Edited version of private advice

Authorisation Number: 1012634875817

Ruling

Subject: GST and acquisitions for the repair of a vessel

Question

Are the supplies made by the Australian contractors to the non-resident entity taxable supplies for the purpose of paragraphs 11-5(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice

For the purposes of paragraph 11-5(b) of the GST Act:

• the supply of the real property (shed where vessel is located) by the contractor is a taxable supply under section 9-5 of the GST Act;

• the supply of the right (insurance policy) is a taxable supply under section 9-5 of the GST Act.

• the supplies of goods (materials and so on) by the contractors are taxable supplies under section 9-5 of the GST Act;

• The supplies of services (labour and transport) by the contractors are GST-free under paragraph (b) of item 2 in the table in subsection 38-190(1) of the GST Act except for the supply of the transport service which is a taxable supply under section 9-5 of the GST Act by virtue of subsection 38-190(3) of the GST Act.

However if you register for GST, the supplies of services will not be GST-free under paragraph (b) of item 2 in the table in subsection 38-190(1) of the GST Act. The supplies will be taxable supplies under section 9-5 of the GST Act.

Relevant fact

You are a company located outside Australia and are not registered for the goods and services tax (GST). You do not carry on a trading activity in Australia.

You purchased a vessel and took possession of the vessel. The vessel was built in Australia and has always been in Australia. After the purchase the vessel has undergone major repairs in Australia to make it AMSA/SIMSA compliant and sea worthy prior to sailing from Australia.

You contracted Company X as project manager for the repair of the vessel after the purchase. The project manager is to make your vessel AMSA compliant. You have asked Company X to put together a team of small contractors to carry out various components of work on the vessel.

You advised that the contractors are contracted by you, do the work for you and report to Company X. The contractors invoice you directly and copy Company X in the invoice. As project manager Company X will approve or disapprove the invoices based on work performed and pays the contractors out of a trust account set up specifically for the project. All invoices have GST included in the price.

Company X advised that on the commencement of works each contractor was provided with a copy of the overall job list and later assigned particular jobs from that list. Company X has progressively provided additional work orders and instruction for additional repair works to the contractor as required.

The following forms the general agreement between all contractors engaged on this project:

• In order to maximise the productivity of all independent contractors engaged in the project, the contractors provide their own labour, tools, equipment and materials to carry out each task as instructed through written work/purchase orders issued by Company X.

• Each invoice is itemised with the job description, work order, purchase order or job number and separated into daily/weekly labour accounts in man hours and if applicable for each particular job materials agreed to be supplied by the contractor or service provider for the hire of necessary plant or equipment in order to allow the job to be completed.

All contractors are registered for GST. You have provided us a list of the supplies made by the contractors to you and from the lists you have acquired from the contractors services, goods, shed for the vessel, insurance policy and transport service.

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 38-185(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-185(3)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 38-190(1)

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

Reasons for decision

Under section 11-20 of the GST Act a GST registered entity is entitled to claim back the GST paid for any creditable acquisitions they have made.

Section 11-5 of the GST Act explains when a creditable acquisition is made. One of the requirements for a creditable acquisition is the supply of the thing to the entity from the supplier is a taxable supply (paragraph 11-5(b) of the GST Act).

Taxable supply

A supply is a taxable supply under section 9-5 of the GST Act 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 for GST.

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

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

Characterisation of supplies made by contractors

Before we determine whether the supplies made by the contractors to you are taxable supplies for the purpose of paragraph 11-5(b) of the GST Act we need to determine the character of the supplies made by the contractors to you.

From the information received, you have acquired the following from the contractors:

• supply of real property (shed where vessel is located);

• supply of right (insurance policy);

• supplies of goods; and

• supplies of services (labour, transport).

We will now consider the GST status of each type of supplies you have acquired.

Supply of real property

Real property is defined in section 195-1 of the GST Act to include:

a) any interest in or right over land; or

b) a personal right to call for or be granted any interest in or right over land; or

c) a licence to occupy land or any other contractual right exercisable over or in relation to land.

Accordingly, the supply of the shed for the vessel is a supply of commercial property for GST purposes.

From the information received, the supplier of the shed for the vessel satisfies all the requirements of section 9-5 of the GST Act as:

• the supplier makes the supply for consideration;

• the supply of the shed is made in the course of the business that the supplier carries on;

• the supply is connected with Australia as the shed is located in Australia;

• the supplier is registered for GST;

• there is no provision under the GST Act that makes the supply of the shed input taxed or GST-free.

Accordingly, the supply of the real property to you is a taxable supply under section 9-5 of the GST Act.

Supply of right

For GST purposes a supply of insurance policy is a supply of right.

The supply of the insurance policy by the contractor satisfies the requirements in paragraph 9-5(a) to 9-5(d) of the GST Act as:

a) the contractor supplies the insurance policy for consideration;

b) the supply of the insurance policy is made in the course of the business that the contractor carries on;

c) the supply of the insurance is connected with Australia as it is made through a business that the contractor carries on in Australia;

d) the contractor is registered for GST.

However, the supply of the right is not a taxable supply to the extent that it is GST-free or input taxed. The supply of the insurance policy is not input taxed.

GST-free supply

Relevant to the supply of the right is item 4 in the table in subsection 38-190(1) of the GST Act (item 4).

Under item 4 a supply that is made in relation to rights is GST-free if:

a) the rights are for use outside Australia; or

b) the supply is to an entity that is not an Australian resident and is outside Australia when the thing supplied is done.

The insurance is for the duration of the repairs made to the vessel in Australia and therefore the right is for use in Australia. Accordingly the supply of the right is not GST-free under item 4.

The supply of the right is a taxable supply under section 9-5 of the GST Act.

Supply of goods

Section 195-1 of the GST Act defines 'goods' to mean any form of tangible personal property. A supply of goods can occur by way of sale, lease, hire and so on.

Based on the information received, the supplies of goods by the contractors satisfy the requirements in paragraph 9-5(a) to 9-5(d) of the GST Act as:

a) the contractors supply the goods for consideration;

b) the supplies of goods are made in the course of the business that the contractors carry on;

c) the supplies of goods are connected with Australia as they are delivered in Australia;

d) the contractors are registered for GST.

However, the supplies of the goods are not taxable supplies to the extent that they are GST-free or input taxed. There is no provision under the GST Act that makes the supply of these goods input taxed.

We will now consider the relevant subsections of 38-185 of the GST Act to determine if the supplies of goods satisfy the requirements of a GST-free supply of goods.

Items 1 and 2 in subsection 38-185(1) of the GST Act (items 1 and 2)

Subsection 38-185(1) of the GST Act is about exports of goods and lists the supplies of goods that are GST-free.

Under items 1 and 2, a supply of goods is GST-free where the supplier exports them from Australia and the export occurs before or within a 60 day period or such further period as the Commissioner allows.

Both items require, not only that there is an export of goods, but that the supplier is the entity that exports them.

Goods and Services Tax Ruling GSTR 2002/6 explains when a supply of goods is GST-free under items 1 and 2. Paragraph 22 of GSTR 2002/6 states:

The requirement that the supplier is the entity that exports the goods is satisfied where either:

a) the supplier contracts at the supplier's own expense with an international carrier for the transportation of the goods to a destination outside Australia; or

b) the supplier is responsible for delivering the goods to the operator of a ship or aircraft who, or that, has been engaged by another party to transport those goods to a destination outside Australia; or

c) the requirements of subsection 38-185(3) of the GST Act are met.

Based on the information received, the contractors do not export the goods as they are not contracting any international carrier to transport the goods overseas. The supplies of goods in this instance are not GST-free under items 1 and 2.

Subsection 38-185(3) of the GST Act

Goods and Services Tax Ruling GSTR 2002/6 explains when a supply of goods is GST-free under subsection 38-185(3) of the GST Act.

Under subsection 38-185(3) of the GST Act, a supplier who has not exported the goods is treated as having exported them for the purposes of items 1 or 2 if the following conditions are met:

a) before the goods are exported, the supplier supplies them to an entity that is not registered or required to be registered (paragraph 38-185(3)(a) of the GST Act);

b) that entity exports the goods from Australia (paragraph 38-185(3)(b) of the GST Act);

c) the goods have been entered for export within the meaning of section 113 of the Customs Act (paragraph 38-15(3)(c) of the GST Act);

d) since their supply to that entity, the goods have not been altered or used in any way, except to the extent (if any) necessary to prepare them for export (paragraph 38-185(3)(d)of the GST Act);

e) the supplier has sufficient documentary evidence to show that the goods were exported (paragraph 38-185(3)(e) of the GST Act); and

f) if that entity is covered by paragraph 168-5(1A)(c) - the supplier has a declaration by that entity stating that:

i. a payment has not been sought under section 168-5 for the supply (subparagraph 38-185(3)(f)(i); and

ii. if the goods are wine (within the meaning of the A New Tax System (Wine Equalisation Tax) Act 1999 (Wine Equalisation Tax) - a payment has not been sought under section 25-5 of that Act for the supply (subparagraph 38-185(3)(f)(ii) of the GST Act).

However, if the goods are reimported into Australia, the supply is not GST- free unless the reimportation is a taxable importation.

For the purposes of paragraph 38-185(3)(d) of the GST Act, activities such as packaging, wrapping, cleaning, disinfecting, dismantling or testing are considered necessary to prepare the goods for export, where it is not reasonable, given the nature of the goods, to export those goods without carrying out that activity.

Paragraph 38-185(3)(d) of the GST Act is satisfied where the goods, since their supply, have not been altered or used in any way except to the extent to prepare them for export. Any use of the goods which is essentially the same as the ultimate intended use of the goods is considered to be more usage than that necessary to prepare them for export.

Based on the information received, all the requirements in subsection 38-185(3) are not satisfied as:

• the contractors are not preparing the goods for exportation and instead use or install/attach them to the vessel that is being repaired so that it can be sea worthy and exported from Australia (paragraph 38-185(3)(d) not satisfied).

• You, as the recipient of the goods supplied by the contractors, are not considered to have exported the acquired goods when exporting the vessel as you are not engaging any international carrier to transport these goods. The goods when attached or installed to the vessel become part of the vessel and therefore you are exporting the vessel only once the repair is finished (paragraph 38-185(3)(b) not satisfied) .

The supplies of these goods to you are not GST-free under subsection 38-185(3) of the GST Act.

Item 5 in the table in subsection 38-185(1) of the GST Act (item 5)

Item 5 provides for GST-free supplies of stores or spare parts for use, sale or consumption on flights and voyages with a destination outside Australia.

Goods and Services Tax Ruling GSTR 2003/4 provides guidance on when a supply is GST-free under item 5.

Paragraphs 14 to 16 of GSTR 203/4 provide:

14. Spare parts are parts or components of a ship or aircraft that are intended to be used to replace defective or worn parts or components, whether or not they are supplied for immediate use in fixing to the craft or vessel.

15. Stores or spare parts are for use, sale or consumption on a ship if it is intended, when the goods are supplied, that the goods will be used, sold or consumed on that ship. The actual use, sale or consumption of the goods may provide evidence of such an intention.

16. To be GST-free, the stores or spare parts must be supplied for a flight or voyage which has a destination outside Australia (that is an international flight or voyage). An international flight or voyage may include a journey between places in Australia.

According to paragraph 32 of GSTR 2003/4, the goods must be for use, sale or consumption on board a ship to be stores or spare parts within the meaning of item 5

Further paragraph 51 of GSTR 2003/4 provides:

51. Item 5 requires that stores or spare parts be for use, consumption or sale on board an aircraft or ship that is on, or is embarking on, a flight or voyage with a destination outside Australia. The Topic description expresses this as export of goods that are to be consumed on international flights or voyages.

Accordingly, item 5 will only apply to those goods which the contractors supply to you which are intended for use or consumption on board a ship embarking on an international voyage.

Based on the information provided the contractors' supplies of goods are not to be taken on board the vessel for use as a spare part during the international voyage. The goods are either used or installed on the vessel by the contractors while repairing the vessel that is in Australia so that it could be seaworthy and exported from Australia. In this instance item 5 is not applicable.

Item 6 in the table in subsection 38-185(1) of the GST Act (item 6)

A supply of goods is GST-free under item 6 if all the requirements of the item are satisfied unless the supplier reimports the goods according to subsection 38-185(2) of the GST Act.

Item 6 is as follows:

Goods and Services Tax Ruling GSTR 2005/2 explains our view of the operation of item 6.

The requirements of item 6 are:

a) there is a supply of goods;

b) the supply is in the course of repairing, renovating, modifying or treating of the other goods;

c) the other goods are goods from outside Australia whose destination is outside Australia; and

d) the goods supplied are attached to or become part of the other goods or become unusable or worthless as a direct result of being used to repair the other goods.

For the purposes of item 6, goods are from outside Australia if they arrive in Australia from a place outside Australia. This includes ships or aircraft and goods on board the ships or aircraft.

In your case item 6 is not applicable as your vessel is from a place in Australia.

Summary

The supplies of the goods by the contractors to you are taxable supplies under section 9-5 of the GST Act.

Supply of services

Based on the information received, the supplies of services by the contractors satisfy the requirements in paragraph 9-5(a) to 9-5(d) of the GST Act as:

a) the contractors supply the services for consideration;

b) the supplies of services are made in the course of the business activities that the contractors carry on;

c) the supplies of services are connected with Australia as they are done in Australia;

d) the contractors are registered for GST.

However, the supplies of the services are not taxable supplies to the extent that they are GST-free or input taxed. There is no provision under the GST Act that makes the supply of these services input taxed.

GST-free supply

Relevant to the supply of services made by the contractors to you is item 2 in the table in subsection 38-190(1) of the GST Act (item2).

Under item 2 a supply of things other than goods or real property that is made to a non-resident who is not in Australia when the thing supplied is done is GST-free where:

a) 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

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

Only one of the paragraphs needs to be satisfied for the supply to be GST-free.

However, a supply is GST-free under item 2 to the extent that it is not negated by subsections 38-190(2), 38-190(2A) and 38-190(3) of the GST Act.

Non-resident not in Australia

For a supply to be within the scope of Item 2, the supply must be made to a non-resident who is not in Australia when the thing supplied is done. The expression 'not in Australia' requires that the non-resident is not in Australia in relation to the supply.

A non-resident company is in Australia if the 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.

Your company is not incorporated in Australia and you do not carry any business activities in Australia. Accordingly, you are not in Australia in relation to the supply when the contractors make their supplies to you.

Paragraph (a) of item 2

Under paragraph (a) of item 2, a supply of services 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 provides guidance on when work is physically performed on goods. The following information is from GSTR 2003/7:

57. The range of supplies that are directly connected with goods includes supplies of work physically performed on goods. That is, a supply of work physically performed on goods is always directly connected with goods. However, not all supplies directly connected with goods are also supplies of work physically performed on goods. A supply of work physically performed on goods requires a much closer connection with the goods: it requires a physical intervention with the goods. For example, a supply of legal services in preparing an agreement for the lease of goods is directly connected with goods but it is not a supply of work physically performed on goods as there is no physical intervention with the goods.

58. 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.

59. In contrast, where activities do not change or affect goods in a physical way, there is no supply of work physically performed on goods. For example, a supply of transporting goods is not work physically performed on goods because the supply only changes the location of the goods, not the goods themselves.

63. For a supply to be a supply of work physically performed on goods, the work physically performed does not have to bring about a fundamental change to the attributes of the goods. For example, cleaning goods is a supply of work physically performed on goods even though the cleaning does not make them into fundamentally different goods - the change is simply the difference between dirty goods and clean goods.

64. Other examples of work physically performed on goods include supplies that maintain or restore the function of goods. Repairs to machinery used in a manufacturing business fall into this category. Painting a ship is also a supply of work physically performed on goods: the purpose of the supply is to preserve the physical condition of the vessel.

65. Work that modifies the function of goods is also physically performed on the goods. Converting a fishing vessel to a cargo vessel is one example. Upgrading of machinery used in manufacturing goods to improve and increase output is a supply that changes the machinery.

66. Work can be physically performed on animate as well as inanimate goods. For example, a supply of horse training or veterinary treatment of livestock is a supply of work physically performed on goods.

67. Most supplies of work physically performed on goods will add value to those goods. But it is not essential that a supply add value to the goods for that supply to be work physically performed on goods. For example, a supply for the destruction of toxic materials is work physically performed on goods as there is purposeful physical intervention with the goods.

68. In many cases it is self-evident that a supply is a supply of work physically performed on goods. However, sometimes a supply must be analysed to determine whether it is properly characterised as 'a supply of work physically performed on goods'. If the supply includes work physically performed on goods but that work is ancillary to some other dominant part of the supply that is not work physically performed on goods, then that supply is not characterised as a supply of work physically performed on goods. This depends on the particular facts of each supply.

69. For example, a supply of a report on the results of testing and analysing samples of goods is characterised as a supply of information or advice if the dominant part of the supply is the analysis of data to enable a professional opinion to be provided. The supply is not characterised as a supply of work physically performed on goods. The testing and analysis of samples of goods enables the information to be compiled and is ancillary to the supply of that information.

The purpose of the engaged contractors is to repair the vessel. In this instance the work done by the contractors for repairing the vessel are work performed on good which is located in Australia except for the transport service. Accordingly, the supplies of services by these contractors do not meet the requirements in paragraph (a) of item 2 and therefore not GST-free.

You have acquired transport service from a contractor for the transport of the main engines and generator from the worksite to Company D in Australia. In this instance, the supply of the transport services is not a supply of work performed on goods though it is directly connected with goods. The supply of the transport service by the contractor is GST-free under paragraph (a) to the extent that it is not negated by subsections 38-190(2), 38-190(2A) and 38-190(3) of the GST Act.

Paragraph (b) of item 2

Under paragraph (b) of Item 2, a supply of a thing other than goods or real property is GST-free if the non-resident acquires the services in carrying on their business and is neither registered nor required to be registered for GST.

The supplier must be satisfied, on reasonable grounds that the non-resident is not required to be registered for GST before they can treat their supply as GST-free under paragraph (b) of Item 2. The supplier can check the GST registration status of an entity that they deal with by checking the Australian business register at www.abr.gov.au

Where the supplier is not in a position to be aware of these circumstances, enquiries should be made of the non-resident. The Commissioner accepts that reasonable grounds to be satisfied, if the non-resident has provided a written statement, declaring that they are not required to be registered. This is only accepted where the supplier has no reason to believe the statement is not accurate.

The supplies of services that you acquire from the contractors are for the vessel which you have purchased for your business purposes. Currently you are not registered for GST and based on the information given you are not required to be registered for GST.

In this instance, the supplies of all services (including the supply of transport) made by the contractors to you are GST-free under paragraph (b) of item 2 to the extent they are not negated by subsections 38-190(2), 38-190(2A) and 38-190(3) of the GST Act.

However, if you choose to register for GST at any time the supplies of these services will no long be GST-free under this paragraph.

Subsection 38-190(2) of the GST Act

Subsection 38-190(2) of the GST Act provides that a supply covered by any of the items 1 to 5 in the table in subsection 38-190(1) of the GST Act is not GST-free if it is the supply of a right or option to acquire something the supply of which would be connected with Australia and would not be GST-free.

Subsection 38-190(2) of the GST Act is not applicable as the supply of services made by the contractors are not supplies a right or option to acquire something the supply of which would be connected with Australia.

Subsection 38-190(2A) of the GST Act

Subsection 38-190(2A) of the GST Act provides that a supply covered by any of items 2 to 4 in the table in subsection 38-190(1) of the GST Act is not GST-free if the acquisition of the supply relates (whether directly or indirectly, or wholly or partly) to the making of a supply of real property situated in Australia that would be input taxed under Subdivision 40-B or 40-C.

Subsection 38-190(2A) of the GST Act is not applicable as the services provided by the contractors do not satisfy this subsection.

Subsection 38-190(3) of the GST Act

Subsection 38-190(3) of the GST Act provides that, without limiting subsection 38-190(2) or (2A), 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.

Subsection 38-190(3) only applies to a supply covered by item 2. If a supply satisfies the requirements of item 2 and is therefore ST-free, that supply is covered by item 2.

Subsection 38-190(3) of the GST Act, in contrast to item 2, focusses on the entity to which the supply is provided, not the entity (the non-resident) to which the supply is made. If the supply is provided or is required to be provided to another entity in Australia, subsection 38-190(3) of the GST Act negates the GST-free status that would otherwise apply to the supply covered by item 2. Although the non-resident recipient of the supply is not in Australia, consumption of the supply is considered to be in Australia because the supply is provided to an entity in Australia.

The term 'entity' is defined in subsection 184-1(1) of the GST Act and includes an individual company, partnership, corporate limited partnership or trust. An agent that is for example, an individual or company is also an entity as defined. However, the mere fact that the supply is made to an agent acting for a non-resident does not mean that the supply is provided (or is required to be provided) to another entity. It is a matter of determining to which entity the supply is provided. If all the agent does is to arrange on behalf of the non-resident, the supply is not provided to the agent.

The word 'provided' is used in subsection 38-190(3) to contrast with the term 'made' in item 2. In the context of section 38-190 of the GST Act, the contrasting words indicate that if a non-resident contracts for a supply to be provided to another entity, the place of consumption should be determined with regard to the entity to which the supply is provided, not the entity to which the supply is made.

In the case of delivery or freight services where goods from one entity are addressed for delivery to another entity we accept that the delivery or freight services are provided to that addressee entity.

Based on the information provided, subsection 38-190(3) is not applicable to the supplies of services made by the contractors to you except for the supply of transport service.

Company D is the addressee to whom the goods are to be delivered when the transport service is done. In this instance, the supply of transport service is considered to be provided to Company D. Subsection 38-190(3) is applicable to the supply as the transport service is provided to another entity in Australia and therefore not GST-free under item 2. Accordingly, the supply of the transport service is a taxable supply.

Summary

The supply of services made by the contractors is GST-free under paragraph (b) of item 2 except for the supply of transport service which is a taxable supply by virtue of subsection 38-190(3) of the GST Act.