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Ruling

Subject: GST and charge over goods held overseas

Question 1

Is the payment to you consideration paid in return for a taxable supply?

Answer

No.

Relevant facts and circumstances

You were retained by various companies, being managers of goods production ventures in overseas (Managers). You were also retained by other companies involved in transactions providing for the purported transfer of some of the goods manufactured pursuant to the production ventures (Sales Companies).

All goods were manufactured and have remained overseas. The Managers and Sales Companies retained you to provide services in respect of the ventures. You in turn briefed others to assist in various related issues including court proceedings.

All the proceedings essentially concerned the same issues. These were issues of ownership of the goods and indemnities for various parties involved.

In the NSW Supreme Court Proceedings, the Managers and Sales Companies claimed. The principal defendant to the proceedings was the Principal. The Principal is a non-resident of Australia for taxation purposes.

You did not provide any services to the Principal, who was not your client. The Principal asserted that it held title to the goods, by reason of a series of agreements including what were described as secured credit facility agreements, for which the governing law was the law in force in a foreign jurisdiction and to which the parties to those agreements consented to jurisdiction. The Principal also claimed it was owed monies, in addition to title to the goods.

The Principal challenged the rights to the goods claimed by the Managers and Sales Companies including your interest in the goods pursuant to the Charge.

Eventually proceedings here and overseas were settled on a no admissions basis. A deed was entered into by the various parties (Settlement Deed). The Principal's controllers are domiciled overseas and were overseas when the Settlement Deed was executed.

The parties to the settlement were the Managers, Sales Companies, participants in the ventures, two officers of the Managers and Sales Companies and you.

Following the settlement, through a series of consent orders and other matters, the Principal has title to the goods overseas and no other persons or entities, including you, make any claim in respect of the goods.

The purported Sales Agreements were rescinded. By consent and without admission, injunctions were dissolved and the undertakings as to damages in connection with the injunctions were released.

Payment to you

Following the Settlement Deed, orders were made by the courts in Australia that culminated in, amongst other things, a payment of to you by the Principal.

Your obligations and acknowledgments

You, although working for the Managers and Sales Companies, had the benefit of the Charge over the goods overseas if the Managers' and Sales Companies' claims in the dispute were upheld.

The settlement did not provide for the payment of legal fees of any particular person or entity, such as those of the Managers and Sales Companies in respect of the Australian proceedings, nor those of one of the Managers and two of the Sales Companies in respect of the overseas proceedings, nor those of officers of the Managers in the taxation proceedings, nor whether the Managers were obliged to indemnify those officers for their legal fees or taxation liabilities. You understand that the Managers, Sales Companies and the Managers' directors do not claim that any money was paid to them nor that they are entitled to an input tax credit in respect of the payment, because no creditable acquisition was made by them.

Rather, the Principal required as a condition of settlement that you be a party to the Settlement Deed which settled the priority dispute and that you acknowledge no right or interest in the goods overseas and otherwise release and make no claim for payment. The Settlement Deed provided for an acknowledgment by you in respect of the Venture goods as follows:

[you] acknowledges that he has no claim, right or interest in the goods Ventures other than is provided by the terms of this Deed.

The Settlement Deed provided that, after the making of the payment to you, the goods were held by the Principal 'free from Encumbrances'. 'Encumbrances' was defined to include 'any charge pledge security interest and any other security agreement or arrangement of any kind, however it is given, arises or is created' and 'security interest' was in turn defined to include 'any charge pledge or power, as or in effect as security for the payment of a monetary obligation or the observance of any other obligation.'

The Settlement Deed imposed no other obligations on you, aside from agreeing to facilitate the making of the consent orders as above, and work on a time costed basis would cost considerably less.

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 9-10

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

A New Tax System (Goods and Services Tax) Act 1999 section 38-190

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

Reasons for decision

Summary

You have made a supply that is GST-free pursuant to Division 38 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Detailed reasoning

Section 9-5 of the GST Act sets out the requirements of a taxable supply:

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.

In considering the GST consequences in circumstances such as those you have outlined, we must focus on the 'supply for consideration' requirement. However, a supply for consideration will not be a taxable supply unless the other requirements set out in section 9-5 of the GST Act are also satisfied.

A 'supply for consideration' is the first step towards there being a taxable supply. However, for there to be a supply for consideration, three fundamental criteria must be met:

· there must be a supply;

· there must be a payment; and

· there must be a sufficient nexus between the supply and the payment for it to be a supply for consideration.

Supply

A supply is something which passes from one entity to another. The supply may be one of particular goods, services or something else. 'Supply' is defined in subsection 9-10(1) as 'any form of supply whatsoever'. Without limiting these general meanings, subsection 9-10(2) of the GST Act provides a non-exhaustive list of activities or occurrences that are included within the meaning of supply:

· a supply of goods;

· a supply of services;

· a provision of advice or information;

· a grant, assignment, or surrender of real property;

· a creation, grant, transfer, assignment or surrender of any right;

· a financial supply;

· an entry into, or release from an obligation:

· to do anything; or

· to refrain from an act; or

· to tolerate an act or situation;

· any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

In acknowledging that you have no claim, right or interest in the Ventures other than is provided for in the Settlement Deed and agreeing that the Principal held the goods free of encumbrances (including the Charge) you have surrendered the right inferred under the Charge. Given the very wide range things that can constitute a supply, this act falls within the reach of section 9-10 of the GST Act.

Payment and nexus to supply

You received a payment arising from the Settlement Deed and subsequent court orders.

Pursuant to section 9-5 of the GST Act, a supply is not subject to GST in Australia unless it is made for consideration. Consideration 'for a supply or acquisition' is defined in section 195-1 of the GST Act as any consideration, within the meaning given by section 9-15 of the GST Act that is 'in connection with the supply or acquisition'.

We consider that, in the context of the GST Act, the expression 'you make the supply for consideration' in paragraph 9-5(a) of the GST Act has a similar meaning to 'there is consideration for the supply that you make'. The references in the GST Act to 'supply for consideration' and more commonly to 'consideration for a supply' underscore the close coupling between the supply and the consideration that is necessary before a payment will be consideration for a supply that will make the supply subject to GST.

A payment will be consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement' of a supply. In determining whether a payment is consideration under subsection 9-15(1) of the GST Act, the test is whether there is a sufficient nexus between the supply and the payment made.

This test may establish a nexus between consideration and supply in a broader range of cases than the 'direct link' test that applies in the European Community and in Canada. While caution needs to be exercised in applying decisions on connective terms in other contexts, the term 'in connection with' has been held to be broader in scope than 'for'.

The meaning given to the term 'in connection with' in Berry v FC of T (1953) 89 CLR 653 (' Berry's case') is similar to that which was described by the Court of Appeal in New Zealand Refining Co . Ltd v C of IR (1995) 17 NZTC, but needs to be applied with regard to the structure of the definition of supply in the GST Act. In Berry's case, Kitto J held that 'in connection with' was a broader test than 'for'.

In determining whether a sufficient nexus exists between supply and consideration, regard needs to be had to the true character of the transaction. The test as to whether there is a sufficient nexus is an objective test. The motive of the supplier and the recipient also may be relevant in determining whether the supply was made for consideration, if a reasonable assessment of the evidence supports that motive.

In the case at hand settlement was negotiated with the consent of all parties; you actively agreed to the Settlement Deed rather than acquiesce to a later court imposed solution. As part of the Settlement Deed you made acknowledgements and freed goods from any form of encumbrance that you may have imposed. The subsequent court order that outlined the various payments to be made was made in full knowledge of and in conjunction with the Settlement Deed. We consider that there is sufficient nexus between your supply and the receipt of the payment for your supply to be made for consideration.

Other requirements of section 9-5

You have stated that a release of disputed rights in an asset overseas is not in the course of or furtherance of your enterprise. We disagree, you have stated elsewhere in your submission that entities in your profession can have an interest in the property of a client by reason of a charging clause. It follows that acting on that interest, even by renouncing it would be in the same strata as acquiring the interest. Further, the definition of 'carrying on an enterprise' contained in section 195-1 of the GST Act is broad enough to include all aspects of you type of practise: ' includes doing anything in the course of the commencement or termination of the enterprise.'

Finally, the supply needs to be 'connected with Australia'. We consider that your supply is connected with Australia as it meets the requirements of both paragraphs 9-25(5)(a) and 9-25(5)(b) of the GST Act:

(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

If your supply is viewed as a simple surrender of rights, it is connected to Australia in the same way. The Commissioner's view is set out in the Goods and services tax ruling GSTR 2003/8 'Goods and services tax: supply of rights for use outside Australia - subsection 38-190(1), item 4, paragraph (a) and subsection 38-190(2)'. The surrender of a right or option is only connected with Australia if the right or option is surrendered in Australia (that is, paragraph 9-25(5)(a) applies) or the supply is made through an enterprise that the supplier carries on in Australia (that is, paragraph 9-25(5)(b) applies).

As the positive limbs of section 9-5 of the GST are satisfied, we must look to whether your supply is either GST-free or input taxed. Your supply does not fall within the input taxed provisions contained in Division 40 of the GST Act, however it does meet the requirements for GST-free treatment.

We consider that your supply meets the requirements of both item 2 and item 3 in the table in subsection 38-190(1) of the GST Act:

38-190 Supplies of things, other than goods or real property, for consumption outside Australia

(1) The third column of this table sets out supplies that are GST-free (except to the extent that they are supplies of goods or *real property):

Your supply is not a supply of work physically performed on goods situated in Australia and the Principal is a non-resident who is not in Australia, thus meeting the requirements of Item 2(a) above.

Further, your supply is made to a recipient who is not in Australia and effectively enjoys your supply outside Australia, thus also meeting the requirements of Item 3 above.

Therefore the supply you made in return for the payment is a GST-free supply. It may be argued that your supply is also GST-free under item 4 in the table in subsection 38-190(1) of the GST Act (Item 4). As your supply is GST-free under other items, we have not discussed Item 4.