Edited version of private advice

Authorisation Number: 1012682324134

Ruling

Subject: Application of Item 1 in subsection 38-190(1) of the GST Act

Question 1

Are the supplies made by OzCo pursuant to the Construction Contract for the first Facility (Construction Contract) GST-free pursuant to Item 1 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 1

Yes, the supplies made by OzCo pursuant to the Construction Contract are GST-free pursuant to Item 1 in the table in subsection 38-190(1) of the GST Act.

Question 2

Are the supplies made by OzCo pursuant to Construction Contract for the second Facility (Construction contract No. 2) GST-free pursuant to Item 1 in the table in subsection 38-190(1) of the GST Act?

Answer 2

Yes, the supplies made by OzCo pursuant to Construction Contract No. 2 are GST-free pursuant to Item 1 in the table in subsection 38-190(1) of the GST Act.

Relevant facts and circumstances

Applicant:

OzCo is a company which is tax resident in Australia and supplies building and civil construction services.

Construction Contract:

In 2013 OzCo entered into the Construction Contract in respect of the first Facility which comprises:

Formal Agreement;

Conditions of Contract;

Contract Particulars;

Project Plan;

Project Documents;

Brief;

Detailed Contractor's Activities Proposal (DCAP); and

Any other documents referred to in the Contract Particulars.

Formal Agreement:

The Formal Agreement states that OzCo acknowledges that the delivery method involves two phases, i.e. the Planning Phase and, subject to approval of the Planning Phase by X, the Delivery Phase.

The Formal Agreement states that in the Planning Phase and by the date for Planning Phase Completion OzCo:

(i) Must prepare all Planning Phase Documentation including the Design Documentation, a Program, a Cost Plan and Project Plans to the satisfaction of X;

(ii) Must assist X to achieve the Planning Phase Milestones by the Planning Phase Milestone Date;

(iii) Must assist X to obtain the necessary Approvals;

(iv) Must obtain all local approvals;

(v) Must generally perform the other activities forming part of the Contractor's Work (Planning).

Clause 2(e) of the Formal Agreement states that if X elects to proceed with the Delivery Phase, OzCo will:

(i) Complete (to the extent not completed in the Planning Phase) the provision of Planning Phase Documentation;

(ii) Complete For Construction Documentation which includes completion of the Design Documentation commenced during the Planning Phase, the documentation for all trade packages and Subcontract tender Documentation and the as-constructed drawings; and

(iii) Commence, construct, commission, complete and handover the Works.

Conditions of Contract:

The Conditions of Contract state that X engages OzCo:

during the Planning Phase to plan and develop the Design Documentation, prepare the Planning Phase documentation, assist with obtaining all relevant Approvals and prepare and have approved all Project Plans; and

during the Delivery Phase to provide the For Construction Documentation and to commence, construct, commission, complete and handover the Works (defined as the physical works associated with the construction of the first Facility at [offshore location]) which OzCo must design, plan, construct, commission, complete and handover to X)

in accordance with the Construction Contract.

The Conditions of Contract state that in consideration of OzCo undertaking the Contractor's Activities X will pay OzCo the Contract Price (defined as the sum of the Contractor's Work Fee (Planning), the Reimbursable Costs, the Contractor's Work Fee (Delivery) and the Management Fee).

The Conditions of Contract define 'Site' for the purposes of the Planning Phase and Delivery Phase as 'as described in the Contract Particulars' and the Contract Particulars refer to the Managing Contractor's Brief (discussed below) which describes the Project Site as an area located at [offshore location]. .

The Conditions of Contract also deal with Reimbursable Work (i.e. that part of OzCo's activities for which OzCo must engage subcontractors) and allow OzCo to enter into Approved Subcontract Agreements.

The Conditions of Contract state that where any supply occurs in connection with the Contract or Works for which GST is not otherwise provided and which is subject to GST the party making the supply will be entitled to increase the amount payable for the supply by the amount of any applicable GST. Reimbursable Costs (i.e. amounts payable by OzCo to subcontractors for Reimbursable Work) are paid into a bank account approved by X without reduction for any input tax credits, but OzCo is not entitled to any additional amount in respect of GST on Reimbursable Amounts.

Contract Particulars:

The Contract Particulars set out the date for Planning Phase Completion and the dates of the Delivery Phase Milestones - Delivery is in six phases from Site mobilisation and Completion of four Stages through to Completion of the Delivery Phase in 2014

Brief:

The Brief provides an overview of the project and states that the background to the project is that X is committed to fast-tracking the development of the Facility at [offshore location]. The Brief sets out the Contractor's Activities in relation to the Planning Phase (prepare the Design Documentation, cost planning, site investigation, assist X to obtain all necessary approvals, prepare Planning Phase Documentation, and prepare all Project Plans) and the Delivery Phase (complete the Design Documentation, complete documentation required for subcontract tendering and completion of the Works in accordance with the Construction Contract, construct, commission, complete and had over the Works, implement the Commissioning and Handover Plan, provide drawings and operation manuals, and attend to all defects during the Defect Liability Period).

DCAP:

The DCAP appears to be a proposal made by OzCo after considering a number of documents (including the Concept Design). The DCAP states that OzCo has produced a revised concept design for X's approval which includes a reduced footprint for the Facility, a reduction in the amount of earthworks, road works and in-ground services required, and using double storey accommodation which can be supplied cheaper and faster.

The DCAP suggests that flat pack or modular buildings to be used for the Facility together with plant and equipment will be dispatched from Australia, transported by ship to [offshore location], offloaded and consolidated at a Cargo Consolidation Facility, transported to the Site, and unloaded either directly onto foundations or into a laydown area for placement, and assembled.

Engagement of Offshore SubCo as subcontractor:

It was stated in the ruling request that, subject to completion of the Planning Phase and where X elects to proceed with the Delivery Phase, OzCo will continue to provide services to X under the Delivery Phase by completing the For Construction Documentation (including documentation for all trade packages, subcontract tender documentation and the as-constructed drawings). However OzCo will also enter into a subcontract with Offshore SubCo and OzCo (through that subcontract) will be responsible for construction, commission, completion and handover of the Facility during the Delivery Phase while OzCo will be responsible for project management, procurement of materials and design and engineering (which will be undertaken in Australia).

Submissions made in respect of the Construction Contract:

The submissions referred to the requirements for a taxable supply set out in section 9-5 of the GST Act.

In relation to the requirement in paragraph 9-5(a) that an entity makes the supply for consideration it was submitted that 'supply' is any form of supply and incudes a supply of services and that the supply made by OzCo comprises the provision of services. Reference was made to the definition of 'works' in the Conditions of Contract section of the Construction Contract (i.e. the physical works associated with the construction of the Facility which the Contractor must design, plan, construct, commission, complete and handover to X…). It was submitted that the services comprise the physical works associated with the construction of the Facility which OzCo must design, plan, construct, commission, complete and hand over in accordance with the Construction Contract. It was submitted that that supply of services was made for consideration, i.e. the Contract Price plus the Contractor's Work Fee (Planning) and Contractor's Work Fee (Delivery).

In relation to whether OzCo makes the supply in the course or furtherance of an enterprise it was submitted that OzCo carries on an enterprise in the form of a business which comprises design, civil engineering, construction, accommodation services, mechanical fabrication and maintenance services.

In relation to whether the supply of services by OzCo is connected with Australia the ruling request referred to paragraph 9-25(5)(a) of the GST Act which states that a supply of anything other than goods or real property is connected with Australia if the thing is done in Australia. It was submitted that a service is 'done' where it is performed and that the services supplied by OzCo under the Planning Phase will be performed in Australia. The ruling request then referred to paragraph 9-25(5)(b) of the GST Act which states that a supply of anything other than goods or real property is connected with Australia if the supplier makes that supply through an enterprise that the supplier carries on in Australia. It was submitted that services supplied by OzCo during the Planning Phase will be made through an enterprise that OzCo carries on in Australia.

The submissions confirmed that OzCo is registered for GST.

The submissions then considered the extent to which the supply made by OzCo is GST-free. The submissions referred to Item 1 in the table in subsection 38-190(1) of the GST Act which states that a supply that is directly connected with goods or real property situated outside Australia is GST-free (except to the extent that the supply is a supply of goods or real property).

The submissions referred to the definition of 'real property' in section 195-1 of the GST Act. It was submitted that the Site is real property located offshore. In relation to whether the supply made by OzCo is 'directly connected' with real property outside Australia reference was made to paragraphs 21 and 33 of Goods and Services Tax Ruling GSTR 2003/7 which state that there must be such a direct connection between the supply and the real property that the location of the real property is regarded as the place where consumption occurs and that such a direct connection exists where the supply changes the real property in a physical way, there is a physical interaction with the real property without changing the real property, the supply affects or protects the nature or value of the real property, or the supply affects the ownership of the real property. It was submitted that the supply made by OzCo under the Construction Contract (including supplies made through subcontractors) comprises the physical works associated with the Facility at [offshore location] which falls within the examples set out in paragraph 38 of GSTR 2003/7 of a supply that changes or affects real property in a physical way, i.e. the construction of a building or other structural improvement.

It was acknowledged that the supply made by OzCo could be considered to comprise more than one part (as represented by the different phases provided for in the Construction Contract) but it was submitted that in substance the supply made by OzCo is the construction of the Facility. The submissions referred to Mechanical Engineering Consultants Ltd [1996] BVC 2289 which is discussed in paragraph 136 of GSTR 2003/7 and which held that a supply related to the commissioning of an incinerator and waste disposal complex was in substance a supply of the commissioning of the complex which was a supply of services that were directly related to land. It was submitted that, in substance the supply made by OzCo under the Construction Contract is construction services directly connected with real property situated outside Australia.

The submissions then considered the application of Item 1 to each element of the supply made by OzCo. In relation to 'Contractor's Work (Planning) - Design and Plan' it was submitted that management, advisory, consulting and other professional services are directly connected with real property where the supply of those services affects or protects the nature or value of real property. Reference was made to paragraph 42 of GSTR 2003/7 (which states that supplies that affect or protect the nature or value of real property include professional services that commonly do not involve physically dealing with real property and include a supply of architectural or design engineering services for particular real property) and Example 9 in paragraph 167 of GSTR 2003/7 (which states that the supply by an architect resident in Australia of plans for a warehouse for a particular site in New Zealand is GST-free). Reference was also made to the Concept Design document which identifies specific real property at [offshore location] as the Site and it was submitted that services supplied by OzCo under the Planning Phase are directly connected to real property situated outside Australia and are GST-free.

In relation to 'Contractor's work (Delivery) - Construct and Complete' it was submitted that paragraph 38 of GSTR 2003/7 states that the construction of a building or other structural improvement is an example of a supply that is directly connected with real property. It was noted that under the Construction Contract OzCo is responsible for the construction of the Facility but that a new subsidiary company in [offshore location] (Offshore SubCo) which has entered into a subcontract for the purpose of undertaking some aspects of the Delivery phase and that Offshore SubCo will be responsible for the physical construction of the Facility.

Construction Contract No. 2

It was stated in the ruling request that X had also awarded a second contract to OzCo to design and build the second Facility at [offshore location].

The copy of the Construction Contract for the second Facility (Construction Contract No. 2) also comprises a Formal Agreement, Conditions of Contract, Contract Particulars, Project Plans, Project Documentation, Deign Documentation, Brief and DCAP in a format similar to the Construction Contract.

Formal Agreement:

The Formal Agreement states that OzCo acknowledges that the managing contractor delivery method involves two phase delivery comprising the Planning Phase and, subject to Planning Phase approval by X, the provision of the Delivery Phase.

The Formal Agreement states that in the Planning Phase, by the date for Planning Phase completion OzCo:

(i) Must prepare all Planning Phase Documentation including all Design Documentation, a Program, a Cost Plan and Project Plans, to the satisfaction of X;

(ii) Must assist X to achieve the Planning Phase Milestones by the Planning Phase Milestones Dates;

(iii) Must assist X to obtain the necessary Approvals;

(iv) Must obtain all local approvals;

(v) Must generally perform the other activities forming part of the Contractor's Work (Planning).

The Formal Agreement also states that, if X requires, OzCo must proceed with the Delivery Phase under which OzCo will:

(i) Complete the provision of the Planning Phase Documentation;

(ii) Complete For Construction Documentation which includes the documentation for all trade packages and Subcontractor tender Documentation and the as-constructed drawings; and

(iii) Commence, construct, commission, complete and handover the Works.

Conditions of Contract:

The two-phase delivery is reflected in the Conditions of Contract which state that X engages OzCo to:

during the Planning Phase plan and develop the Design Documentation, prepare the Planning Phase Documentation, assist with obtaining all relevant Approvals and prepare and have approved all Project Plans; and

during the Delivery Phase to provide the For Construction Documentation and commence, construct, commission, complete and handover the Works

in consideration for which X agrees to pay OzCo the Contract Price (defined as the Contractor's Work Fee (Planning), the Reimbursable Costs, the Contractor's Work Fee (Delivery) and the Management Fee).

The Conditions of Contract state that OzCo acknowledges that as at the Award Date X has not yet secured the Site and that X will use its best endeavours to secure the Site by the Date for Planning Phase Approval. The Contract Particulars defines Site as 'as described in the Brief and to be confirmed during Planning Phase activities' and the Brief states that the second Facility is proposed to comprise the expansion of a facility operated at [offshore location].

The Conditions of Contract state that where any supply occurs under or in connection with the Contract or the Works for which GST is not provided and which is subject to GST, the party making the supply will be entitled to increase the amount payable for the supply by the amount of any applicable GST.

Contract Particulars:

The Contract Particulars state the Date for Planning Phase Completion and set out four Planning Phase Milestone Dates between 2013 and 2014.

The Contract Particulars indicate that there are 8 Delivery Phase Milestones between approval by X and completion of project and the Milestone Fee Payment Schedule indicates that the Management Fee is paid in portions upon Site Mobilisation, Completion of Works for Stages 1, 2, 3 and 4 of the Works (which are to be negotiated) and upon Site Demobilisation.

Brief:

The Brief states that the project proposes to expand an existing facility at [offshore location].

DCAP:

In the DCAP OzCo proposes building four storey staff accommodation on two hardstand sites, rationalising other accommodation, a significant reduction in the requirement for imported land fill, and accelerated procurement of the Reimbursable Works.

OzCo also proposes timely completion of Design Documentation during the Planning Phase, early engagement of key design subcontractors to complete the Design Documentation during the Planning Phase and complete the For Construction Documentation. In relation to procurement OzCo suggests eliminating an EOI process by using OzCo's list of contractors who have already expressed interest in works at [offshore location] in response to two previous advertising campaigns and using a reduced tender process.

As with the Construction Contract, OzCo proposes the shipment of modular buildings, plant and equipment to [offshore location] from Australia, offloading, transport to site and assembly.

Submissions made in respect of Construction Contract No.2:

It was submitted that, given the substantial similarities between the Construction Contract and Construction Contract No. 2, the submissions made in respect of the former are equally applicable to the latter.

Relevant legislative provisions

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

Reasons for decision

Reasons for decision - Question 1:

Summary of decision:

All of the supplies made by OzCo in the Planning Phase as described in the Formal Agreement portion of the Construction Contract fall within Example 9 in Goods and Services Tax Ruling GSTR 2003/7 and are GST-free under Item 1 in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The same applies to the supplies made by OzCo in the Delivery Phase of completing provision of the Planning Phase Documentation and completing the For Construction Documentation referred to in the Formal Agreement.

We also consider that the remaining supplies made by OzCo in the Delivery Phase (i.e. commence, construct, commission, complete and handover the Works) pursuant to the Formal Agreement and in accordance with the DCAP will be consumed outside Australia and are GST-free under Item 1 in subsection 38-190(1) of the GST Act.

Detailed reasoning:

Supplies of goods or real property

Subsection 38-190(1) of the GST Act states that the supplies listed in the third column in the table in that subsection are GST-free 'except to the extent that they are supplies of goods or real property'. Section 195-1 defines 'goods' as any form of tangible personal property and states that 'real property' includes any interest in or right over land, a personal right to call for or be granted any interest in or right over land, a licence to occupy land or any other contractual right exercisable over or in relation to land.

Paragraph 14 of Goods and Services Tax Ruling GSTR 2003/7 states that subsection 38-190(1) only applies to supplies of things that are not supplies of goods or real property such as services or various rights. Paragraph 15 of GSTR 2003/7 states that to determine whether a supply is properly characterised as a thing other than goods or real property it is necessary to consider all the circumstances of the transaction to ascertain its essential character.

In the present case the essential character of the transaction is evident from the terms of the Formal Agreement which, in the Planning Phase, oblige OzCo to perform activities such as preparing documentation, obtaining approvals and the other activities which form part of the Contractor's Work (Planning) and in the Delivery Phase require OzCo to complete the Planning Documentation and For Construction Documentation and commence, construct , commission, complete and handover the 'Works' (defined as the physical works associated with the construction of the Facility). The language of the Formal Agreement indicates that OzCo makes a supply of services rather than goods or real property.

Goods and Services Tax Ruling 2000/18 also supports the view that OzCo makes a supply of services. GSTR 2000/18 deals with the treatment under the A New Tax System (Goods and Services Tax Transition) Act 1999 (GST Transition Act) of supplies of 'construction and building services' that span 1 July 2000 and explains the meaning of that term as follows:

15. For the purposes of this Ruling, construction and building services are only those services supplied in respect of a building or civil engineering work. Construction and building services include, but are not limited to bricklaying, carpentry, plumbing, tiling, electrical, painting, air conditioning installation, lift installation, or any combination of these. Typically these types of services are provided in home renovation, office refurbishment, or by a subcontractor working in a larger construction project.

16. In some circumstances a supplier may enter into an agreement to design and construct. Where these services are supplied under the same agreement then the design component is considered to be part of the construction and building service.

The reference in paragraph 15 of GSTR 2000/18 to such services typically being supplied by 'a subcontractor in a larger construction project' appears to exclude a supply made by a head contractor. However that exclusion merely reflects the fact that section 19 of the GST Transition Act contains a specific rule which applies to 'a supply of goods or real property that is the construction…of a building or of a civil engineering work by the supplier' which paragraph 13 of GSTR 2000/18 states 'only applies to a supply which is the whole of a construction… of a building or civil engineering work'. As the GST Act does not contain a provision similar to section 19 of the GST Transition Act we consider that a supply described in paragraph 15 of GSTR 2000/18 made by a head contractor is also a supply of services.

The Ruling section of GSTR 2000/18 states:

10. In most circumstances a supply of construction and building services is entered into to provide a given result. We consider that, for the purposes of this Ruling, this kind of supply is a supply of a service only. Any materials used in producing the given result are ancillary or integral to the provision of the service (refer paragraph 19).

and the Explanation section of GSTR 2000/18 confirms that there is a single supply of services:

15. For the purposes of this Ruling, construction and building services are only those services supplied in respect of a building or civil engineering work. Construction and building services include, but are not limited to bricklaying, carpentry, plumbing, tiling, electrical, painting, air conditioning installation, lift installation, or any combination of these. Typically these types of services are provided in home renovation, office refurbishment, or by a subcontractor working in a larger construction project.

16. In some circumstances a supplier may enter into an agreement to design and construct. Where these services are supplied under the same agreement then the design component is considered to be part of the construction and building service.

…

19. Where you are engaged to produce a given result, we consider the substance of the agreement is to perform a service. Any materials used in producing the service are ancillary or integral to the work that must be performed to provide the finished job. In such circumstances, you are making a single supply, being a supply of a service.

In the present case OzCo has been engaged to produce two given results (subject to X agreeing to proceed with the Delivery Phase after OzCo completes the Planning Phase).

Real property situated outside Australia:

Item 1 in subsection 38-190(1) refers to a supply that is directly connected with goods or real property situated outside Australia. The definition of 'real property' in section 195-1 of the GST Act has been referred to above.

It was submitted in the ruling request that the Works will be constructed on land over which X 'holds exercisable rights'. Those rights would be either a 'right over land' or a 'contractual right exercisable over or in relation to land' and therefore 'real property'.

'Australia' is defined in section 195-1 of the GST Act as follows:

Australia does not include any External Territory. However, it includes an installation (within the meaning of the Customs Act 1901) that is deemed by section 5C of the Customs Act 1901 to be part of Australia.

'External territory' is not defined in the GST Act, but is defined in section 2B of the Acts Interpretation Act 1901 (AIA) as a Territory, other than an Internal Territory where an Act makes provision for the government of the Territory as a Territory. Christmas Island, Cocos (Keeling) Islands and Norfolk Island are external Territories. 'Internal Territory' is defined in section 2B of the AIA as the Australian Capital Territory, the Northern Territory, and the Jervis Bay Territory. Goods and Services Tax Ruling GSTR 2003/4 refers to the definition of 'Australia' in section 195-1 of the GST Act and summarises the effect of the provisions discussed above (Para 50):

Australia therefore includes the entire land territory of Australia, and Australia's coastal areas and sea bed, but not any external Territories, such as Norfolk Island, Christmas Island or the Australian Antarctic Territory. Under section 5C of the Customs Act, Australia also includes sea and resources installations (such as oil or gas rigs) that are attached to the sea bed within the territorial boundaries of Australia, or to an adjacent area or coastal area as defined in that Act.

The Conditions of Contract define 'Site' for the purposes of the Planning Phase and the Delivery Phase as 'as described in the Contract Particulars', the Contract Particulars refer to the 'Site' as 'as described in the Brief and to be confirmed during the Planning Phase activities' and the Brief states that the proposed Site is located at [offshore location] Consequently we consider that the Site is 'real property situated outside Australia' for the purposes of Item 1 in subsection 38-190(1) of the GST Act.

Does OzCo make a single supply?

In the ruling request it was submitted that the supply made by OzCo does not comprise two parts (i.e. the Planning Phase and the Delivery Phase) but is in substance a single supply of the Facility. Mechanical Engineering Consultants Ltd [1996] BVC 2289 (which is referred to in paragraph 136 of GSTR 2003/7) was cited in support.

In the penultimate paragraph of the decision in Mechanical Engineering Consultants Ltd the Tribunal rejected an alternative submission on behalf of the taxpayer that the supply made pursuant to a contract was 'the supply of staff' within paragraph 6 of Schedule 3 of the Value Added Tax Act 1983 (UK). The Tribunal stated that although the amount payable under the relevant contract was calculated by the number of hours worked by Mr S (the taxpayer's managing director and a consulting engineer), 'the nature of the work involved was the most important consideration in determining the nature' of the relevant contract and the nature of the work was to supervise the commissioning of a waste incinerator complex.

In our view the application of 'the nature of the work involved' test to the present case would result in OzCo making two supplies pursuant to the Construction Contract if OzCo delivers both the Planning Phase and the Delivery Phase. The Formal Agreement states that the delivery method involves a two phase delivery comprising the Planning Phase and:

…subject to Planning Phase approval by X, the provision of the Delivery Phase.

Pursuant to the Formal Agreement OzCo acknowledges that X may elect not to proceed with provision of the Delivery Phase by OzCo for a number of reasons and that OzCo must proceed with the Delivery Phase 'if X elects to proceed with the Delivery Phase'.

Those terms are repeated in the Conditions of Contract which state that if Planning Phase Completion is not achieved X must issue a written notice, in which case OzCo:

…will have no entitlement to commence, construct, commission, complete or handover any part of the Works including any of the Contractor's Works (Delivery…

In our view the nature of the work involved under the Construction Contract indicates that OzCo will make two supplies if OzCo delivers both the Planning Phase and the Delivery Phase and it is necessary to consider whether each supply is directly connected with real property situated outside Australia.

Directly connected with real property situated outside Australia - Planning Phase:

Clause 2(c) of the Formal Agreement states that in the Planning Phase OzCo:

(i) must prepare all Planning Phase Documentation (i.e. Project Plans (e.g. Site Management Plan, Commissioning and Handover Plan), the Cost Plan, the Program (i.e. a program of OzCo's activities based on the Milestones during the Planning Phase), including the Design Documentation (e.g. a master plan, floor plans), a Program (of OzCo's activities based on the Milestones), a Cost Plan and Project Plans;

(ii) must assist X to achieve the Planning Phase Milestone by the Planning Phase Milestone Date;

(iii) must assist X to obtain the Approvals;

(iv) must obtain all local approvals; and

(v) must generally perform the other activities forming part of the Contractor's Work (Planning).

Paragraph 32 of GSTR 2003/7 states that 'directly connected with' contemplates a very close link or association between the supply and the real property, paragraph 33 of GSTR 2003/7 states that such a link exists where the supply affects or protects the nature or value of the real property, and paragraph 41 of GSTR 2003/7 states that such supplies include management, advisory, consulting or other professional services that commonly do not involve physically dealing with the real property.

The ruling request referred to paragraph 42 of GSTR 2003/7 (which states that a supply of architectural or design engineering services for particular real property falls within this category) and Example 9 at paragraph 167 of GSTR 2003/7 (which states that the supply by an architect resident in Australia of plans for a warehouse for a particular site in New Zealand is GST-free under Item 1). We agree that the delivery of the Planning Phase by OzCo falls within Example 9 and is GST-free under Item 1 in subsection 38-190(1).

Directly connected with real property situated outside Australia - Contractor's Work (Delivery):

Clause 2(e) of the Formal Agreement states that, if X elects to proceed with the Delivery Phase, OzCo will:

(i) complete the provision of any uncompleted Planning Phase Documentation (defined as all Project Plans, the Cost Plan, the Program and the Design Documentation);

(ii) complete the For Construction Documentation (defined as completion of the Design Documentation and any other documentation required to execute the Works and all documentation necessary for calling tenderers for subcontracts to construct the Facility); and

(iii) commence, construct, commission, complete and handover the Works.

The reasoning set out above in relation to the supply of the Contractor's Work (Planning) applies to sub-paragraph (ii) of clause 2(e) (which are to be supplied by OzCo), i.e. those services fall within Example 9 in GSTR 2000/37 and are GST-free under Item 1 in subsection 38-190(1).

The only qualification to this is that the DCAP (which is stated by the Conditions of Contract to be one of the documents that constitutes the contractual relationship between OzCo and X) provides for the use of subcontractors and consultants to complete the Design Documentation and the For Construction Documentation.

The Conditions of Contract state that X will pay the Contract Price in consideration of OzCo undertaking the Contractor's Activities and acknowledges that OzCo may engage Subcontractors to undertake Reimbursable Work (defined as that part of the Contractor's Activities for which the Contractor must engage Subcontractors). We therefore consider that where OzCo engages a subcontractor to undertake Reimbursable Work the subcontractor makes a supply to OzCo and OzCo makes a corresponding supply to X. That view is supported by the Conditions of Contract which deal with the GST treatment of Reimbursable Costs (defined as amounts payable by OzCo to Subcontractors for Reimbursable Work). On that basis OzCo supplies to X the services described in sub-paragraphs (i) and (ii) of cause 2(e) in the Formal Agreement and those supplies are GST-free under Item 1 in subsection 38-190(1) as falling within Example 9 in GSTR 2003/7.

It was stated in the ruling request that Offshore SubCo will undertake construction and installation as a subcontractor. It was submitted that OzCo nevertheless supplies those construction and installation services to X through the Construction Contract and that the supply made by OzCo was connected with Australia pursuant to paragraph 9-25(5)(b) of the GST Act as being made through an enterprise carried on in Australia by OzCo and GST-free pursuant to Item 1 in subsection 38-190(1). The submissions did not address the arrangement outlined in the DCAP where modular or flat pack buildings plus plant and equipment are constructed in Australia and despatched to [offshore location] to be placed or assembled at the Site. We assume that under such an arrangement OzCo will manufacture the modular or flat pack buildings, plant and equipment in Australia or engage a subcontractor to do so and Offshore SubCo will undertake the offloading, transportation to site, and placement or assembly at [offshore location].

In relation to the 'commence, construct, commission' etc. item in sub-paragraph (iii) of clause 2(e) in the Formal Agreement paragraph 33 of GSTR 2003/7 states that a supply which changes or affects real property in a physical way falls within Item 1 in subsection 38-190(1). In support of the supply of construction and completion work being GST-free under Item 1 the ruling request referred to paragraph 38 of GSTR 2003/7 which states that examples of supplies which change or affect real property in a physical way include the construction, alteration, demolition, repair or maintenance of a building or other structural improvement. Where the supply made by OzCo involves providing modular or flat pack buildings in Australia and shipping them to [offshore location] there may be an issue as whether those supplies are 'directly connected with' real property situated outside Australia in the sense described in paragraph 113 of GSTR 2003/7. However paragraph 121 of GSTR 2003/7 states that 'directly connected' appears in the context of a provision which prescribes the circumstances in which supplies are GST-free and where the policy intent is to make a supply GST-free 'where consumption of that supply occurs outside Australia'. Applying that policy intent to the present case, we consider that all of the supplies made by OzCo pursuant to sub-paragraph (iii) of clause 2(e) of the Formal Agreement and in accordance with the DCAP will be consumed outside Australia and is GST-free under Item 1 in subsection 38-190(1) of the GST Act.

Reasons for decision - Question 2:

Summary of decision:

All of the supplies made by OzCo in the Planning Phase as described in the Formal Agreement portion of the construction contract for the second Facility (Construction Contract No. 2) fall within Example 9 in Goods and Services Tax Ruling GSTR 2003/7 and are GST-free under Item 1 in subsection 38-190(1) of the GST Act.

The same applies to the supplies made by OzCo in the Delivery Phase of completing provision of the Planning Phase Documentation and completing the For Construction Documentation referred to in the Formal Agreement.

We also consider that the other supplies made by OzCo in the Delivery Phase (i.e. commence, construct, commission, complete, and handover the Works) pursuant to the Formal Agreement and in accordance with the DCAP will be consumed outside Australia and are GST-free under Item 1 in subsection 38-190(1) of the GST Act.

Detailed reasoning:

Given the similarities between the Construction Contract discussed in Question 1 and Construction Contract No.2, we do not propose to provide detailed reasoning in relation to Question 2.