Edited version of your written advice

Authorisation Number: 1013051592983

Date of advice: 14 July 2016

Ruling

Subject: GST and supplies made to a non-resident

Question 1

Is the one off set up fee which you have received from the non-resident company consideration for a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as per the signed Agreement?

Advice

No. The one off set up fee which you have received from the non-resident company is consideration for a GST-free supply under item 2 in the table in subsection 38-190(1) of the GST Act.

Question 2

Are the supplies you make to the non-resident company under the signed Agreement taxable supplies under section 9-5 of the GST Act?

Advice

Under the signed Agreement you make a supply of repair of faulty goods under warranty to the non-resident company and the administrative, call centre duties, warehousing and distributing services are incidental to the supply of repair of faulty goods under warranty.

Your supply of repair of faulty goods under warranty to the non-resident company is currently a taxable supply under section 9-5 of the GST Act by virtue of subsection 38-190(3) of the GST Act.

From 1 October 2016 your supply of repair of faulty goods under warranty to the non-resident company will be GST-free under subsection 38-191(1) of the GST Act provided the non-resident company is not required to be registered for GST.

Relevant fact

You are a service facilitation provider located in Australia and are registered for the goods and services tax (GST).

You have entered into an agreement with a non-resident company and have provided us with a copy of the Agreement. The services to be provided in the Agreement are administrative, call centre duties, warehousing and distribution services and general warranty services for the non-resident company's products that are sold through Australian stores in Australia.

The non-resident company is not registered for GST and does not have a subsidiary company, employee, office or agent in Australia.

Customers who purchase a defective product of the non-resident company sold through in Australian stores are given an Australian 1300 telephone number (your support line) to contact for assessment and replacement/refund. This telephone number and the associated call centre are managed by you through your office in Australia.

Customers call your service support line and submit details of the product fault. Based on the details of the claim submitted, and availability of spare parts or replacement stock, you determine if products are to be repaired, replaced or refunded. You approve the course of action taken. If a repair is required, the job is allocated to one of the repairers in your trade network. If replacement is required, your warehouse team arrange for the replacement product to be sent to the Customer from the replacement stock provided for such purpose to you by the non-resident company. If a refund is required, your finance team arrange for a refund to the Customer.

If a repair is approved, the job is logged in the software workflow system and allocated to one of the Australian repairers in your repairer network. You manage the repair from the time it is logged into the software system until the time of completed repair. You are responsible for selecting the appropriate repairer, dispatching any spare parts required to the repairer (as supplied by the non-resident to you for such purpose) and paying the repairer on completion of work.

A refund will be provided to the Customer where a valid warranty claim is lodged and the replacement stock provided by the non-resident company to you has been exhausted. In this instance, you will refund the Customer through your own banking facilities the retail price of the products as confirmed by a copy of the Customer's receipt. You will invoice the non-resident company for reimbursement of any refunded amounts, plus a service fee including GST for each transaction refunded.

The spare parts and products used for replacement are provided by the non-resident to you. These spare parts and products are housed, managed and insured by you through your warehouse in Australia.

Following lodgement and approval of a customer request, replacement products and parts are sent by you via an Australian transport agency from the Australian warehouse to the customer's Australian address. The delivery fee is part of the service provided to the non-resident company, it is not reimbursed separately.

All defective products dealt with by you under the contract are under warranty and the services provided by you to the non-resident company relate to these warrantied products only.

You have a contract with a local telecommunications provider to supply both the 1300 number and local telephone number ("landing point") to which the 1300 number is ported. You charge a one off service fee to the non-resident company for the time and costs associated with the set up involved in programming and porting the dedicated 1300 number to the "landing point" phone number. The non-resident company has no direct relationship with the telecommunication provider.

You issue a tax invoice to the non-resident for the service involved in programming and porting the 1300 number. You do not forward tax invoices received by the telecommunication provider. You have provided us with a copy of the tax invoice for this 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 section 38-190

A New Tax System (Goods and Services Tax) Act 1999 section 38-191

Reasons for decisions

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.

Question 1

Characterisation of supply

From the facts received, the one off set up fee you received from the non-resident company was for the programming and porting the 1300 number to the landing point phone number. In this instance you have made a supply of services to the non-resident company.

GST status of supply of services

GST is payable on a taxable supply. Under section 9-5 of the GST Act, an entity makes a taxable supply if:

a) the supply is made for consideration; and

b) the supply is made in the course or furtherance of an enterprise that the entity carries on; and

c) the supply is connected with Australia; and

d) the entity is registered for GST.

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

Your supply of services to the non-resident company satisfies paragraphs 9-5(a) to 9-5(d) of the GST Act as:

a) you make the supply of services for consideration; and

b) the supply is made in the course of an enterprise that you carry on in Australia; and

c) the supply is connected with Australia as the supply is made through an enterprise that you carry on in Australia and the supply is done in Australia; and

d) you are registered for GST.

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

There is no provision under the GST Act that makes your supply of services an input taxed supply.

GST-free supply

Relevant to your supply to the non-resident company is item 2 in the table in subsection 38-190(1) of the GST Act (item 2).

Item 2 provides that a supply of a thing (other than goods or real property) made to a non-resident is GST-free if it is a supply that is made to a non-resident that is not in Australia when the thing supplied is done, and:

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 for GST.

Only one of the paragraphs in item 2 needs to be satisfied for the supply to be GST-free.

Your supply of services to the non-resident company satisfies paragraph (a) of item 2 as:

• the supply is made to a non-resident that is not in Australia in relation to the supply when the services are performed; and

• 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.

Your supply of services is GST-free to the extent it is not negated by subsection 38-190(3) of the GST Act.

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 in that table is not GST-free if:

a) it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident; and

b) the supply is provided or the agreement requires it to be provided to another entity in Australia.

From the facts received, subsection 38-190(3) of the GST Act is not applicable as you are not providing your services to another entity in Australia when you performed your services.

Your supply of services to the non-resident company is therefore GST-free under paragraph (a) of item 2.

Question 2

Characterisation of supply

The services to be provided in the Agreement are defined as administrative, call centre duties, warehousing and distribution services and general warranty services for products sold through Australian stores in Australia.

Accordingly, we need to determine the character of your supplies before determining the GST status of the supplies.

Where a transaction comprises a bundle of features and acts, it may be necessary to characterise what is supplied to determine whether a particular provision applies in whole or in part. The characterisation should be undertaken in a manner that is consistent with the object of the particular statutory provision in issue.

By having regard to the essential character or features of the transaction it can be ascertained whether a supply contains separately identifiable taxable and non-taxable identifiable parts or it is a composite supply of one thing.

It will be a matter of fact and degree whether the parts of a supply are separately identifiable and retain their own identity. Paragraph 52 of GSTR 2001/8 states:

52. The commissioner's view is that a supply has separate identifiable parts where the parts require individual recognition and retention as separate parts, due to their relative significance in the supply. This view applies where the supply is comprised of a mix of separate things, such as various combinations of goods and services, including the provision of advice.

A supply is a composite supply of one thing if one part of the supply should be regarded as being the dominant part, with the other parts being integral, ancillary or incidental to that dominant part.

Paragraph 59 of GSTR 2001/8 provides some indicators on when a part may be integral, ancillary or incidental to a supply and includes:

• You would reasonable conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

• It represents a marginal proportion of the total value of the package compared to the dominant part; or

• It is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

• It contributes to the proper performance of the contract to supply the dominant part.

After taking into consideration all the information given, we consider that your supplies relate to the repair of faulty goods under warranty and it is the dominant part of your supply. The administrative, call centre duties, warehousing and distributing services are incidental to the dominant part of the supply which is the repair of faulty goods under warranty as they contribute to the supply of repairing the faulty goods that are under warranty as a whole.

Accordingly, you are making a supply of one thing under the agreement, the supply being a supply of repair of faulty goods under warranty.

GST status of supply of repair of faulty goods under warranty

GST is payable on a taxable supply. Under section 9-5 of the GST Act, an entity makes a taxable supply if:

a) the supply is made for consideration; and

b) the supply is made in the course or furtherance of an enterprise that the entity carries on; and

c) the supply is connected with Australia; and

d) the entity is registered for GST.

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

Your supply of repair of faulty goods under warranty to the non-resident company satisfies paragraphs 9-5(a) to 9-5(d) of the GST Act as:

a) you make the supply for consideration; and

b) the supply is made in the course of an enterprise that you carry on in Australia; and

c) for GST purposes the supply of repair of faulty goods under warranty is a supply of services. The supply is connected with Australia as the supply is made through an enterprise that you carry on in Australia and the supply is done in Australia; and

d) you are registered for GST.

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

There is no provision under the GST Act that makes your supply of repair of faulty goods under warranty an input taxed supply.

GST-free supply

Relevant to your supply to the non-resident company is item 2 in the table in subsection 38-190(1) of the GST Act (item 2).

Item 2 provides that a supply of a thing (other than goods or real property) made to a non-resident is GST-free if it is a supply that is made to a non-resident that is not in Australia when the thing supplied is done, and:

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 for GST.

Only one of the paragraphs in item 2 needs to be satisfied for the supply to be GST-free.

Paragraph (a) of item 2

Paragraph (a) of item 2 has two conditions that need to be satisfied for this paragraph to be applicable to the supply and they are:

• the supply is not a supply of work physically performed on goods situated in Australia when the work is done; and

• the supply is not a supply directly connected with real property situated in Australia.

Goods and Services Tax ruling GSTR 2003/7 provides guidance on when a supply is directly connected with goods or real property and when a supply of work is physically performed on goods.

According to paragraph 58 in GSTR 2003/7, a supply is a supply of work physically performed on goods when 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.

Your supply of repair of faulty goods under warranty does not satisfy paragraph (a) of item 2 since your supply is a supply of work physically performed on goods situated in Australia when the work is done.

Paragraph (b) of item 2

A supply that does not satisfy paragraph (a) of item 2 may nevertheless satisfy item 2 where paragraph (b) of item 2 is met.

A supply will satisfy paragraph (b) of item 2 when the non-resident recipient acquires the thing in carrying on their enterprise and is not registered or 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 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 acceptable where the supplier has no reason to believe the statement is not accurate.

From the information received your supply of repair of faulty goods under warranty to the non-resident company will satisfy the requirements in paragraph (b) of item 2 as the non-resident company acquires your supply in carrying on its services and is not registered for GST and provided it is neither required to be registered for GST. In this instance the supply is GST-free to the extent it is not negated by subsection 38-190(3) of the GST Act.

Where the non-resident company is required to be registered for GST, paragraph (b) of item 2 is not satisfied and the supply will be a taxable supply as paragraph (a) of item 2 is not satisfied as well.

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 in that table is not GST-free if:

a) it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident; and

b) the supply is provided or the agreement requires it to be provided to another entity in Australia.

Paragraph (a) of subsection 38-190(3) of the GST Act

Paragraph (a) of subsection 38-190(3) of the GST Act is satisfied as you have entered into an agreement with the non-resident.

Paragraph (b) of subsection 38-190(3) of the GST Act

Goods and Services Tax Ruling GSTR 2005/6 provides guidance on the application of paragraph (b) in subsection 38-190(3) of the GST Act. Paragraphs 59, 61 and 62 in GSTR 2005/6 state:

59. 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, 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.

61. Thus the expression 'provided to another entity' means in our view that in the performance of a service (or in the doing of something), the actual flow of that supply is, in whole or part, to an entity that is not the non-resident entity with which the supplier made the agreement for the supply. The contractual flow is to one entity (the non-resident recipient) and the actual flow of the supply is to another entity.

62. For example if a supply of entertainment services is made to a non-resident company and in the performance of that service the employees are the entities that are entertained, the actual flow of that service is to another entity, each employee. The supply is made to the non-resident company (the employer) and provided to another entity (each employee).

Thus the focal point in working out whether a supply is provided to another entity is the facts and circumstances of the doing of the thing supplied. By the supplier examining what it is required to do and in what circumstances, the supplier is able to objectively determine to whom the supply is provided.

When you supply the repair of faulty goods under warranty, it is the Australian customers that are being provided with your supply since it is their faulty goods that are being repaired. Paragraph (b) of subsection 38-190(3) of the GST Act is satisfied as your supply is provided to the Australian customers in Australia.

Summary

Since all the requirements in subsection 38-190(3) of the GST Act are satisfied, your supply of repair of faulty goods under warranty is not GST-free under item 2. Your supply to the non-resident company is a taxable supply under section 9-5 of the GST Act.

Section 38-191 of the GST Act

A new section, section 38-191 has been added in the GST Act. From 1 October 2016 supplies relating to the repair etc of goods under warranty are GST-free under section 38-191 of the GST Act where all the requirements in that section are met.

Section 38-191 of the GST Act states:

38-191 Supplies relating to the repair etc. of goods under warranty

(1) A supply of anything other than goods or *real property is GST-free if:

a) the *recipient is a *non-resident who:

i. is not in the indirect tax zone when the thing supplied is done; and

ii. acquires the thing in *carrying on the recipient's *enterprise, but is not *registered or *required to be registered; and

b) the supply is constituted by the repair, renovation, modification or treatment of goods; and

c) the repair, renovation, modification or treatment is done in order to meet the recipient's obligations under a warranty relating to the goods; and

d) either:

i. *consideration for the warranty was included in the consideration for the supply of the goods; or

ii. the supply of the warranty was a separate *taxable supply to the supply of the goods.

(2) A supply of goods is GST-free if:

a) it is made in the course of a supply that is GST-free under subsection (1), and to the same *recipient; and

b) either:

i. the goods are attached to, or become part of, the goods to which the warranty relates; or

ii. the goods become unusable or worthless as a direct result of being used to repair, renovate, modify or treat the goods to which the warranty relates.

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

Your supply of repair of faulty goods to the non-resident company will satisfy all the requirements in subsection 38-191(1) of the GST Act as:

a) The non-resident company is a non-resident and will not be in Australia when you make your supply and it acquires your supply in carrying on its business and is not registered for GST and provided it is not required to be registered for GST; and

b) Your supply is constituted by the repair of the faulty goods; and

c) The repair is done in order to meet the non-resident company's obligations under a warranty relating to the goods; and

d) Either consideration for the warranty was included in the consideration for the supply of goods or the supply of the warranty was a separate supply to the supply of the goods.

Accordingly, from 1 October 2016 your supply of repair of faulty goods under warranty will be GST-free under subsection 38-191(1) of the GST Act provided the non-resident company is not required to be registered for GST.