Edited version of private ruling

Authorisation Number: 1011869750646

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Ruling

Subject: taxable supply

Question

Do you make a taxable supply when you supply the replacement machinery to an Australian entity?

Answer

Yes, you make a taxable supply when you supply the replacement machinery to an Australian entity because the entity has to pay you a lump sum amount before it takes delivery of the replacement machinery

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are registered for goods and services tax (GST) in Australia. You import machinery which are manufactured from overseas and sell them to Australian customers. Your supplier is a non resident entity, who manufactures machinery parts.

You pay your supplier before the machinery parts leave the overseas port. These machinery parts are under warranty for one year. You sent us a copy of the manufacturer's warranty.

You imported the original machinery manufactured by your supplier and paid the GST on taxable importation. You are the owner of the original machinery on Australian Customs documentation.

After the original machinery was imported into Australia, you contracted with your contractor, an Australian company registered for GST in Australia, to assemble and check the original machinery for quality. Then you sold the original machinery to an Australian individual entity not registered for GST (the original buyer); and charged GST on the sale.

Within one year from your sale of the original machinery to the original buyer, the original buyer reported that the original machinery has a problem.

The original buyer made a claim on the warranty. Your supplier said they could not afford to replace the machinery.

Therefore you negotiated with your supplier; and they will sell you a replacement machinery which will go to the original buyer after being imported and assembled and tested for quality by you and your contractor. In addition your supplier said it was not worth the cost of disassembling the original machinery to send back to the supplier overseas. Therefore you have arranged to have the original machinery sold to a second buyer, who is registered for GST in Australia (the second buyer). You will charge GST on your sale of the original machinery to the second buyer. The second buyer is waiting for finance to be approved before they agree to buy the original machinery.

You provide a copy of the contract between yourself and the original buyer. The contract states that the original buyer will allow the ownership of the original machinery to be changed to the second buyer as soon as the second buyer's finance is ready (preferably before the replacement machinery is shipped from overseas). The ownership and registration will be transferred directly from the original buyer to the second buyer to save registration fee. According to the contract, the original buyer agrees to pay you a set price for the usage indicator of the original machinery (as depreciation cost).

In return you will provide the original buyer with the new replacement machinery, after it has been assembled and tested for quality. The contract has now been signed by the original buyer.

If the finance for the second buyer is not approved, and your proposed sale of the original machinery does not go through; the original buyer still gets the replacement machinery and the original machinery will be returned to you. You will try to find another buyer for the original machinery.

You plan to pay your supplier for the replacement machinery before the replacement machinery leaves overseas. If the finance for the second buyer is not approved, your supplier will still send you the replacement machinery, but you will not pay your supplier until you find a buyer for the original machinery. All negotiations between you and your supplier in relation to the payment for the replacement machinery have been oral and there is no written agreement. You and your supplier agree that when the replacement machinery is imported into Australia, the name of the owner and the importer on the Customs documents will be you, whether you have paid your supplier or not.

Reasons for the decision

A supply will be a taxable supply where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. 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

Consideration is defined in section 195-1 of the GST Act to mean 'any consideration within the meaning given by section 9-15 of the GST Act, in connection with the supply or acquisition'. Subsection 9-15(1) of the GST Act states as follows

Consideration includes:

(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

For the purposes of the GST Act 'consideration' has a broad meaning. Consideration includes anything done or offered by way of reward or remuneration provided in connection, in response to or for the inducement of the supply. The definition includes payments made in connection with the supply.

A warranty claim against a sale would not give rise to GST if the warranty was inclusive of the initial price. This is because there is no separate consideration paid for the warranty component. The original price would include the base price of the goods and the warranty, combined. Any warranty claim arising in regard to these goods would not attract GST if there is no consideration. Therefore, the replacement of goods under warranty for no consideration is not a taxable supply and is not subject to GST.

You state that you will settle the original buyer's claim under the warranty by exchanging the replacement machinery with the original machinery for the original buyer. However, you also receive a once-only payment from the original buyer in connection with the exchange. Therefore, it is necessary to determine whether this payment is also consideration for the supply of the replacement machinery under warranty.

The original buyer agrees to pay you a lump sum amount of $XXX before taking delivery of the replacement machinery. This amount is in connection with the supply of the replacement machinery because without this amount you would not have agreed to the replacement of the goods under warranty.

Therefore your supply of the replacement machinery satisfies paragraphs 9-5(a) and (b) of the GST Act as you make a supply of goods for consideration in the course of an enterprise that you carry on in Australia. According to the contract, the consideration is the amount which the original buyer agrees to pay you before taking delivery of the replacement machinery.

In addition, your supply of the replacement machinery satisfies paragraph 9-5(c) of the GST Act because you make a supply of goods in Australia therefore the supply is connected with Australia (subsection 9-25(1) of the GST Act). You are registered for GST in Australia so paragraph 9-5(d) of the GST Act is satisfied.

In addition, the sale of your replacement machinery to an Australian resident entity will not satisfy the requirements to be an input taxed supply or GST-free supply.

In summary, the sale of your replacement machinery to the original buyer satisfies all the requirements of section 9-5 of the GST Act, and is a taxable supply. You are required to remit 1/11^th of the consideration to the Australian Taxation Office (ATO).