Edited version of your written advice

Authorisation Number: 1012780235474

Ruling

Subject: GST and sale of goods on consignment

Question 1

Will ABC Limited (ABC) make a taxable supply when it sells the goods to XYZ Pty Ltd (XYZ) in the circumstances described below (that is, the goods are located in Australia at the time that title passes to XYZ)?

Answer

Yes.

ABC will be making a taxable supply as it will satisfy all the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as follows:

• the sale of the goods to XYZ will be made for consideration

• the sale of the goods will be made in the course of an enterprise carried on by ABC

• the sale of the goods will be connected with Australia as the goods are made available to XYZ in Australia

• ABC will be registered for GST, and

• the sale of the goods will neither be GST-free nor input taxed.

Question 2

If the Answer to Question 1 is yes, is XYZ entitled to an input tax credit in respect of its acquisition of the goods from ABC?

Answer

Yes.

XYZ will satisfy the requirements of section 11-5 of the GST Act and therefore will be making a creditable acquisition because:

• XYZ will acquire the goods in carrying on its enterprise

• the supply of the goods from ABC to XYZ will be a taxable supply

• XYZ will provide or be liable to provide consideration for the supply, and

• XYZ is registered for GST.

Therefore, XYZ will be entitled to the input tax credit.

Question 3

Will ABC make a taxable importation when it imports the goods into Australia in the circumstances described below?

Answer

Yes.

ABC will be making a taxable importation of those goods because it will satisfy the requirements of section 13-5 of the GST Act as follows:

• ABC will import the goods into Australia, will be the owner of the goods and will lodge the import declaration and

• the importation will not be a non-taxable importation.

Question 4

If the Answer to Question 3 is yes, will the importation be a creditable importation such that ABC is entitled to claim an input tax credit for the importation?

Answer

Yes.

ABC will satisfy the requirements of section 15-5 of the GST Act and therefore will be making a creditable importation because:

• ABC will import the goods for the purposes of sale to XYZ

• the importation is a taxable importation, and

• ABC will be registered for GST.

Therefore, ABC will be entitled to the input tax credit on the importation of the goods into Australia.

Question 5

If the arrangement described below is altered so that XYZ declares itself as the 'owner' on the import declaration (real ownership of the goods will be retained by ABC until a customer is found by XYZ), causes the goods to be brought to Australia and enters the goods for home consumption, will the importation by XYZ be a creditable importation?

Answer

Yes.

XYZ will be making a creditable importation pursuant to section 15-5 of the GST Act because:

• XYZ will import the goods for the purpose of sale to Australian customers

• the importation is a taxable importation, and

• XYZ is registered for GST.

Question 6

What if the arrangement is altered so that XYZ acts as an agent of ABC solely in respect of the importation such that it is liable for GST under Division 57 of GST Act in respect of the importation, would the importation then be a creditable importation for XYZ?

Answer

Under this arrangement XYZ will be entitled to the input tax credit on the importation, not ABC, pursuant to section 57-10 of the GST Act because:

• ABC will be registered or required to be registered for GST

• XYZ will be a resident agent for ABC, a non-resident principal, and

• ABC will make a creditable importation through XYZ.

Question 7

If the answer to Questions 5 and 6 is yes, can ABC avoid having to be registered for GST by entering into a reverse charge agreement under Division 83 of the GST Act with XYZ in respect of ABC's taxable supply of the goods to XYZ?

Answer

Division 83 of the GST Act allows a non-resident supplier and the recipient of the supply to agree that the GST liability is to be borne by the recipient where certain requirements are met (that is, the GST on the taxable supply is 'reverse charged' to the recipient). These requirements are set out in section 83-5 of the GST Act.

Paragraph 83-5(1)(b) of the GST Act lists one of the requirements which is for the supplier not to make the supply through an enterprise that the supplier carries on in Australia. In relation to this requirement, subsection 9-25(6) clarifies that an enterprise is carried on in Australia if the enterprise is carried on through:

(a) a permanent establishment (as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)); or

(b) a place that would be such a permanent establishment if paragraph (e), (f) or (g) of that definition did not apply.

The definition of permanent establishment for the purposes of the GST Act has a wider meaning than in subsection 6(1) of the ITAA 1936. This is because the exclusions from a permanent establishment in subsection 6(1) of the ITAA 1936 (paragraphs (e), (f) and (g)) are not similarly excluded from the definition of permanent establishment for GST purposes.

ABC is currently waiting for an income tax private ruling addressing whether the consignment arrangement will make ABC to have a permanent establishment in Australia as defined in subsection 6(1) of the ITAA 1936.

We have considered paragraphs (e), (f) and (g) of the definition of permanent establishment in subsection 6(1) of the ITAA 1936 and conclude that they do not apply to make ABC to have a permanent establishment in Australia for GST purposes. Hence, provided the income tax private ruling states that the consignment arrangement will not cause ABC to have a permanent establishment in Australia under subsection 6(1) of the ITAA 1936, the requirement that ABC will not make the supplies through an enterprise that ABC carries on in Australia will be satisfied.

In addition, provided ABC and XYZ agree that GST on the supply will be payable by XYZ; the GST payable on the supply of the goods will be payable by XYZ because all the other requirements of section 83-5 of the GST Act will also be satisfied as follows:

• ABC's supply of the goods to XYZ in Australia will be a taxable supply (on the basis that ABC will be required to be registered for GST)

• ABC is a non-resident

• XYZ is registered for GST, and

• the exclusions in subsection 83-5(2) of the GST Act will not apply.

Where a reverse charge agreement is in place between XYZ and ABC, the agreed supplies will be disregarded in working out the GST turnover of ABC. This means that ABC will not need to register for GST if the only reason that it is required to be registered is because it meets the registration turnover threshold when the taxable supplies covered by section 83-5 of the GST Act are taken into account (sections 83-25, 83-30 and 188-23 of the GST Act).

Relevant facts and circumstances

ABC is incorporated overseas and has its central management and control overseas. ABC sells certain types of goods. ABC's associated company, XYZ, engages in retail and wholesale distribution of those goods in Australia.

At present, XYZ imports the goods into Australia, stores and then sells the goods to its customers. Due to an increase in the quantity of goods sold in Australia and financial considerations, ABC and XYZ have decided to start using a consignment arrangement.

Under the consignment arrangement, ABC will import goods into Australia as consignor, with XYZ then taking delivery and control of the goods as consignee. The consignor/consignee relationship will be documented on standard legal terms.

ABC will import the goods into Australia, will be the owner of the goods and will lodge the import declaration with Customs (or arrange for an independent customs broker to do it on its behalf). XYZ will take delivery of the goods in Australia as consignee and will then store the goods in a warehouse owned or leased by XYZ. ABC will not have any rights or entitlements in respect of the warehouse. ABC will not have any employees in Australia, nor will it have a dependant agent in Australia acting on its behalf. ABC does not have any other fixed place of business in Australia at its disposal, and does not have any substantial equipment in Australia.

ABC will not engage or materially deal with customers in Australia. Rather, XYZ will be the sole distributor of the goods in Australia and deal with Australian customers. XYZ would only take title to the goods when a customer is found. At that point, XYZ will acquire title to the goods from ABC and then immediately sell the goods to the customer. This is often referred to as a 'sale or return', 'buy-sell' or 'flash title' arrangement. XYZ will not act as an agent for ABC at any time, and this fact will be specifically stated and reflected in the consignment agreement.

In terms of ensuring that the consignment arrangement is one of seller/purchaser rather than agency, the consignment agreement will include provisions to the following effect:

• The power that the consignee has (in determining when title to the consigned goods passes from consignor) is exercisable only as purchaser;

• The risk of loss from damage, destruction, theft or loss while in transit and prior to sale by the consignee is assumed by the consignee;

• The consignee is entitled to move the goods held on consignment from time to time to such locations as it desires without the consignor's notice or consent;

• The consignee is not liable to account to the consignor for the sales proceeds from third parties;

• The consignee is under no obligation to purchase the consigned products; and

• The consignor has the right to recall any consigned products prior to their purchase by the consignee.

Before entering into the consignment agreement, ABC will register for GST. XYZ is already registered for GST. Both parties will remain registered for GST throughout the course of the arrangement.

In a telephone conversation with the ATO, you advised the following:

• ABC is a non-resident for tax purposes.

• XYZ is a resident for tax purposes.

• ABC determines the quantity of goods to be imported.

• ABC sets the prices at which the goods can be sold to XYZ's customers.

• Initially, XYZ will pay for storage but there may be a cost recovery mechanism to compensate XYZ for holding the goods.

ABC has also applied for an income tax private ruling asking whether the consignment arrangement will make ABC to have a permanent establishment in Australia. To date you have not received the private ruling.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

section 9-5

section 9-25

section 11-5

section 11-15

section 11-20

section 13-5

section 13-10

section 15-5

section 15-15

section 57-10

section 83-5

section 195-1