Edited version of your private ruling

Authorisation Number: 1012514426323

Ruling

Subject: GST and supplies connected with Australia

Question 1

Is the specified grant paid to a non-resident entity based overseas (A) by an Australian resident entity (B) pursuant to the Agreement between A and B consideration for supplies made by A that are connected with Australia?

Answer

No, the specified grant paid to A is not consideration for supplies made by A that are connected with Australia.

Question 2

Is the additional distribution paid on regular intervals to A by B pursuant to the Agreement consideration for supplies made by A that are connected with Australia?

Answer

No, the additional distribution paid to A is not consideration for supplies made by A that are connected with Australia.

Question 3

Is payment U paid to A and funded by another entity consideration for supplies made by A that are connected with Australia?

Answer

Yes, payment U is consideration for supplies made by A that are connected with Australia.

Question 4

Is payment V paid to A by B consideration for supplies made by A that are connected with Australia?

Answer

No, payment V is not consideration for supplies made by A that are connected with Australia.

Question 5

Is any share of net profits from the sale of certain products that feature A's property which is paid to A by B pursuant to the Agreement consideration for supplies made by A that are connected with Australia?

Answer

Yes, any share of net profits from the sale of certain products which feature A's property is consideration for supplies made by A that are connected with Australia.

Question 6

Is any share of net profits from specified activities paid to A by B pursuant to the Agreement consideration for supplies made by A that are connected with Australia?

Answer

Yes, any share of net profits from specified activities paid to A is consideration for supplies made by A that are connected with Australia.

Question 7

Is payment W paid to A by B pursuant to the Agreement consideration for supplies made by A that are connected with Australia?

Answer

No, payment W paid to A is not consideration for supplies made by A that are connected with Australia.

Question 8

Is any non-monetary consideration (if any) provided to A by B pursuant to the Agreement consideration for supplies made by A that are connected with Australia?

Answer

No, any supplies made to A by B pursuant to the provisions of the Agreement referred to in the ruling request are not non-monetary consideration for supplies made by A.

Relevant facts and circumstances

Parties:

A is a non-resident and not registered for ABN or Australian GST purposes and does not have fixed places in Australia through which it carries on any activities.

B is a resident of Australia.

The Agreement:

B and A have entered into an Agreement (the Agreement) whereby B grants A a licence (Licence) to participate in a specified program for a term which commenced on DD/MM/YYYY and expires on DD/MM/YYYY and sets out the terms on which B grants and A accepts the right to participate in such program for the term.

The ruling request states that B offered the Agreement to A and A accepted the terms offered in the overseas country. A notified its acceptance by email to B in Australia. There have been two versions of the Agreement, both of which were executed by or on behalf of A in the overseas country and then returned to B for execution in Australia.

A provided a copy of the Agreement.

The Agreement states that it is a condition precedent to the grant of the Licence that A enters into specified agreements with third parties for specified purposes.

The Agreement states that the right to enjoy the Licence is subject to a number of conditions including:

· regular compliance review in accordance with the Agreement

· satisfaction of A's obligation as set out in the Agreement in relation to the minimum performance measures at each review point in accordance with the Agreement

· any promotion or relegation system introduced by B

· other than with the prior written approval of B, A may not exercise its rights under the Licence or conduct any activities other than within the overseas country.

The Agreement states that A must use best endeavours to meet minimum performance measures and that B will review A's Licence on a regular basis for compliance and will consider a range of specified matters. Where, following a review, B is not satisfied with A's compliance, B may terminate the Agreement with immediate effect.

The Agreement sets out A's and B's obligations.

The Agreement obliges A to be bound by and pay any charges imposed by B for failing to meet specified standards.

The Agreement deals with commercial rights and provides that B aims to promote the economic viability and growth of the program and distributing revenue in accordance with the terms of the Agreement. The Agreement provides a list of specified rights that B retains the exclusive right to commercially exploit.

Under the Agreement B grants to A some rights in relation to specified activities.

The Agreement provides that A:

· must not grant to any person any of the rights specified in the Agreement

· must promote certain entities and ensure they obtain their respective rights and benefits in accordance with the Agreement

· may appoint its own suppliers during the term of the Agreement provided certain requirements are met

· must, within a specified period of time provide specified information in respect of specified proposed activities for B's approval.

In respect of the intellectual property the Agreement provides that A acknowledges that B owns all rights, title and interest in the 'program property'.

Under the Agreement A assigns to B all existing and future intellectual property rights in 'A's property'.

The Agreement provides that A consents to B performing all acts necessary or desirable to enable B to fully exploit A's property.

The Agreement states that B will pay to A a specified share of the net profits from the sale of specified products that feature A's property.

The Agreement makes B responsible for the marketing and promotion of the program, including implementation of a centralised marketing campaign. The Agreement obliges A to actively participate in marketing of the program.

The Agreement deals with the arrangements for sharing revenue and makes it clear that B retains revenues and meets certain expenses and costs.

The Agreement states that, subject to a specified clause in the Agreement, B will pay A a specified grant. The Agreement states that payment of the specified grant to A is subject to A's compliance with the Agreement and the payment may be set off against amounts owed by A to B.

The Agreement sets out how net profits received from the sale of A' Property, B's Property and specified activities are shared between B and A.

The ruling request states that, in addition to the specified grant payable pursuant to the Agreement, A receives additional distribution at regular intervals for complying with certain requirements and satisfying certain conditions.

The letter dated DD/MM/YYYY issued by B also refers to A receiving payment U at regular intervals, which is funded by a third party. The ruling request states that this payment is funded through a specified agreement between B and a specified entity that requires A to comply with specified conditions.

B issued a letter on DD/MM/YYYY advising of the key performance indicators applicable to the financial year 20XX/20YY for which payment V is made. The ruling request states that this amount is not specified in the Agreement.

Attached to the ruling request is a letter from B dated DD/MM/YYYY which states that the key performance indicators for payment V are that A undertake and implement certain things by specified dates and comply on an ongoing basis with obligations under the Agreement and other specified contracts and regulations.

The Agreement states that, subject to a specified clause, B retains the exclusive right to utilise specified rights in relation to specified activities. The Agreement states that A must not grant to any person the rights to the specified activities. The Agreement states that A will receive a share of the net profits from the specified activities.

The Agreement states that, in order to meet the long term goal of the program, B distributes payment W earned from specified activities. The Agreement states that A must ensure that it participates in the program and specified activities as directed by B and obliges A to comply with the relevant specified regulations and obligations. Payment W is distributed by B in accordance with the Agreement and as determined by B.

The Agreement states that A agrees to pay to B an annual licence fee of a specified amount.

Submissions made in the ruling request:

In the ruling request it was submitted that it was first necessary to determine the nature of any supplies made by A and then whether those supplies are connected with Australia and are made for consideration. It was further submitted that many of the things which A agreed either to do or to refrain from doing are merely conditions of the Agreement and do not constitute a supply.

It was also submitted that, for the purposes of determining whether a supply is connected with Australia, it is necessary to determine whether the supply is one of goods, real property or other thing.

The submissions then addressed specific supplies made by A pursuant to the Agreement.

Supplies provided to specified entities

It was submitted that A's obligation to ensure that specified entities obtain their rights and benefits pursuant to the Agreement was a supply of services and not a supply of rights made to B.

It was submitted that these services were supplied to B, but 'provided' to the specified entities in the overseas country, were performed outside Australia, were not made through an enterprise carried on in Australia, and were not rights or options to acquire other things the supply of which would be connected with Australia, and therefore were not connected with Australia.

A's property and specified information:

It was submitted that the assignment by A to B of all intellectual property rights in A's property and specified information was a supply that it is not connected with Australia because the Agreement was executed by A in the overseas country and then returned to B for execution in Australia.

In the alternative it was submitted that if the supply of A's property and specified information was connected with Australia, the consideration for that supply is the share of the net profit received by A pursuant to the specified clauses of the Agreement. It was submitted that the entire amount received by A pursuant to the specified clauses was consideration for the assignment of A's property.

Exploitation of program property and specified revenues

It was submitted that A does not make a supply for which A's shares in net profit from the exploitation of program property and from the specified revenues are consideration because A has no interest in program property and did not supply an interest in the program property to B. Instead B has an exclusive right to exploit program property and B does not require anything from A to do so. It was further submitted that the payments to A pursuant to the Agreement are part of what B does to further the long term goal of the program, as set out in the Agreement.

It was submitted that a share of net profits from specified activities are support payments without a sufficient connection to any supplies made by A and are similar to the support payments made in C of IR v New Zealand Refining Co. Ltd. It was submitted that A makes no identifiable supplies for which a share of net profits from specified activities are consideration.

Alternatively, if the Commissioner considers that A does make supplies for which these payments are consideration, it was submitted that those supplies are not connected with Australia because if the supplies are services, they are performed outside Australia or if the supplies are rights or obligations entered into, they are made outside Australia because A executed the Agreement outside Australia.

Payment W

It was submitted that payment W received by A pursuant to the Agreement is consideration for supplies connected with Australia only where A has earned the relevant payment through activities carried out in Australia.

Where A receives payment W for activities carried out by other entities, it was submitted that any such payment was not further consideration for activities in which A has participated because A may never participate in activities and still be entitled to payment W.

It was further submitted that any payment W received by A as a non-participating entity is not sufficiently connected to any other supplies A makes, or if that share is sufficiently connected, those supplies are not connected with Australia.

Obligations of A not amounting to supplies

It was submitted that the general obligations entered into by A pursuant to the Agreement are not supplies in their own right but mere conditions of the Agreement. For example, while A is entitled to participate in the program, that does not amount to a supply in its own right as it does not have an independent identity separate from the grant of the Licence but is something which defines the nature of the Licence. Another example is the prohibition on A from participating in specified activities without prior B's approval. It was submitted that this obligation also goes to define the nature of the Licence, and does not amount to a supply in its own right. It was also submitted that the other general obligations in a specified clause of the Agreement are mere conditions of the grant of the Licence.

It was also submitted that certain specified things are not supplies in their own right. Further A's obligation to ensure that the specified agreements allow A to meet its obligations to B under the Agreement is not a supply as the provision of the specified agreements are a condition precedent of the grant of the Licence. An obligation to conduct specified activities in accordance with certain minimum standards or to provide specified information on certain activities within a specified time are merely conditions of the Licence. An undertaking not to enter into any agreement to license or exploit program property, is something which helps to define A's assignment of A's property under a specified clause of the Agreement.

Payment U

The letter dated DD/MM/YYYY states that payment U is paid on regular intervals to A and is funded by a third party.

The ruling request states that the payment U is funded through an agreement between B and the third party which imposes obligations on B which include an obligation not to contract with conflicting suppliers and that A is required to comply with this undertaking through A's obligations under the Agreement.

The Agreement states that A may appoint A's own suppliers provided that those suppliers do not compete with program suppliers.

It was submitted that A's obligation not to contract with conflicting entities is outside the scope of GST because A executed the Agreement outside Australia.

Other Payments

It was submitted that the following payments received by A:

· specified grant

· payment T, and

· payment V

are not consideration for supplies made by A because B makes these payments in order to further the long-term goal of the program, i.e. as support for A. However if the ATO considered that these payments are consideration for supplies made by A, it was submitted that those supplies are not connected with Australia because:

· if the supplies are services, they are performed outside of Australia, and

· if the supplies are rights or obligations entered into, they are made outside Australia because A executed the Agreement outside Australia.

Non-Monetary Consideration

Although B makes certain supplies pursuant to the Agreement, it was submitted that those supplies are not non-monetary consideration for any supplies made by A. The ruling request referred to the following supplies made by B:

· the grant of the Licence

· the grant of the rights and benefits to specified things

· the grant of the right for A to enter into specified agreements in the overseas country, and

· the grant of the licence to use A's property and specified information.

If the ATO considered that B provides non-monetary consideration for supplies made by A, it was submitted that the supplies made by A are not connected with Australia.

Relevant legislative provisions

The A New Tax System (Goods and Services Tax) Act 1999 section 9-5

The A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-10(2)(g)

The A New Tax System (Goods and Services Tax) Act 1999 subsection 9-25(5)

Reasons for decision

Question 1 - Is the specified grant consideration for supplies that are connected with Australia?

Relevant provisions of the Agreement:

The Agreement states that, subject to a specified clause in the Agreement, B will pay to A as a specified grant. The Agreement states that payment of the specified grant to A is subject to A's compliance with the Agreement and the payment may be set off against amounts owed by A to B.

Submissions in the ruling request:

The ruling request included general submissions that a supply must involve something passing from one entity to another and must be identifiable and economically valuable.

It was submitted that, based on Goods and Services Tax Ruling GSTR 2001/6 (Paras 80-89), the obligations entered into by A pursuant to the Agreement were not supplies in their own right because they merely defined the terms of the Licence granted to A. It was further submitted that the specified grant was not consideration for supplies made by A but rather paid as support for A and to further the long term goal of the program to be commercially sustainable.

Alternatively, if the specified grant was consideration for supplies made by A, it was submitted that those supplies are not connected with Australia (i.e. to the extent that those supplies are services they are performed outside Australia and to the extent that those supplies are rights or obligations they are not a thing done in Australia because A executed the Agreement outside Australia).

Consideration for a supply:

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that an entity ('you') makes a taxable supply if all the following requirements are met:

(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 for GST.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

(* denotes a term defined in section 195-1 of the GST Act)

In relation to whether a payment is consideration for a supply, Goods and Services Tax Ruling GSTR 2012/2 refers to a 'financial assistance payment' (which includes a payment made to provide support or aid to the payee), and states:

15. For a financial assistance payment to be consideration for a supply there must be a sufficient nexus between the financial assistance payment made by the payer and a supply made by the payee. A financial assistance payment is consideration for a supply if the payment is 'in connection with', 'in response to' or 'for the inducement of' a supply. The test is an objective one.

16. Reference to all of the surrounding circumstances of the arrangement, in particular any written documentation, determines whether a financial assistance payment is 'in connection with', 'in response to' or 'for the inducement of' a supply. The surrounding circumstances may include the statutory purpose of the payer in providing the financial assistance, the activities which are to be undertaken by the payee and any other terms and conditions attached to the payment. However, none of these factors will be determinative on their own and the arrangement must be considered as a whole. The description the parties may give to the arrangement, whilst relevant, is not determinative.

The Agreement states that B will distribute the specified grant to A and the payment of the grant to A is subject to A's compliance with the terms of the Agreement.

The Agreement states that B grants A the Licence to participate in the program on the terms of the Agreement and A agrees that the right to enjoy the Licence and A's continued participation in the program is subject to the regular compliance review required by the Agreement and satisfaction of A's obligation pursuant to the Agreement in relation to the minimum performance measures at each review point. The Agreement lists the minimum performance measures which A must maintain. The Agreement allows B to determine whether A is complying with its obligation to meet the minimum performance measures' at each review point and states that a material failure by A to meet the minimum performance measures allows B to terminate the Agreement with immediate effect. Apart from these provisions, the Agreement states that A must do a range of specified things and meet certain obligations.

In our view these provisions of the Agreement indicate that there is a sufficient nexus between payment of the specified grant and the obligations entered into by A to be subject to regular compliance review and to use A's best endeavours to meet the minimum performance measures.

Supply:

Paragraph 9-10(2)(g) of the GST Act states that 'supply' includes an entry into an obligation to do anything, to refrain from an act, or to tolerate a situation.

It was submitted in the ruling request that, in order for there to be a supply, something must pass from one entity to another (Proposition 6 in Goods and Services Tax Ruling GSTR 2006/9). However the discussion of Proposition 6 in GSTR 2006/9 includes an acknowledgement (Para 93) that, in relation to the supply of entry into an obligation, the thing supplied is not necessarily the thing acquired because the obligation remains with the supplier, while the 'right' is created in the hands of the recipient, rather than there being a thing that passes from one entity to another.

It was also submitted that a supply must be identifiable and economically valuable rather than a mere condition of an agreement. GSTR 2001/6 states (Para 80) that things such as obligations can often be disregarded as non-monetary consideration as they do not have economic value and independent identity separate from the transaction. GSTR 2001/6 provides as an example of obligations which do not go beyond merely defining the obligations entered into by a franchisee pursuant to a franchise agreement to sell only specified products for set prices and not to operate outside a specified area (Example 8, Para 89).

The true character of the transaction is for the supply by Franchisor of certain rights in return for a monetary payment. The obligations Franchisee enters into are in the nature of defining and describing the supply by Franchisor. Although, when viewed in isolation they may meet the definition of both ' supply' and ' consideration', they do no more than define what Franchisor is supplying .

GSTR 2012/2 contains examples of where a financial assistance payment does and does not have sufficient nexus with the supply of entry into an obligation. In Example 3 (Paras 29-31) the financial assistance payment made to a dance troupe has a nexus with an 'enforceable obligation' to present a number of performances. In Example 5 (Paras 37-39) a financial assistance payment enables the recipient to do something but no such 'enforceable obligation' exists.

In our view the obligations entered into by A with which the specified grant has a nexus are similar to the obligations entered into by the franchisee in Example 8 in GSTR 2001/6 as those obligations do no more that define what B is supplying pursuant to the Agreement, i.e. a licence to participate in the program on the terms of the Agreement. Consequently the specified grant is not consideration for a supply made by A.

Question 2 - Is the additional distribution consideration for supplies that are connected with Australia?

Relevant provisions of the Agreement:

The Agreement states that each party must comply with any special conditions specified in the Agreement. The ruling request states that, in addition to the specified grant payable pursuant to the Agreement, A receives additional distribution at regular intervals pursuant to a letter dated DD/MM/YYYY from B to A and a term of the Agreement.

Submissions in the ruling request:

The submissions made in respect of additional distribution are the same as those made in respect of the specified grant, i.e. that a supply must involve something passing from one entity to another and must be identifiable and economically valuable, that the obligations entered into by A pursuant to the Agreement were not supplies in their own right because they merely defined the terms of the Licence granted to A and that the additional distribution is not consideration for supplies made by A but are paid by B as support for A.

Consideration for a supply:

Given that the Agreement treats the additional distribution as an increase to the specified grant, we consider that, per Question 1, the terms of the Agreement indicate that there is a sufficient nexus between payment of the additional distribution and the obligations entered into by A to be subject to regular compliance review and to use A's best endeavours to meet the minimum performance measures.

Supply:

For the reasons set out in Question 1 we consider that the obligations entered into by A with which the additional distribution has a nexus do no more than define what B is supplying pursuant to the Agreement, i.e. the Licence to participate in the program on the terms of the Agreement, and do not constitute a supply.

Question 3 - Is payment U which is funded by another entity consideration for supplies that are connected with Australia?

Relevant provisions of the Agreement:

The letter dated DD/MM/YYYY states that payment U is paid on regular intervals to A and is funded by a third party.

The ruling request states that the payment U is funded through an agreement between B and the third party which imposes obligations on B which include an obligation not to contract with conflicting suppliers and that A is required to comply with this undertaking through A's obligations under the Agreement.

The Agreement states that A may appoint A's own suppliers provided that those suppliers do not compete with program suppliers.

Submissions in the ruling request:

It was submitted in the ruling request that many obligations entered into by A pursuant to the Agreement were mere conditions of the Agreement and not supplies in their own right. It was acknowledged, however, that some obligations entered into by A were sufficiently identifiable and economically valuable to be supplies.

It was further submitted that the obligation entered into by A not to contract with conflicting suppliers was outside the scope of GST because A executed the Agreement outside Australia. It was explained that B offered the Agreement to A which accepted the terms offered in the overseas country. A notified its acceptance by email to B in Australia. There have been two versions of the Agreement, both of which were executed by or on behalf of A in the overseas country and then returned to B for execution in Australia.

Consideration for a supply, and supply:

The submissions in the ruling request appear to accept that the obligation entered into by A not to compete with the program suppliers satisfies the requirement in GSTR 2001/6 that an obligation should have economic value and independent identity separate from the transaction. We consider that the obligation entered into by A pursuant to the Agreement is an 'enforceable obligation' of the type described in Example 3 in GSTR 2012/2 (Paras 29-31) and that payment U is consideration for a supply made by A.

Connected with Australia:

For the purposes of determining whether a supply of anything other than goods or real property is connected with Australia, subsection 9-25(5) of the GST Act states:

Supplies of anything else

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

(a) the thing supplied is done in Australia; or

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

(c) all the following apply:

(i) neither (a) or (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

Goods and Services Tax Ruling GSTR 2000/31 (GSTR 2000/31) explains paragraph 9-25(5)(a) as follows:

62. 'Thing' is defined to mean anything that can be supplied or imported such as a service, advice, information or a right. It is the subject of the supply.

63. Under paragraph 9-25(5)(a) the connection with Australia requires that the 'thing' being supplied is 'done' in Australia.

64. 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.

In relation to supply of a right or entry into an obligation, GSTR 2000/31 states:

The creation, grant, transfer, assignment or surrender of a right

74. If the supply is the creation, grant, transfer, assignment or surrender of a right, the creation of that right in another, the granting, transfer or assignment of that right to another, or the surrender of that right, is done where the right is created in that other person, granted, transferred or assigned to that other person or surrendered respectively.

75. The act that creates that right in another or grants, transfers or assigns that right to another, or surrenders the right, will depend on the facts of each individual case.

76. If, for example, a right is granted under an agreement to another to use certain intellectual property, the granting of that right to another is done where the agreement is made. If the agreement is made²⁷ in Australia, the supply of that right is connected with Australia. If the agreement is made outside Australia, the supply is not connected with Australia under paragraph 9-25(5)(a). However, even if the agreement is made outside Australia the supply is connected with Australia under paragraph 9-25(5)(b) if the supplier makes the supply through an enterprise that the supplier carries on in Australia (refer paragraphs 78 to 89 below).

Entry into, or release from, an obligation

77. If the supply is the entry into, or release from, an obligation to do anything, or to refrain from an act, or to tolerate an act or situation, the entering into that obligation or the release from that obligation is done where the obligation is entered into or the release is effected.

Footnote 27 in paragraph 76 of GSTR 2000/31 states:

A contract is made where the last act necessary to create a binding contract is performed (see W. A. Dewhurst and Co. Pty. Ltd. v. Cawrse [1960] V.R. 278 at 282.

In A W Dewhurst & Co. Pty Ltd v Cawrse [1960] V.R. 278 (Dewhurst) a company registered and carrying on business in Victoria, issued a writ out of the Supreme Court of Victoria claiming damages for breach of contract against Cawrse who carried on business as a grazier in South Australia. Cawrse moved to stay the proceedings. The issue was whether the Supreme Court of Victoria had jurisdiction pursuant to section 11(1)(b) of the Service and Execution of Process Act 1901 (Vic) on the ground that the contract was 'made in Victoria'. Dean J stated:

[Dewhurst] has to make it appear that the contract for the sale of the meat in question was made in Victoria. This means that the offer was accepted here. It has been held recently by the Court of Appeal that the law applicable to the making of a contract by an acceptance by post or telegram is not the same as where the acceptance is by teleprinter, by telephone, or by other instantaneous means. In the case of acceptance by post the acceptance is in the usual case completed by posting the letter of acceptance, even though it never reaches the offeror. The contract is made where the letter of acceptance is posted; but where acceptance is by telephone or teleprinter there is no acceptance until it is received. See Entores Ltd v Miles Far East Corporation … a case where a contract resulted from messages transmitted instantaneously between the parties by teleprinter. At p. 332, Denning LJ said: 'When a contract is made by post it is clear law throughout the common law countries that the acceptance is complete as soon as the letter is put into the post box, and that is the place where the contract is made'. His Lordship then turned to the case of instantaneous communications and said that the rule is different. His Lordship said, at p. 334: 'The contract is only complete when the acceptance is received by the offeror and the contract is made at the place where the acceptance is received'. I need not discuss the reasons for this distinction which are carefully explained by all members of the Court.

Dean J found that Mr Dewhurst sent an invitation to treat to Mr Cawrse by letter dated 20 November 1957 asking whether Mr Cawrse could offer boneless mutton for shipment to the United States, but that there were conflicting accounts of a subsequent telephone conversation that occurred when Mr Cawrse (in Adelaide) telephoned Mr Dewhurst (in Melbourne). Mr Cawrse's evidence was that during that telephone conversation Mr Cawrse offered Mr Dewhurst up to 100 tons of mutton at a specified price and Mr Dewhurst accepted that offer. Dean J stated:

If this account is correct, it was Mr Dewhurst who accepted the defendant's offer, and so completed the contract, and the contract was made in South Australia.

Mr Dewhurst's evidence was that he could not remember the telephone conversation but that he told Mr Cawrse that W A Dewhurst could pay a certain amount per pound of mutton and Mr Cawrse accepted that offer. Dean J stated:

If that account is accepted the acceptance was by Mr Cawrse in Adelaide and the contract was made in Melbourne where it was accepted by plaintiff.

Dean J held that the plaintiff Dewhurst could not discharge the burden of satisfying the Court that the contract was made in Victoria:

Upon this evidence I do not feel satisfied even to the extent to which I am required to be satisfied that [Cawrse] was the acceptor. There is, as I think, a burden on [Dewhurst] to bring himself within s.11(1)(b), a lesser burden than on the trial of an issue, but still a definite burden. In view of the admitted uncertainty of his memory, the importance of the precise words used and their order, and in light of the evidence of [Cawrse] whose memory is slightly more reliable, I do not consider [Dewhurst] has discharged the burden upon him.

The common law rules governing formation of a contract as discussed above in Dewhurst are repeated in Bressan v Squires [1974] 2 NSWLR 460, 461 Bowen C J:

The general rule is, of course, that a contract is not concluded until acceptance of an offer is actually communicated to the offeror. To this rule there is an exception in the case of acceptance by post … .It is an important exception, since it may determine not only when a contract has been made but also where it has been made.

As discussed in Dewhurst, the common law rules on the formation of a contract distinguish between instantaneous (including near-instantaneous) means of communication and post when determining when and where communication of acceptance occurs. In Olivaylle Pty Ltd v Flotweg GMBH & Co KGAA (No. 4) [2009] FCA 522 (Olivaylle Pty Ltd) Logan J stated that e-mail was an instantaneous means of communication and that where the acceptance of an offer was communicated by e-mail sent from New South Wales to Victoria, the contract for supply of production line equipment was made where the acceptance was received, i.e. Victoria. (Para 25):

Having regard to the position taken by the parties in this case, it is not necessary to give detailed consideration to the point. It is enough to observe that I consider that there are analogies to be drawn with the way the law developed in relation to telex communications in an earlier era where what I have termed 'the instantaneous communication rule' came to be adopted, perhaps at the expense of scientific precision but not so in relation to common commercial understanding. Thus, by analogy with cases concerning the position with what were, or were treated as, other forms of instantaneous communication, I consider that the contract was made where acceptance was received, i.e. in Victoria: Entores Ltd v Miles Far East Corporation [1955] 2 QB 327; W A Dewhurst & Co Pty Ltd v Cawrse [1960] VR 278; Express Airways v Port Augusta Air Services [1980] Qd R 543; Reese Bros Plastics Ltd v Hamon-Sobelco Australia Pty Ltd (1988) 5 BPR 11,106.

Olivaylle Pty Ltd is cited in Contract Formation: Law and Practice (2010, OUP, Para 4.91):

Moreover, generally a contract is formed at that place where the acceptance takes effect. Thus, in the case of instantaneous modes of communication this is where acceptance is communicated or received. Examples of instantaneous communications include face-to-face communications, telephone, fax and telex. It is likely that e-mail and text messaging will be categorised as instantaneous forms of communication. (308)

Footnote 308 states:

Receipt will occur when the message is received in the offeror's server - see UNCITRAL Model Law on Electronic Commerce….for reasons of fairness and convenience, communication should be taken to have occurred at this point.

Olivaylle Pty Ltd was applied in New South Wales by the Supreme Court of New South Wales in Showtime Touring Group v Mosely Touring Inc [2010] NSWSC 974 where the issue was whether the defendants had been properly served with a statement of claim in any of the circumstances in which an originating summons may be served outside Australia, as set out in Schedule 6 to the Civil Procedure Act 2005 (NSW). Those circumstances include where the subject matter of the proceedings is a contract and the contract is 'made in New South Wales' (Schedule 6, clause (c)(i)). Hislop J stated (Paras 38 40):

The May agreement was made when the agreement signed in New South Wales was emailed back to the defendants' lawyers in New York. The contract was made in New York where the e-mail was received - Olivaylle Pty Limited v Flotweg GMBH & Co KGAA (No 4) [2009] FCA 522.

The plaintiff's evidence is that the second agreement was made by sending a fax accepting the defendants' offer to the defendants' lawyer in New York. If there was an agreement distinct from the May agreement, it was made in New York where the fax was received - Reese Bros Plastics Limited v Hamon-Sobelco Australia Pty Ltd (1988) 5 BPR 11,106, Egis Consulting Australia Pty Limited v First Dynasty Mines Limited [2001] WASC 22.

Thus the agreement sued upon, whether it be regarded as a separate agreement or a variation of the May agreement was made in New York not New South Wales. Schedule 6 cl (c)(i) has no application.

In the present case the ruling request suggests that B made an offer (in the form of an unexecuted Agreement) to A and that A notified A's acceptance of that offer to B by e-mail sent by A from the overseas country and received by B in Australia. If that is the case then, based on Olivaylle, the last act necessary to create a binding contract (i.e. communication of acceptance) was via an instantaneous means of communication and takes effect where the e-mail was received (i.e. in Australia). Consequently the Agreement was made in Australia, not in the overseas country, and payment U is consideration for a supply that is connected with Australia.

Question 4 - Is payment V consideration for supplies that are connected with Australia?

Relevant provisions of the Agreement:

The ruling request states that this amount is not specified in the Agreement.

Attached to the ruling request is a letter from B dated DD/MM/YYYY which states that the key performance indicators for payment V are that A undertake and implement certain things by specified dates and comply on an ongoing basis with obligations under the Agreement and other specified contracts and regulations.

Submissions in the ruling request:

It was submitted that B pays payment V as support for A and that if the ATO considers payment V to be consideration for supplies, those supplies are not connected with Australia because they are either services performed outside Australia or supplies of rights or obligations which are made outside Australia because the Agreement was made outside Australia (despite payment V not being specified in the Agreement).

Consideration for a supply:

Notwithstanding that the ruling request states that the performance is not specified in the Agreement, we note that the Agreement obliges A to comply with all applicable standards, awards, laws and regulations, procedures, contracts and all reasonable directions from B within the scope of the Agreement. We therefore consider that payment V is additional consideration which has a sufficient nexus with obligations entered into by A pursuant to the Agreement.

Supply:

For the reasons set out in Question 1 we consider that the obligations entered into by A with which payment V has a nexus do no more than define what B is supplying pursuant to the Agreement, i.e. a licence to participate in the program and that payment V is not consideration for supplies made by A.

Question 5 - Is A's share in net profits from licensed products consideration for supplies that are connected with Australia?

Relevant provisions of the Agreement:

The Agreement states that A assigns to B all in A's property.

The Agreement states that B will pay to A a specified share of the net profits from the sale of licensed products that feature A's property.

Submissions in the ruling request:

It was submitted that the assignment by A pursuant to the Agreement was a supply but was not connected with Australia as the Agreement was executed by A in the overseas country. If the ATO considered that the supply was connected with Australia it was submitted that the consideration for the supply is the amount of net profits received by A pursuant to the Agreement.

Consideration for supply, and supply:

The submissions in the ruling request accept that the assignment of intellectual property rights in A's property is a supply made by A and is made for consideration comprising A's shares in the net profits. We agree. We also agree with the submission that the consideration for the supply is limited to the amount of net profits received by A pursuant to the Agreement.

Connected with Australia:

The relevant supply was the assignment of rights by A to B pursuant to the Agreement. GSTR 2000/31 states (Para 76) that the assignment of those rights is 'done' for the purposes of paragraph 9-25(5)(a) of the GST Act where the Agreement was made, i.e. where the last act necessary to create a binding contract is performed. For the reasons set out above in relation to Question 3 we consider that the last act necessary to create a binding contract between A and B (i.e. communication of acceptance) took effect in Australia, the Agreement was made in Australia and the assignment of rights by A to B is connected with Australia.

Question 6 - Is A's share in net profits from specified activities consideration for supplies that are connected with Australia?

Relevant provisions of the Agreement:

The Agreement states that, in order to meet the long term goal of the program, B distributes payment W earned from specified activities. The Agreement states that A must ensure that it participates in the program and specified activities as directed by B and obliges A to comply with the relevant specified regulations and obligations. Payment W is distributed by B in accordance with the Agreement and as determined by B.

Submissions in the ruling request:

It was submitted that A makes no identifiable supplies for which any share of net profits from the specified activities is consideration because A did not make a supply to B of an interest in program property or specified rights which might entitle A to receive a share of the net profits. It was submitted that B did not require anything from A to render exploitation possible. It was further submitted that the payment of a share of net profits from the specified activities to A was part of what B does to further the long term goal of the program. This is a support payment without a sufficient connection to any supply made by A per CIR v New Zealand Refining Co Ltd. In the alternative it was submitted that if the ATO considered that A did make supplies for which any share of net profits from the specified activities was consideration, those supplies are not connected with Australia because if those supplies are services they are performed outside Australia or if those supplies are supplies of rights or obligations entered into they are made outside Australia because A executed the Agreement outside Australia.

Consideration for supply, and supply:

We disagree with the submission that A does not make a supply. In our view B considered that it was necessary in order to support B's exclusive right to commercially exploit certain rights (including the specified rights) to require A to enter into an obligation not to grant those rights to any person. We therefore consider that A made a supply within the meaning of paragraph 9-10(2)(g) of the GST Act, i.e. entry into an obligation to refrain from an act.

We consider that the share of net profits received from specified activities which is paid to A is the consideration for that supply.

Connected with Australia:

The relevant supply was the entry by A into an obligation not to grant to any person the specified rights pursuant to the Agreement.

GSTR 2000/31 states (Para 76) that the entry into that obligation was 'done' for the purposes of paragraph 9-25(5)(a) of the GST Act where the Agreement was made, i.e. where the last act necessary to create a binding contract is performed. For the reasons set out above in relation to Question 3 we consider that the last act necessary to create a binding contract between A and B (i.e. communication of acceptance) took effect in Australia, the Agreement was made in Australia and the assignment of rights by A to B is connected with Australia.

Question 7 - Is payment W paid to A consideration for supplies that are connected with Australia?

Relevant provisions of the Agreement:

The Agreement states that A must ensure that it participates in the program and specified activities as directed by B and obliges A to comply with the relevant specified regulations and obligations.

The Agreement states that, in order to meet the long term goal of the program, B distributes payment W earned from specified activities.

The Agreement states that payment W earned from specified activities will be distributed by B so that as specified in the Agreement or determined by B.

Submissions in the ruling request:

It was submitted that payment W is consideration for supplies that were connected with Australia where A earned those amounts by conducting specified activities in Australia, but not where A earned those amounts by conduction the specified activities outside Australia.

It was submitted that in certain situations payment W was not consideration for a supply made by A and was not sufficiently linked to any other supplies made by A or, if it was sufficiently linked to supplies made by A, those supplies were not connected with Australia.

Consideration for a supply:

In our view the provisions of the Agreement indicate that there is a sufficient nexus between payment W by B to A and the obligation entered into by A to participate in specified activities.

Supply:

For the reasons set out in Question 1 we consider that obligations entered into by A in relation to the specified activities with which payment W has a nexus do no more than define what B is supplying pursuant to the Agreement, i.e. a licence to participate in the program on the terms set out in the Agreement and do not constitute a supply.

Question 8 - Does B provide any non-monetary consideration to A for supplies made by A that are connected with Australia?

Relevant provisions of the Agreement:

The ruling request referred to certain supplies made by B pursuant to the Agreement such as the grant of the Licence to participate in the program and the grant of the specified rights and benefits.

Submissions in the ruling request:

It was submitted that, although B makes supplies referred to above pursuant to the Agreement, those supplies were not non-monetary consideration for supplies made by A.

Alternatively, if those supplies were non-monetary consideration for supplies made by A, those supplies are not connected with Australia.

Supply for non-monetary consideration:

GSTR 2001/6 deals with non-monetary consideration and states (Para 15) that many transactions involve parties entering into multiple obligations and that the question arises as to whether those obligations are consideration (or additional consideration) for a taxable supply. GSTR 2001/6 further states:

47. … Where one party makes a monetary payment to another, something of economic value is provided. The question is whether there is a sufficient nexus between the supply and the payment as consideration.

48. The same analysis applies in determining whether a good, service or thing is non-monetary consideration for a supply. However, due to the breadth of the definition of consideration (and the numerous promises that each party to a transaction usually makes), establishing what is the consideration for a supply is not always as simple as for monetary transactions. Nor is it always as clear if something of economic value is being provided.

and:

80. Consideration for a supply may include acts, rights or obligations provided in connection with, in response to, or for the inducement of a supply. However, things such as acts, rights and obligations can often be disregarded as payments as they do not have economic value and independent identity separate from the transaction.

81. For a thing to be treated as a payment for a supply, it must have economic value and independent identity provided as compensation for the making of the supply. That is, it must be capable of being valued and be a thing that an acquirer would usually or commercially pay money to acquire. Whether this requirement is satisfied will usually be demonstrated by the parties to an arrangement assigning a specific or separate value to the thing. However, the assigning of a value by the parties is not necessary for a thing to have economic value.

82. Whether a payment is consideration for a supply depends on the true character of the transaction. Consideration for a supply is something the supplier receives for making the supply. Although a non-monetary payment (and acts or forbearances) can form consideration, the character of the transaction will determine whether it forms part of the consideration received by the supplier for making the supply.

83. Many transactions involve exchanging various rights and obligations between the parties to the transaction. In particular, the true character of the transaction may characterise the payment as a condition of the contract rather than the provision of non-monetary consideration. For example, in many cases, agreeing to enter into a contract to receive a supply for a specific period of time is not non-monetary consideration for that supply.

…

85. Non-monetary consideration needs to have a clearly independent identity. Obligations that are essentially another way of describing the consideration do not have a separate existence. For example, the obligation to pay money does not exist separately from the payment of money for the purposes of identifying the consideration. Also, in most cases, the use of a particular method of payment is not consideration. For example, where a supply is made for a lower price if a customer uses a credit card, the use of the credit card is not non-monetary consideration.

Obligations that define a supply

86. Particular terms that form part of a transaction need to go beyond merely defining or describing the supply, or specifying rights that are to be retained by the entity making the supply, before the terms form a separate supply or additional consideration for a supply under the transaction. This principle also applies in overseas jurisdictions.

In our view the supplies made by B referred to in the ruling request do not have an economic value and independent identity separate from the transaction. We consider that the transaction is the grant by B to A of the Licence to participate in the program. In the event that A participated in a specified activity, we do not consider that the rights and benefits granted by B to A have an economic value and an independent identity separate from the grant of the Licence. Nor do we consider that the grant of the right to enter into specified agreements in the overseas country or use certain information have an economic value or independent identity separate from the grant of the Licence.

Consequently we do not consider that the provisions of the Agreement referred to in the ruling request amount to non-monetary consideration provide by B for supplies made by A.