telecommunication supply into the GST Act, this definition is designed to capture the means of communication but not the content. Further, it states that the content is a different type of supply with its own GST treatment.

The Explanatory Memorandum to the Tax Laws Amendment (2010 GST Administration Measures No. 3) Bill 2010 (EM), whilst discussing global roaming arrangements for portable devices adds weight to the legislators' intent that the means of transmission and the content of transmission are different things. Paragraph 2.27 of the EM states:

2.27 The type of telecommunication supply provided to the user of a portable device under a global roaming arrangement is not limited by this amendment. Those supplies include transmission of voice, pictures and text messages, email and Internet access. A variety of information and entertainment services may be delivered by telecommunication suppliers to roaming customers. A charge that is for the content delivered to a portable device as distinct from the transmission service to deliver that content is not covered by this amendment. For example, a separate charge for a pay-per-view sporting event that is delivered to a portable device is not for a telecommunication supply.

We consider that B will make a supply of delivered content to its Australian subscribers. The subscribers to the Product will not subscribe to it for the access rights, but rather to view the content that are provided. A supply of delivered content of the nature of that transmitted by you is considered to be a supply of television content or similar and not a telecommunications supply.

As such, it is appropriate to consider the GST treatment of its supplies against the general principles in sections 9-5 and 9-25 of the GST Act, rather than in terms of Division 85 of the GST Act.

Supply connected with Australia

The connection to Australia of B's supplies to its Australian subscribers fall for consideration under subsection 9-25(5):

A supply of anything other than goods or *real property is connected with Australia if:

(a) the thing is done in Australia; or

(b) the supplier makes the supply through an *enterprise that the supplier *carries on in Australia; or

(c) all of the following apply:

i. neither paragraph (a) nor (b) applies in respect of the thing;

ii. the thing is a right or option to acquire another thing;

iii. the supply of the other thing would be connected with Australia.

Example: A holiday package for Australia that is supplied overseas might be connected with Australia under paragraph (5)(c).

To characterise the supply, we need to examine what it is that B undertakes to supply to a subscriber taking into account all relevant arrangements. The starting point therefore is the subscriber terms and conditions. These reveal that Entity X agrees to supply and a subscriber agrees to acquire for the period of the subscription, A/B's Carrier channel and other delivery service.

The pertinent features of the arrangement, summarised, as it relates to the supply of the Product to a customer are:

· The customer must be a customer in Australia with a pre-existing subscription to the Carrier for delivery to a residential address in Australia;

· The Carrier subscription requires equipment to be installed at that address for the purpose of receiving the service. Any change of address for the service must be requested;

· A customer can also separately subscribe to the Product, which is delivered through the same (Carrier) equipment to the same residential address. The A/B service is personal to the subscriber and cannot be used for commercial purposes, re-supplied, assigned or transferred without A/B's consent;

· The Carrier and Entity X have a separate agreement allowing the Carrier's equipment to be used to deliver the service.

We consider that it is implicit in the above that the delivery of the television content to the residential address of the subscriber is a critical component of the supply. The point or place of origin of the content signal is largely irrelevant as the thing that the supplier and customer have contracted for is delivery to/availability at a predetermined location (customer's residence). It is only by delivery that B's contractual obligations can be satisfied; a customer neither knows nor cares where the signal originates. This supply can only be done in Australia.

You have suggested that the supply of the Product is comparable to the delivery of mail by Australia Post. That is, the role of the Carrier is merely that of transmitting the signal; it has no involvement in the provision of channel content.

We accept that the Carrier is not responsible for the content. However we do not accept that the Carrier's role is therefore analogous to that of Australia Post. Subscribers to the Product must first have a contractual relationship with the Carrier. The Carrier must make its service and equipment available to both A/B and to the A/B/Carrier subscriber through contractual arrangements. The Carrier network must be capable of delivering and being compatible with the Product. The Carrier must also be aware of the existence of a contractual relationship between the subscriber and A/B and do whatever is necessary to its systems, facilities and infrastructure to accordingly allow (as well as appropriately limit) access. The Access Agreement shows that the Carrier has a role in modifying the signal (decryption), determining which customers are entitles to receive it etc. Conversely mail recipients of postal articles have no contractual relationship with Australia Post and Australia Post plays no part beyond mere delivery of postal items.

You also contend that the supply of television coverage could be considered to be an obligation to provide television coverage to subscribers. We consider that the contractual obligation to make the supply does not describe the essence of what is being supplied (television content).

In ascertaining where a supply of the Product content supplied to Australian subscribers is done, Goods and Services Tax Ruling GSTR 2000/31 'Goods and services tax: supplies connected with Australia' also provides guidance. GSTR 2000/31 sets out how various classes of supplies can be connected with Australia for the purposes of section 9-25 of the GST Act. At paragraph 64 GSTR 2000/31 notes that in respect of paragraph 9-25(5)(a) of the GST Act:

The meaning of 'done' depends on the nature of the 'thing' being supplied. 'Done' can mean, for example, performed, executed, completed, finished etc depending on what is supplied.

Produced television content is not specifically mentioned in GSTR 2000/31, the most analogous example given is that of an instantaneous supply of advice or information. Paragraph 201 states:

An instantaneous provision of advice or information

201. If the supply is an instantaneous provision of advice or information, the provision of that advice or information is done where it is provided. The meaning of provided will depend on the facts in any given case. For example, a supply of information that is already developed or created or already in existence, such as a supply of information by way of a telephone service, is 'done' where the advice is provided.

While there are obvious differences between the provision of advice or information over the telephone and the supply of television content, there are similarities in the inherent characteristics of the supply namely:

· the supplier and recipient are in separate locations, and

· delivery of the supply is over a telecommunications network.

As such it is enlightening to compare and contrast the nature of these two supplies.

As to where telephone advice is provided, the Commissioner considered the determining factor to be the location of the provider of the advice. The location of the recipient would not be known to the supplier as the recipient could obtain the information from any location from which a phone call could be made ie anywhere. While the supply requires a telephone connection for delivery, the phone service is unrelated to the information supply - the information service can be accessed by anyone. The telephone does not enable the supplier to know where the recipient is (where the advice is consumed). Accordingly the most appropriate and only practical location to attach the supply to is the location of the supplier.

In the context of what is being supplied - the instantaneous supply of information created by a person speaking into a telephone - the supply is done where that provision takes place. Importantly, this is not necessarily the same place as where that information was developed or created. If that information was developed earlier, that activity of developing the information is a step earlier than the supply (and another step removed from the place of consumption).

In considering the place where television content is done, from the above example we can draw the following parallels and distinctions:

· As with a telephone information service, the supply of content that is already created or developed or in existence is not provided where it was developed. By extension, this also applies to live broadcasts of sporting events. The creation of the content and the supply of the content are two different things.

· Unlike a telephone information service, the supplier and recipient have entered a contract for the delivery of the specified service. The contract requires the television content to be delivered to the specified location (residential address) of the customer. Delivery is a fundamental feature of the supply. To enable delivery A/B has obtained access to a specified capacity in particular telecommunications facilities.

· Unlike a telephone information service, which is accessed by simply making a call, a pay television service requires both the supplier and the customer to have an existing contract with the telecommunications provider (in this case the Carrier). The role of the Carrier is far more integral to the supply than that of the telephone company delivering a call (as discussed earlier).

· Unlike the telephone information service, it is both appropriate and feasible to attach the place of supply to the location of the recipient. This location is known to the supplier - the recipient's Carrier/A/B connection is to a fixed place in Australia and the obligation on the supplier is to deliver the service to this location. In the context of the supply of a television service, this is the location, in the words of the Explanatory Memorandum to the GST Bill, of the 'private consumption in Australia'.

As delivered content, the nature of delivery, the subscriber's domicile and commitment are critical factors in determining that B's supply exceeds what you envisage to be the delivery of content from overseas.

The predetermined and multifaceted nature of B's supply, the level of required cooperation by other parties (E and the Carrier in Australia) and the level of participation required by subscribers to receive B's supplies results, in our opinion, in B's supply of the Product to its Australia subscribers being done in Australia. What occurs after content has passed the Network Termination Point is akin to the processing, repackaging and distribution of goods already in existence, the Product's consumption by subscribers in Australia results from B's supply being 'executed; completed; finished; settled' in Australia, which as GSTR 2000/31 notes equates with being done in Australia for the purposes of paragraph 9-25(5)(a) of the GST Act.

As the provision of television content in Australia engenders B's supply being done in Australia, it thus will be connected with Australia. B is not currently registered for GST, however at the point where its Australian supplies of the Product and any other supplies it makes that are connected with Australia cause its GST turnover to meet the registration turnover threshold, it will be required to register for GST. At this point B's supplies will meet the requirements of section 9-5 of the GST Act. Accordingly its supplies of the Product to Australian subscribers will be taxable supplies. This will also impact the application of Division 72/question 1.

This outcome is consistent with the aim of the GST which is to tax consumption in Australia. As has been noted in a number of significant GST cases, in applying the GST law it is relevant to consider the policy intent. Mansfield J in Travelex Limited v Commissioner of Taxation [2009] FCAFC 133 at paragraphs 13-14, quotes from the Explanatory Memorandum to the GST Bill:

Broadly speaking, the GST is a tax on private consumption in Australia. The GST taxes the consumption of most goods, services and anything else in Australia, including things that are imported. Generally the GST will not apply to consumption outside Australia, which is why the GST does not apply to exports.

More particularly, the Explanatory Memorandum at par 5.73 says that GST is a tax on consumption in Australia.

Similarly in Saga Holidays Limited v Commissioner of Taxation [2006] FCAFC 191 at paragraphs 29- 30 Stone J states that 'the Court has tended to adopt a purposive approach to the interpretation of the GST Act, rejecting strict grammatical analyses in favour of a consideration not only of the syntax but also of the policy and surrounding legislative context of the relevant provision.

Broadly speaking, the policy as stated in the Explanatory Memorandum is to tax consumption in Australia, achieved by taxing supplies which, in addition to other requirements, are connected with Australia.