Edited version of your written advice

Authorisation Number: 1013075086526

Date of advice: 25 August 2016

Ruling

Subject: GST and supply of the repair of faulty goods under warranty

Question 1

Is the supply made by the Australian entity to the non-resident company a GST-free supply under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as per the Service Agreement and the three scenarios provided to us?

Advice

Under the Service Agreement and as per the three scenarios provided to us, the Australian entity makes a supply of the repair of faulty goods under warranty to the non-resident company.

The Australian entity's supply of the 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 the Australian entity's supply of the repair of faulty goods under warranty (including the goods used to do the repairs) ) to the non-resident company will be GST-free under section 38-191 of the GST Act provided the non-resident company is not required to be registered for GST.

Relevant facts

The Australian entity (you) is an Australian company and is registered for the goods and services tax (GST).

You entered into a Service Agreement with a non-resident company located outside Australia (copy of the executed agreement received). The non-resident company does not have any presence in Australia and is your parent company. You advised that the non-resident company is not registered for GST and is not required to be registered for GST.

The non-resident company exports goods to Australian customers that are registered for GST. The customers are the importers of the goods into Australia. These goods are subject to warranty under the sales agreement between the non-resident company and these Australian customers.

During the warranty period when the products sold to the Australian customers have an issue, under the Service Agreement the non-resident company will request you to investigate and carry out necessary actions as per instructions given to repair and fix issues on the goods.

You have provided three scenarios in regard to how you do the repair and fixing of the issues on the goods:

• Scenario 1 - all services you provide to the non-resident company are 100% subcontracted to Australian suppliers and you do not participate to the work carried out.

• Scenario 2 -you hired qualified trades from Australian local company to perform the work under the supervision of your employee (site supervisor). Your employee does not perform any work to these wagons.

• Scenario 3 - you employ qualified trades to perform work under the supervision of your site supervisor.

In all scenarios your fees structure is the same. You charge the non-resident company for:

• Any cost (labour, materials, equipment) incurred by local supplier and charged to you;

• Travel expenses incurred by your site supervisor;

• X% admin charges for all above expenses; and

• Man-hour for your staff.

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 decision

Characterisation of supply

After taking into consideration all the information provided, we consider that under the Service Agreement, you are making a supply of the repair of faulty goods under warranty to the non-resident company. The onsite support and services to the Australian customers are incidental to your supply of the repair of faulty goods under warranty.

The fact that you contract someone or have your employee to do the repairs for you (scenarios 1 to 3) does not change the fact that you are making a supply of the repair of faulty goods under warranty to the non-resident company. You are contracting/hiring these people in order to be able to execute your supply of the repair of faulty goods under warranty to the non-resident company under the Service Agreement. This business decision does not have any impact on the GST status of your supply to the non-resident company.

GST status of supply of the repair of faulty goods under warranty

Taxable supply

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 the 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 the 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 the 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 the 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 the 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 is not in Australia in relation to your supply when your supply is done; it acquires your supply while carrying on its business and is neither registered nor 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 for the provision of your supply.

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 the 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 and the used of goods to do the repairs 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 the 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 the non-resident company 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.

Further the goods you used to repair the faulty goods that are under warranty will be GST-free under subsection 38-191(2) of the GST Act.

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