Edited version of your written advice

Authorisation Number: 1012771389818

Ruling

Subject: goods and services tax (GST) and inspection services

Question

Is the supply to A of the service of inspecting goods situated outside Australia GST-free?

Answer

Yes.

Relevant facts and circumstances

B is an Australian resident wholly owned subsidiary of the C group, of which the ultimate parent company, D, is headquartered overseas. The C group specialises in, amongst other services, providing inspection services for major projects throughout the world.

E is a wholly owned subsidiary of B. E employs staff and provides services in Australia.

B and E are registered for GST. B and E are not members of a GST group.

Pursuant to a contract entered into between B and an Australian entity, A, B is contracted to provide inspection services to A in relation to the project.

B has entered into the contract as agent on behalf of E, the Australian operating entity responsible for delivery of the services. There is no written agreement between B and E in relation to this role. B has implied authority to engage E. References to B below refer to B in its capacity as agent for E.

B is contracted to provide Quality Assessment/Quality Control inspections on all the equipment which is to be assembled within the particular location outside Australia.

Following completion, the facility will be located in the region that is away from the Australian mainland. The facility is anticipated to stay moored at this location for many years. No services will be provided by B in the region under the above-mentioned contract.

The primary role of B is to assess the conformity of any equipment or spare parts (to A's specifications) before such goods are shipped to the overseas country. That is, B is contracting with A to provide services in countries (almost entirely outside of Australia) before the goods arrive in an overseas country for assembly.

Whilst some inspections for conformity may take place in Australia, such inspections on goods in Australia take place on a limited scale, and it is acknowledged that supplies of such inspection services on goods located within Australia constitute taxable supplies and are accordingly subject to GST. It is re-emphasised that the scope of the ruling request is restricted to the supplies involving the inspection of goods located outside of Australia.

B is not engaged by A to supply the constructed facility nor to import the facility into Australia.

For the services being performed, B/E subcontracts the C group's overseas subsidiary, F, to manage delivery of the services. F will in turn sub-contract a C group associated entity to undertake the physical inspections in the relevant country outside of Australia (referred to below as the C group performing entity (C Perform Co)). F does not act as agent for the relevant C PerformCo or B.

The physical inspections are performed by employees or contractors engaged by C PerformCo in the relevant overseas country. The physical inspections are undertaken at the supplier manufacturing site in those relevant counties outside of Australia.

If C PerformCo identifies any non-conformity during the inspection of the goods, A (or an associated A entity) is advised of this matter and the equipment is either modified by the relevant manufacturer before being shipped to the overseas country, or alternatively it may be rectified in the overseas country.

Inspections are performed at the request of A (or an associated A entity) by the A authorised team located in the overseas country and are performed onsite in the relevant country outside of Australia (that is, there is no desktop review or work performed in Australia).

Following an inspection, the relevant C PerformCo office issues a report which is sent directly to A (or an associated A entity).

E issues the invoice to A. Following receipt of payment by A, E in-turn remits payment to F for the services provided under the sub-contract to B/E. In this regard, commercial and collection risks as well as insurance requirements are borne by B/E for the services to be performed.

In addition to the general facts, the following details are provided regarding the operational and remuneration arrangements associated with the services provided:

Operational arrangements

Inspection procedures

1. An A representative/inspector coordinator sends a notification of a work order for inspection services required directly to the relevant C PerformCo. This procedure raises a work order for inspection of parts/material for the construction process. F and G (refer below) are copied in to this notification purely for back-office, administrative purposes.

That is, F is the official management office, whereby no operational work is conducted in an overseas country as the actual inspection services are performed by the relevant C PerformCo pursuant to a sub-contract entered into between the two parties. Part of F's work is conducted by a shared service centre in an overseas country (G). Notwithstanding this, F remains the official management office and the relevant sub-contractor engaged by B/E.

2. F will then create an Internal Purchase Order in group C's (name of model) (computer system name) in relation to the performing C group country.

For example if H (which would be considered a relevant C PerformCo in your ruling request) receives a notification for inspection of goods outside of Australia. F will create the Internal Purchase Order and, once the inspection is completed, H renders an invoice to F.

3. In particular, the relevant C PerformCo undertakes the inspection and invoices F for the costs incurred by C group PerformCo. In this regard, please also note the following:

• The inspection work is performed by C PerformCo's employees and the length of inspections can vary depending on the type of equipment being inspected.

• All materials and parts required by the yard in the overseas country for the construction of this vessel are acquired from different locations around the world.

• Each inspection may vary in cost depending on the number of hours required and the amount of travel expense and other incidentals that may be incurred.

• All employees are situated in the location of the relevant C PerformCo. However, the employees may be required to travel locally (but not to Australia) to the site of inspection.

4. F subsequently audits the invoice from C PerformCo to ensure correct rates have been applied. F also confers with A's project manager regarding these costs.

5. The invoicing arrangement involves the following events (but not necessarily in this sequence)

(i) an invoice is raised by the relevant C PerformCo (and is then

approved by F);

(ii) an invoice is raised by F to E; and

(iii) an invoice is raised by E to A.

6. Upon E receiving payment from A, E pays the invoice to F.

7. F subsequently pays the invoice for the services provided by C PerformCo.

Inspection Report

Once an inspection is performed by the relevant C PerformCo, an inspection report is uploaded to C group's system by the performing C group country and made available to A (or an associated A entity) via a web based portal. At this point in time, the A team can download the reports and other deliverables which is undertaken in the overseas country.

The report is effectively delivered online to the A party that requested the inspection.

Remuneration arrangements

Pursuant to the contract, the fee payable to E for the services provided is determined on an hourly basis plus agreed upon disbursements.

The fee payable to the relevant C PerformCo is similarly determined on an hourly basis according to particular rates. The rate is then verified by A and F.

E invoices A for the fees payable for the services, including any relevant expenses and incidentals.

F issues an invoice to E for services rendered outside Australia in relation to the subcontract arrangement described above.

C PerformCo issues an invoice to F for the subcontracting services provided to F as described above.

In relation the services provided, there is no separate fee payable by A for the preparation of the report that is issued by C PerformCo following each inspection. This forms part of the total hourly rate for inspection services provided.

There is also no separate fee charged by E to A for facilitating and co-ordinating the delivery of the services outside Australia.

Relevant legislative provisions

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

Reasons for decision

Summary

The supply of the services to A is GST-free because it is a supply of something other than goods or real property and the supply is directly connected with goods situated outside Australia.

Detailed reasoning

In accordance with paragraph 45 of Goods and Services Tax Ruling GSTR 2000/37, when an agent is authorised to undertake a transaction on behalf of the principal, thereby binding the principal to the legal effects of the transaction, then the transaction is made by the principal through the agent.

Therefore, as B has entered into the A contract as agent on behalf of E, E makes a supply to A.

Item 1 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) (item 1) provides that a supply of something other than goods or real property is GST-free if the supply is directly connected with goods or real property situated outside Australia.

The supply in this case is a supply of services. This includes the service of writing the reports. Services are not goods or real property.

Goods and Services Tax Ruling GSTR 2003/7 provides guidance on what the expression 'directly connected with goods' means for the purposes of subsection 38-190(1) of the GST Act.

Paragraphs 32 to 34 of GSTR 2003/7 state:

32. As explained above, we consider that the expression 'directly connected with' contemplates a very close link or association between the supply and particular goods or real property.

33. We consider that such a close link or association between the supply and particular goods or real property exists where, for example, the direct object of the supply is the goods or real property in the sense that:

• the supply changes or affects the goods or real property in a physical way; or

• there is a physical interaction with the goods or real property but without changing the goods or real property; or

• the supply establishes the quantity, size, other physical attributes or the value of the goods or real property; or

• the supply affects (or its purpose is to affect) or protects the nature or value (including indemnity against loss) of the goods or real property; or

• the supply affects, or is proposed to affect, the ownership of the goods or real property including any interest in, or right in or over goods or real property.

34. This is not an exhaustive list of the situations where, in our view, a direct connection exists. There may be some supplies that are directly connected with goods or real property that do not readily fit into one of these categories.

Paragraph 40 of GSTR 2003/7 provides examples of supplies that establish the quantity, size or other physical attributes or the value of goods or real property. It states:

40. Examples of supplies in this category include supplies of services of the following kind:

• testing and analysing goods, for example, to see whether goods such as drugs or appliances meet specified standards;

• surveying services that are physically carried out on particular land, for example, to determine its boundaries or topography;

• counting goods, for example, a stocktake of goods;

•exploration services such as a seismic survey, aeromagnetic survey or drilling services; and

• the examination of goods or real property to establish a value.

The services in this case are of a similar kind to testing and analysis to see whether goods meet specified standards as goods are inspected and the objective and deliverable of E is to attest to the goods' conformity to A specifications. The supply establishes physical attributes of goods. Therefore, the services are directly connected with goods.

Additionally these goods are situated outside Australia when the services are being performed.

Hence, the supply E makes to A is a supply of services that are directly connected with goods situated outside Australia.

Therefore, the supply of the services in this case is GST-free under item 1.