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Ruling

Subject: GST and warranty repair services

Question

Is the payment from the non-resident manufacturer to the Australian distributor for warranty repair services carried out in Australia under the warranty given by the non-resident manufacturer subject to GST?

Answer

Yes, the payment from the non-resident manufacturer to the Australian distributor for warranty repair services carried out in Australia under the warranty given by the non-resident manufacturer is subject to GST.

Relevant facts and circumstances

You are an Australian entity registered for GST.

You have entered into a written agreement with a non-resident manufacturer. You have provided a copy of this contract.

Under the terms of the agreement you are granted a licence to sell and distribute their products in a geographically determined area and to ensure customer service within your area.

The agreement provides that you are not acting as an agent for the non-resident manufacturer. Furthermore, you purchase the products from the non-resident manufacturer to onsell. You will contract with customers in your own name and on your own behalf.

You advised that you are responsible for importing the products from the non-resident manufacturer and pay the GST on the imports on arrival in Australia.

The agreement provides that you may offer a purchaser any guarantees you consider necessary however such guarantees may not in any circumstances be inferior to or less than those which the non-resident entity is liable for in its capacity as manufacturer, as prescribed in its general conditions of sale and certain regulations.

You advised that you do not provide a separate warranty or guarantee in respect of the products sold to your customers.

A warranty on the products sold by you is supplied by the non-resident entity as the manufacturer directly to your customers and is attached as part of your sales contract with your customer. Under this warranty the customer is firstly required to contact their authorised distributor.

The agreement provides that you are obligated to provide after sales service and repairs both during and outside the guarantee or warranty period. Minor repairs shall be dealt with by you during the guarantee or warranty period and in all other cases, an estimate of the repairs shall be submitted to non-resident manufacturer in advance for approval first where the cost exceeds a certain specified amount. Outside the guarantee or warranty period, repair work shall be invoiced to the customer.

You advised that if warranty repair work is required to be carried out, you arrange and pay for this and then invoice non-resident manufacturer for a GST inclusive amount to seek reimbursement for this work carried out under warranty.

The warranty repair work which is the subject of the private ruling request is carried out in Australia on the products imported into Australia permanently.

You are not requesting a private ruling for warranty repair work carried out on the products imported into Australia temporarily, the ultimate destination being outside Australia.

The non-resident manufacturer does not have a branch, office or agent in Australia and is not registered with ASIC. It also did not have any presence in Australia when the repair services were provided.

The non-resident manufacturer is not a resident of Australia for income tax purposes and is not registered or required to be registered for GST in Australia.

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 Subsection 38-190(1) item 2 and

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-190(3).

Reasons for decision

Taxable supply

A supply is subject to GST if it is a taxable supply. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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.

(*denotes a term defined in the GST Act)

All the elements of section 9-5 of the GST Act must be satisfied for a supply to be a taxable supply.

A supply is any form of supply whatsoever and includes a supply of services. In the agreement between you and the non-resident manufacturer, you are authorised to carry out repairs to the customer's products in order to discharge the manufacturer's obligation under its warranty. You will be reimbursed for the expenses that you incur for the repairs you carry out under warranty.

Goods and Services Tax Determinations GSTD 2006/1 and GSTD 2006/2 (which are available from the Australian Taxation Office's (ATO) website at www.ato.gov.au) deal with offshore warranty arrangements.

GSTD 2006/1 considers the treatment of a payment from a non-resident manufacturer to an Australian distributor in circumstances where the distributor, under its own warranty with a customer, carries out repairs for the customer or engages a third party to make the repairs.

GSTD 2006/2 considers the treatment of a payment from a non-resident manufacturer to an Australian distributor in circumstances where a non-resident manufacturer, under its warranty with a customer, engages the Australian distributor to make repairs to the customer's goods.

The key factor that distinguishes GSTD 2006/1 from GSTD 2006/2 is whether the Australian distributor of a non-resident manufacturer is making provision of repair services under warranty to an Australian customer under the non-resident manufacturers warranty or under its own warranty.

In this case, you advised that you do not provide a separate warranty in respect of the products sold to your customers. A warranty on the products sold by you is supplied by the non-resident entity as the manufacturer directly to your customers and is attached as part of your sales contract with your customer. As such, it is considered that GSTD 2006/2 applies to your circumstances and GSTD 2006/1 does not apply.

Under the agreement, you are supplying warranty repair services to the non-resident manufacturer. The supply of these services satisfies the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:

· you receive consideration from the non-resident manufacturer for your supply of the warranty repair services

· the supply is made in the course of an enterprise that you carry on

· the supply is connected with Australia as the services are performed in Australia, and

· you are registered for GST.

Hence, the supply of your warranty repair services to the non-resident manufacturer is taxable to the extent that it is not GST-free or input taxed.

Your warranty repair services do not satisfy any of the input taxed provisions under the GST Act. However, your warranty repair services may be GST-free.

GST-free

Section 38-190 of the GST Act specifies the circumstances where the supplies of things, other than goods or real property, for consumption outside Australia, will be GST-free. Your supply of warranty repair services to the non-resident manufacturer is neither the supply of goods nor a supply of real property, as such, the supply of your warranty repair services is appropriately considered under section 38-190 of the GST Act.

When you make supplies of warranty repair services to a non-resident entity, item 2 in the table in subsection 38-190(1) of the GST Act (Item 2) is most relevant. A supply will be GST-free under Item 2 where it is made to a non-resident who is not in Australia when the thing supplied is done, and either:

· 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

· the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered.

For a supply of services to be GST-free under Item 2, there is a precondition that the non-resident must not be in Australia in relation to the supply when it is provided and the supply must satisfy either paragraph (a) or (b) in Item 2.

Non-resident not in Australia when services are supplied

You advised that the non-resident manufacturer is not a resident of Australia for income tax purposes.

Goods and Services Tax Ruling GSTR 2004/7 (also available from the ATO's website at www.ato.gov.au) provides guidance on when a non-resident is 'not in Australia when the thing supplied is done' for the purposes of Item 2.

Paragraph 37 of GSTR 2004/7 provides that a non-resident company is in Australia if that company carries on business (or in the case of a company that does not carry on business, carries on its activities) in Australia:

· at or through a fixed and definite place of its own for a sufficiently substantial period of time; or

· through an agent at a fixed and definite place for a sufficiently substantial period of time.

Paragraph 41 of GSTR 2004/7 provides that a non-resident company is in Australia in relation to the supply if the supply is solely or partly for the purposes of the Australian presence, for example, its Australian branch. If the supply is not for the purposes of the Australian presence but that Australian presence is involved in the supply, the company is in Australia in relation to the supply, except where the only involvement is minor.

You advised that the non-resident manufacturer does not have an office, branch, agent or any representatives in Australia and is not registered with ASIC. Therefore, we consider that the non-resident manufacturer is not in Australia in relation to the supply of the warranty repair services when such supply is made.

Where the 'not in Australia' requirement is met, the supply of the warranty repair services must also satisfy the requirements of either paragraph (a) or paragraph (b) of Item 2 for the supply to be GST-free.

Paragraph (a) 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 not GST-free if the supply is directly connected with real property situated in Australia or is a supply of work physically performed on goods situated in Australia when the work is done.

Goods and Services Tax Ruling GSTR 2003/7 (also available from the ATO's website at www.ato.gov.au) discusses among other things the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods' for the purposes of subsection 38-190(1) of the GST Act.

Paragraph 58 of GSTR 2003/7 provides that a supply is a supply of work physically performed on goods where something is done deliberately to the goods to change them or to otherwise affect them in some physical way. The repair of goods is an example of work that is physically performed on goods.

The warranty repair services that you carry out on the products in Australia for non-resident manufacturer is work physically performed on goods situated in Australia. Therefore, the supply of warranty repair services to the non-resident manufacturer does not satisfy paragraph (a) in Item 2.

Paragraph (b) of Item 2

For a supply to satisfy paragraph (b) of Item 2, the non-resident must acquire the thing in carrying on the non-resident's enterprise but the non-resident must not be registered, or required to be registered for GST.

The non-resident manufacturer engages you to provide the warranty repair services in the course of their enterprise and is neither registered nor required to be registered for GST. Therefore, the supply satisfies the requirements of paragraph (b) of item 2.

Limitation

Having met the requirements of Item 2, it is now necessary to consider subsection 38-190(3) of the GST Act which 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.

Goods and services Tax Ruling GSTR 2005/6 (also available from the ATO's website at www.ato.gov.au) explains the operation of subsection 38-190(3) of the GST Act. This ruling provides that subsection 38-190(3) only applies if there is a supply of something, being a supply that is made to a non-resident and is covered by Item 2, and that same supply is provided, or is required to be provided to another entity in Australia. That is the contractual flow of the supply is to one entity (the non-resident) and the actual flow of the supply is to another entity in Australia.

The intent of this provision is to impose a further location test where the supply is provided or required to be provided to another entity. If that other entity is in Australia, subsection 38-190(3) of the GST Act operates to negate the GST-free status that would otherwise apply under Item 2.

Based on the information that you have provided, paragraph 38-190(3)(a) of the GST Act is satisfied as the supply of your warranty repair services is under an agreement entered into with non-resident manufacturer who is a non-resident.

In order to determine whether the requirement of paragraph 38-190(3)(b) of the GST Act is met, it must be established to which entity the supply is 'provided'.

Your situation is similar to example 3 at paragraphs 22 to 24 of GSTD 2006/2 which state:

Example 3: Treatment of repairs made under a warranty from the non-resident manufacturer to the customer

22. Oz Distributor is the Australian distributor of a non-resident manufacturer's (NRM) cars. Oz Distributor is registered for GST. NRM is not registered for GST and is not an associate of Oz Distributor or grouped with Oz Distributor for GST purposes. Oz Distributor distributes the cars in Australia in its own right, not as agent for NRM. NRM provides a warranty with all the cars it makes that are sold by Oz Distributor. Under an agreement with NRM, Oz Distributor does such repairs as are necessary to fulfil NRM's obligations under the warranty NRM gave to Oz Distributor's customer. The distributor either performs the repairs itself or has a member of its dealer network perform the repairs under a separate arrangement. Neither Oz Distributor nor NRM charge the customer for repair services covered by NRM's warranty. However, Oz Distributor does charge NRM for its supplies as provided for in its agreement with NRM.

23. There is a supply of repair services by Oz Distributor to NRM under the agreement between them. The agreement is that Oz Distributor will perform repairs on the cars that fall within the terms of the warranty given by NRM. The supply is made to NRM, but the services are carried out in Australia on the Australian customer's car. The supply is the repair of the car brought in by the Australian customer. The actual flow of the repair services is to the Australian customer.

24. Although the supply of the repair services meets the requirements of item 2 in the table in subsection 38-190(1) of the GST Act, the supply is not GST-free under that item as subsection 38-190(3) applies. The supply is a taxable supply as the requirements of section 9-5 are met.

In your case, under the agreement between you and the non-resident manufacturer, you are required to provide warranty repair services in Australia on customer's products in order to discharge the manufacturer's obligation under its warranty. The contractual flow of the supply of the warranty repair services is to the non-resident manufacturer while the actual flow of the supply is to the Australian customers. Therefore, the requirements of paragraph 38-190(3)(b) of the GST Act is also met.

Therefore, although the supply of the warranty repair services to the non-resident manufacturer may meet the requirement of paragraph (b) of Item 2, the supply is not GST-free under that item as subsection 38-190(3) of the GST Act applies

There are no other GST-free provisions in the GST Act or any other Act that are applicable to the supply of the warranty repair services. Therefore, the supply of the warranty repair services to the non-resident manufacturer is a taxable supply as the supply meets all the requirements of section 9-5 of the GST Act. In conclusion, the payment from the non-resident manufacturer to you as the Australian distributor for warranty repair services carried out in Australia under the warranty given by the non-resident manufacturer is subject to GST.