Edited version of your private ruling

Authorisation Number: 1012463587226

Ruling

Subject: GST and a progressive supply that is partly connected with Australia

Question 1

Is GST applicable to the milestone payments that have been determined by the parties to the Contract as relating to onshore supplies?

Answer

Yes.

Question 2

Is GST applicable to the milestone payments that have been determined by the parties to the Contract as relating to offshore supplies?

Answer

No.

Question 3

If GST is applicable to the onshore supplies, should GST be attributed in accordance with Division 156 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) with respect to the onshore milestone progress payments?

Answer

Yes.

Relevant facts and circumstances

Company A is registered for GST. Company A, an overseas entity, entered into the Contract with Company B for the engineering, procurement and construction of a plant in Australia (Plant). Under the Contract arrangements, Company A is responsible for the design engineering, procurement of the goods (collectively materials) that are required for the plant, and construction. The materials will be procured from offshore suppliers or fabricators and from local Australian suppliers.

The title to the materials required for the Plant passes under the Contract terms to Company B (generally) when the materials are identifiable as being produced for the plant. In relation to materials to be supplied by third party suppliers subcontracted by Company A, the terms of the Contract entered into between Company A and Company B are generally applied 'mutatis mutandis' to the supply contracts entered into with those suppliers. The terms of trade agreed to between Company A and the suppliers of the goods procured from non-resident suppliers are based on Incoterm 2010, FCA. The title to the goods passes from the offshore supplier to Company A at the point of loading for Company A to arrange the freight of the goods to Company B. At the point of loading, the title to the goods also passes from Company A to Company B as the goods are identifiable as being produced for the Plant.

In addition, all materials will be marked as Company B's property by the relevant offshore fabricator/supplier entity when these materials are identifiable as to be incorporated into the Plant. You note that materials, for the purposes of the Contract are defined in the Contract in the following terms:

Materials means all items required for the Work (intended form part of the Plant including consumables as stated in the Contract), other than working equipment

Company A is responsible for arranging the importation of Company B's goods. This includes arranging the freight and customs clearance of the goods through a freight forwarding entity and a customs broker or agent. However, under the Contract it is Company B that will be the importer of all materials into Australia and will be named as owner of the materials on the Customs entry for home consumption documentation. Company A's' responsibilities under the Contract arrangements are for all the practicalities concerning the importation of the materials into Australia. Company A advised that this entails Company A being responsible for arranging the transport of the materials to Australia and to the site. In this regard Company A will engage a freight forwarder to undertake the transport of the goods and it is expected that the freight forwarder will engage a customs agent to clear the goods through customs. Company A further advised that Company A will be acting as agent for Company B when Company A arranges the transport of the materials to Australia.

Company A's head office overseas is responsible for carrying out all required engineering and design specifications and for the drawings and other documentation as required for the Plant. Company A overseas will also be responsible for providing project management services, procurement services and procuring the goods from offshore suppliers (i.e. placing the purchase orders for goods to be procured from offshore suppliers under Company A's purchasing system).

Company A's Australian office will be responsible for coordinating the activities that are to be conducted in Australia for the construction, supervision and installation of the Plant. The Australian office will also be responsible for procuring the goods from the Australian resident suppliers.

Under the Contract, the Contract price, for the construction of the Plant is to be paid in instalments when certain milestones are met. In an Attachment to the Contract each milestone has been characterised as relating to either offshore work (i.e. not connected with Australia) or onshore work (i.e. connected with Australia) to be completed by Company A. Where GST is applicable to a milestone payment under the Contract, the contract terms provide for additional consideration for the GST applicable under the Contract terms to be invoiced by Company A to Company B.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 96-5

A New Tax System (Goods and Services Tax) Act 1999 section 156-5

A New Tax System (Goods and Services Tax) Act 1999 section 29-5

Reasons for decision

Questions 1 and 2

Summary

GST is applicable to the milestone payments that have been determined by the parties to the Contract as relating to onshore supplies whereas GST is not applicable to the milestone payments that have been determined by the parties to the Contract as relating to offshore supplies.

Detailed reasoning

Division 96 of the GST Act deals with supplies that are only partly connected with Australia and overrides the general provisions of section 9-25 of the GST Act. Subsection 96-5(1) states:

(1) If, because a supply (the actual supply) is a supply of more than one of these kinds:

(a) a supply of goods;

(b) a supply of *real property;

(c) a *telecommunication supply;

(d) a supply of anything, other than goods or real property, that is not a telecommunication supply;

only part of the actual supply is *connected with Australia, then the actual supply is to be treated as if it were separate supplies in the following way.

Company A has contracted to Company B to design, engineer and construct the Plant and to procure the materials needed to do so. Specifically, as per the Contract, Company A is required to:

Perform and complete the engineering, procurement, construction, installation and completion of the Plant fit for its intended purpose as in, or as may reasonably inferred from, the Contract, carrying out the commissioning, start-up activities and under this responsibility supervise the performance tests for the Plant, remedy defects in the Contract Object and perform training of [Company B's] employees. [Company A] shall provide labour, the supervision thereof and all working equipment required for the execution of the Work together with all such other things, whether of a temporary or permanent nature, required in connection with the Work.

Given the breadth of the supplies required of Company A under the Contract we accept that the actual supply is more than one of the prescribed supplies in subsection 96-5(1) of the GST Act. Specifically Company A makes supplies of goods and supplies of services, making its overall supply within the ambit of subsection 96-5(1) of the GST Act.

Given the sourcing of inputs, some supplies will be connected with Australia whereas others won't be. In summary, under the Contract Company A will make:

· supplies of things other than goods or real property where these supplies will be done outside Australia (services);

· supplies of services or things other than goods (Materials) or real property which are done in Australia;

· supplies of goods wholly within Australia (that is supplies of Materials procured from within Australia); and

· supplies of Materials procured from offshore for the Plant.

We accept that Company A's services of design and engineering are not connected with Australia as these services are performed overseas rather than in Australia or through an enterprise that Company A carries on in Australia.

We also accept that Company A overseas supplies of Materials to Company B, when shipped on FCA terms, will not be connected with Australia if Company A neither imports the goods nor installs or assembles them in Australia.

Supplies of services performed in Australia and goods procured in Australia will be connected with Australia.

Subsections 96-5(2) and 96-5(3) of the GST Act prescribe how supplies that are partly connected with Australia are dealt with for GST purposes:

(2) The part of the actual supply that is *connected with Australia is to be treated as if it were a separate supply that is connected with Australia.

(3) The part of the actual supply that is not *connected with Australia is to be treated as if it were a separate supply that is not connected with Australia.

Subsection 96-5(2) of the GST Act will apply to onshore supplies, subsection 96-5(3) will apply to offshore supplies. We presume that the parties will classify the following as onshore supplies:

· supplies of services or things other than goods (Materials) or real property which are done in Australia;

· supplies of goods wholly within Australia (that is supplies of Materials procured from within Australia); and

· supplies of Materials procured from offshore for the Plant where Company A installs or assembles the Materials in Australia.

Question 3

Summary

GST should be attributed to the onshore supplies in accordance with Division 156 of the GST Act with respect to the onshore milestone progress payments.

Detailed reasoning

Supplies made on a progressive basis are treated as separate supplies in respect of the attribution rules. Section 156-5 of the GST Act sets out how GST is attributed to supplies made on a progressive basis:

(1) The GST payable by you on a *taxable supply that is made:

(a) for a period or on a progressive basis; and

(b) for *consideration that is to be provided on a progressive or periodic basis;

is attributable, in accordance with section 29-5, as if each progressive or periodic component of the supply were a separate supply.

(2) If the progressive or periodic components of such a supply are not readily identifiable, the components correspond to the proportion of the total *consideration for the supply that the separate amounts of consideration represent.

Goods and Services Tax Ruling GSTR 2000/35 provides guidelines on specific circumstances in which Division 156 of the GST Act applies. GSTR 2000/35 notes that contracts for major capital works often involve construction over a lengthy period of time and result in progress payments being made upon agreed milestones being reached. Division 156 of the GST Act may or may not apply to supplies and acquisitions made under such contracts, depending on the terms of the contract.

Milestone payments may arise in the context of various contractual arrangements including:

· a supply of goods, services or real property where the item is constructed on-site;

· a supply of services where the item is constructed on-site; and

· a supply of goods followed by a supply of services, e.g., installation.

Paragraphs 109 and 110 of GSTR 2000/35 provide examples of progressive supplies under Division 156 of the GST Act that are analogous with the construction of the Plant.

109. Where a contract provides for milestone payments for construction of an item affixed to land owned by the recipient, the contract is for supply of goods and services (to be incorporated in fixtures) progressively, whether or not the plans or designs are owned by the supplier. For example, a contract for construction of a warehouse on land owned by the recipient where the supplier produces the plans in-house and the plans are owned by the supplier.

110. Where a contract provides for milestone payments for construction of an item using materials provided by the recipient, the contract is for a progressive supply of services. For example, a crop duster purchases an aircraft kit and engages a contractor to assemble it.

The Construction of the Plant would be categorised as either one or the other of the examples above; it is important to note that the example in paragraph 110 deals with materials 'provided' by the recipient rather than materials 'supplied'. If the example in paragraph 110 correctly reflects the Contract, it will not diminish the applicability of Division 96 of the GST Act; it cannot be argued that Company A does not make a supply of materials under the Contract.

Paragraph 114 of GSTR 2000/35 notes, that an exclusion to, Division 156 of the GST Act occurs where title will not pass to a recipient until installation is completed:

114. Where a contract provides that title does not pass to the recipient until the item or items have been delivered and installation completed, this will not be a progressive supply to which Division 156 applies. For example, the supply and installation of fittings and fixtures to a hairdressing salon where title in the fittings and fixtures passes on completion of installation is not a progressive supply.

Despite being a contract for delivery under a 'turn the key' arrangement, the exclusion in paragraph 114 will not apply to the Contract which has been structured so as to ensure that title in the Materials passes to Company B progressively. Under the Contract, title to the Materials for incorporation in the Plant will pass to Company B at the earlier of:

· when the Materials are identifiable as being procured for the purpose of incorporation in the Plant, whether completed on in the process of construction;

· when Company A receives payment in respect of the Materials; or

· arrival at Company B's site.

This ensures that title to the Materials of the Plant passes to Company B on a progressive basis as opposed to title passing once the construction and installation of the Plant is complete. The consideration provided for the supply is made on a progressive basis as it is provided once certain milestones are reached. As the supply and consideration are made on a progressive basis, the elements of section 156-5 of the GST Act are satisfied and the GST payable will be attributable, in accordance with section 29-5 of the GST Act, as if each progressive or periodic component of the supply were a separate supply.

Given our view on goods fabricated overseas but installed by Company A, we understand that the apportionment contemplated in the Attachment to the Contract will need to be reviewed. We understand that each milestone payment could reflect payment for both onshore and offshore supplies. It follows that Company A, unless it can compute onshore and offshore liabilities directly, will require a methodology to apportion GST across each payment. If this turns out to be the case, the Commissioner will rule on any fair and reasonable apportionment method contemplated. Goods and Services Tax Ruling GSTR 2001/8 offers some guidance on apportioning the consideration for a supply that includes taxable and non-taxable parts.