Edited version of private advice

Authorisation Number: 1051622672992

Date of advice: 3 February 2020

Ruling

Subject: GST and domestic air travel of non-residents and Australian residents

Question

Is your supply of domestic air travel, on an aircraft chartered to transport non-residents, GST-free under item 3 in the table in section 38-355(1) of the A New Tax System (Goods and Services Tax) 1999 (GST Act), when Australian resident staff from your office and from your client's office are present?

Answer

Your Australian resident Charter Manager is working on the chartered aircraft to deliver your supply of domestic transport to the non-resident passengers and is not considered a passenger. Your supply of domestic air travel via chartered aircraft to non-residents and Australian residents is not GST-free. It is a mixed supply of:

·        GST-free component to eligible non-residents; and

·        taxable component to Australian resident passengers who are your clients' representatives.

This ruling applies from the date of this ruling to a period four years from this date.

The scheme commences on the date of this ruling.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an aircraft charter management company and you are registered for GST.

You procure the aircraft and the aircrew from Aircraft Operators to transport passengers from one destination to another within the indirect tax zone. Your supply of the domestic transport is not sold in conjunction with or cross-referenced to the international transport for your customers. Your supply of transport service for non-resident passengers is not transport of passengers on domestic legs of international flights.

The supply under this ruling application only concerns your supply of domestic transport of customers by chartered aircrafts, not your other supplies to the passengers, such as the supply of connecting ground transportation, security personnel, tailored catering and gourmet meals, VIP terminal access, transfers, etc. However, the supply includes ground handling service (the loading and unloading of the baggage to and from the aircraft, or the supply of the fuel to the aircraft), the basic catering services (such as drinks, packs of snacks and of hot meals), and airport charges, such as passenger security and terminal charges, departure and landing charges, passenger movement charges, etc.

You charter the aircraft and aircrew at a fixed price from an Aircraft Operator for a fixed period, and you on-charter the entire aircraft to your clients with your margin on the price. Your clients include non-resident individuals who book the charter services from you, or travel agents who wish to have their non-resident customers transported within Australia by air charter.

The travel agents who book your domestic air travel are either non-residents or Australian residents businesses. However, the passengers on your aircraft are individual entities who are non-residents. All the bookings are made while the passengers are outside Australia. You issue invoices to your clients, whether they are the travel agents or the individual passengers. According to the Aircraft Charter Agreement (Agreement), your client warrants to you that the passengers on the chartered aircraft are non-residents, being permanent residents of other countries, not domiciled in the indirect tax zone for any amount of time. In addition, the client warrants that the passengers are outside of the indirect tax zone as at the date of the Agreement.

This ruling request is about your supply to your clients of domestic transport by air of non-resident passengers who are outside of the indirect tax zone as at the date of the Agreement when:

·        your Australian resident staff (such as .....) are performing their work functions on the aircraft as part of your supply to your client; or

·        your client's Australian resident staff (such as a representative of the travel agent) are performing their work functions on the aircraft as part of their supply to their client/passengers or

·        both your Australian resident staff and your client's Australian resident staff are performing their respective work functions on the aircraft as part of the supply to the passengers.

This is your website address...., following by information about your relevant domestic air travel....

For all your charter flight services, you will issue a quotation for the services to be provided, which would be followed by an acceptance process by your customers. The customers then enter into an Aircraft Charter Agreement, which incorporates the General Terms and Conditions.

You sent us a copy of your Aircraft Charter Agreement (Agreement) between you and a client. The Aircraft Charter Agreement provides as follows....................

This is the link which contains the current General Terms and Conditions (General Terms).......

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 38-355

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-80(1).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-80(2).

A New Tax System (Goods and Services Tax) Act 1999 Section 9-80.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40.

Reasons for decision

Summary

Your Australian resident staff, is not considered a passenger in your supply of domestic transport. The person's presence on the aircraft is to allow passengers to focus on business, hence the person is working on the chartered aircraft to deliver your supply of domestic transport to the non-resident passengers, and can be treated as the aircrew. The supply of services from your Charter Manager to the passengers is incidental to your supply of domestic transport to eligible non-resident passengers, which is GST-free under item 3 of 38-355 of the A New Tax System (Goods and Services Tax) 1999 (Item 3) .

The Australian resident representative of the travel agents from the travel agents, would fit under the meaning of 'passenger' per your General Terms and Conditions. Since these Australian resident passengers do not satisfy Item 3, your supply of domestic transport to them would be a taxable supply.

Your supply of domestic air travel services is a mixed supply of a GST-free component to non-resident passengers who meet the requirements of Item 3 and a taxable component to the Australian resident passengers.

You need to work out the value or price of the taxable part, or the proportion of the value of the actual supply that the taxable part represents, so that you can determine the correct amount of GST payable.

Detailed reasoning

Please note that the GST legislation now generally refers to the 'indirect tax zone' rather than 'Australia' wherever relevant, because there are areas such as external territories that are not part of the indirect tax zone for the purposes of the GST. In this report, we use the two terms interchangeably.

GST is payable on a taxable supply under section 9-5 of the GST Act, which states:

You make a taxable supply if:

·        you make the supply for *consideration; and

·        the supply is made in the course or furtherance of an *enterprise that you *carry on; and

·        the supply is *connected with indirect tax zone; and

·        you are *registered, or required to be registered.

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

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

The facts indicate that you satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as follows:

• you will make the supply of domestic air travel via charter flights in return for consideration (such as payments);
• the supply will be made in the course of your charter flights business;
• your supply of domestic air travel will be connected with the indirect tax zone (because the supply is either done in the indirect tax zone or made through an enterprise (business) that you carry on in the indirect tax zone); and
• you are registered for GST in the indirect tax zone.

However, your supply of domestic air travel is not taxable to the extent that it is GST-free or input taxed. There are no provisions of the GST Act under which your supply of domestic air travel would be input taxed. Therefore, what remains to be determined is whether your supply of domestic air travel is GST-free.

Section 38-355 of the GST Act specifies the circumstances where certain supply of transport is GST-free. You indicate that your supply of domestic air travel does not form part of a ticket for international air travel, nor is cross-referenced to such a ticket issued at that time. Of particular relevance to your supply of domestic air travel is the following item in the table in subsection 38-355(1) of the GST Act:

Subsection 38-355(1) of the GST Act, item 3 (Item 3), states:

The fact sheet GST and international transport of passengers (NAT 3459) states:

Travel within Australia - non-residents

Air travel within Australia is GST-free for non-residents provided they are outside Australia when they purchase it....

Example: GST-free travel

Nils lives in Sweden and arrives in Australia for a holiday. When he booked his international transport in Sweden, he knew he wanted to visit the Northern Territory and purchased a domestic flight to Darwin as part of his itinerary. Supply of the entire transport including the domestic air travel to Nils is GST-free.

Example: GST payable

Sue-Ellen is an American resident and arrives in Australia for a holiday. While in Sydney she decides to spend a week on the Gold Coast and purchases a ticket direct from a domestic airline. Even though Sue-Ellen is a non-resident, GST will be included in the price of her domestic air ticket....

Travel within Australia is also GST-free for non-residents if it is arranged within Australia as part of a package that is purchased overseas.

Example: Package tour for non-resident tourists

Mac Tours is an Australian business that organises package tours to Australia and then arranges for these packages to be sold in the USA. Part of the package involves the use of domestic air transport from Cairns to Dunk Island. Mac Tours has an agreement with Cal Air to transport non-residents from Cairns to Dunk Island. The international air transport is arranged separately.

Supply of the international flights is GST-free. Supply of the domestic air transport will be GST-free if the following applies:

• there is a binding agreement between Mac Tours and Cal Air that confirms the transport of the non-resident passengers from Cairns to Dunk Island when Mac Tours purchases the domestic transport
• the non-resident passengers are outside Australia when the travel is booked

Further, Issue 12 of the Tourism and Hospitality Industry Partnership on this link, considers the meaning of 'transport' which is GST-free, and states:

http://54.66.192.110/Business/Bus/Issue-12---Air-transport-within-Australia/

• Issue 12 - Air transport within Australia

Tourism operators provide scenic flights, hot air balloon flights and charter flights which may not involve the transport of a person from one destination to another.

Issue

Does 'Transport of a passenger within Australia by air' include:

a. charter flights

b. scenic flights, hot air ballooning trips

if they are all part of the international holiday package?

This issue is a public ruling for the purposes of section 105-60 of schedule 1 to the Taxation Administration Act 1953.

Decision

The term 'transport' is given its ordinary meaning. 'Transport' is defined in the Macquarie Concise dictionary as 'to carry or convey from one place to another'. Travel is similarly defined as 'to go from one place to another'. Therefore a derived definition for domestic air travel is 'to convey the passenger from one place to another (different) place'.

The transport of a passenger within the indirect tax zone by air is GST-free, if:

....

·        the passenger is a non-resident

·        the transport was purchased while the passenger was outside Australia.

Applying this to the examples given:

·        A charter flight that conveys passengers from one place to another place is transport of a person within the indirect tax zone by air for GST purposes. The charter flight would be GST-free if the conditions above are met.

·        A scenic flight or hot air balloon flight is not the transport of a person within the indirect tax zone by air for GST purposes because it does not convey passengers from one destination to another, but rather provides a sight-seeing service. Where a flight has no specified destination distinct from the point of departure at which passengers disembark, the flight does not meet the definition of 'transport'. GST is payable on these services, even if purchased by a non-resident outside the indirect tax zone.

We note that your charter flights convey passengers from one destination to another, hence they will meet the definition of 'transport', for the purposes of section 38-355 of the GST Act.

Nature of the supplies and related consideration

Your clients are either the resident or non-resident travel agents, or individual non-residents tourists. They contact you to arrange domestic air travel, by chartered aircraft when they are outside Australia, for the domestic air travel to be provided in Australia.

You do not act as agent for any entity. You supply domestic air travel by acquiring the chartered aircraft and aircrew and charter to your clients. Your clients sign the Agreement with you and accept the General Terms displayed on your website. You issue invoices to your clients, whether they are the travel agents or the individual passengers, and your clients pay into your account.

In order for your supply of domestic air travel to be GST-free under Item 3, this requires the passengers to be non-residents.

Meaning of non-resident

In Goods and Services Tax Ruling GSTR 2005/6 (GSTR 2005/6), the meaning of non-resident for these purposes is detailed in paragraphs 205-218 of GSTR 2005/6.

The travel agents who book your service are either non-residents or Australian residents businesses. However, the passengers on your aircraft are individual entities. An individual is a resident if he or she resides in Australia. As stated at paragraph 208 of GSTR 2005/6, this includes a person who is domiciled in Australia, or has been in the indirect tax zone for one half of a year of income, among other things.

The Charter Agreement requires your client to warrant that the passengers are non-residents, being permanent residents of other countries, not domiciled in the indirect tax zone for any amount of time. They are non-residents for the purposes of Item 3. Please note the following information on our website relating to 'How does a supplier establish the residency of a passenger who books and pays for domestic air travel remotely?' as follows:

https://www.ato.gov.au/Business/Bus/Issue-14---Domestic-air-travel-purchased-overseas-by-a-non-resident/

Issue 14 - Domestic air travel purchased overseas by a non-resident

Sales of domestic air travel can be made in a number of ways, for example via the internet, by phone or through retail sales agents. Airlines need to establish whether the passenger meets the requirements of item 3 in the table in section 38-355 of the GST Act (item 3) before the travel can be treated as GST-free.

Under item 3 a supply of domestic air travel will be GST-free if:

(a) the passenger is a non-resident

(b) the supply was purchased while the passenger was outside Australia

Issue

How does a supplier establish the residency of a passenger who books and pays for domestic air travel remotely?

Decision

The ATO has accepted the following procedures as satisfying the requirements of item 3.

Internet sales procedure

You will need to record the following to satisfy the requirements of item 3.

1. The passport number and the country of issue of the proposed passenger.

2. The nationality of the passenger.

3. Confirmation that the passenger is currently outside Australia.

Where the conditions above are not satisfied the sale is not GST-free.

Telephone sales procedure

The following questions need to be asked and responses recorded.

1. Is the passenger a resident of Australia?

2. Is the passenger currently in Australia?

3. What is the passport number and the country of issue of the proposed passenger?

Where the answer to either question 1 or question 2 is 'yes', the sale is not GST-free.

Where these questions are not answered, the sale should not be treated as a supply within the meaning of item 3.

Retail sales procedure

1. Where the sale is made in a country outside Australia, the sale can be treated as a supply within the meaning of item 3.

2. Where the sale is made by a travel agent and the IATA Agent identifier indicates that the travel agent is located outside Australia, the sale can be treated as a supply satisfying item 3.

A passenger cannot make a GST-free purchase under item 3 from the Australian premises of a travel agent.

Meaning of passenger in Item 3:

The Australian resident who is your staff, would not be considered a passenger. The person is working on the chartered aircraft to deliver your supply of domestic transport to the non-resident passengers, hence the person can be treated as the aircrew.

However, the Australian resident representative of the travel agents and the translator, would be nominated by your Client in the Aircraft Charter Agreement to be carried on the Chartered Aircraft as passengers in connection with your supply. They would fit under the meaning of 'passenger' per sub clause 1(ee) of your General Terms and Conditions incorporated in the Aircraft Charter Agreement.

Mixed supply and composite supply

The next step is to consider whether your supply of domestic transport to both Australian residents and non-residents via the chartered flight is a mixed supply or a composite supply. If your supply to the Australian residents does not have to be individually recognised from the supply of transport via the chartered flight, then the whole of your supply of domestic transport will be GST-free under Item 3.

Goods and Services Tax Ruling 2001/8 Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8) discusses mixed supply and composite supply in the following paragraphs.

Mixed supply

16. In this Ruling the term 'mixed supply' is used to describe a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised.

Composite supply

18A. You need to consider all of the circumstances of a supply to work out whether the supply is mixed or composite. GST is only payable on the taxable part of a mixed supply. If a composite supply is taxable, then GST is payable on the whole supply. If a composite supply is non-taxable, then no GST is payable on the supply.

43. A mixed supply is a single supply made up of separately identifiable parts, where one or more of the parts is taxable and one or more of the parts is non-taxable, and these parts are not integral, ancillary or incidental in relation to a dominant part of the supply. On the other hand, a composite supply is a single supply made up of one dominant part and other parts that are not treated as having a separate identity as they are integral, ancillary or incidental to the dominant part of the supply.

44. In working out whether you are making a mixed or composite supply, the key question is whether the supply should be regarded as having more than one separately identifiable part, or whether it is essentially a supply of one dominant part with one or more integral, ancillary or incidental parts.

59. No single factor (by itself) will provide the sole test you use to determine whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply. Having regard to all the circumstances, and taking a common sense and practical approach, indicators that a part may be integral, ancillary or incidental include where:

·        you would reasonably 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.

The supply of services from your staff to the passengers would be considered integral, ancillary or incidental supply to the dominant part of your supply of transport, whether your supply of transport is supplied directly to the eligible non-resident passengers or to the travel agents (residents and non-residents).

However, we do not consider your supply of domestic air travel to your clients' Australian resident staff would be integral, ancillary or incidental supply to the dominant part of the supply of domestic air travel to the non-resident passengers. Since these Australian resident passengers do not satisfy Item 3, the portion of your supply of domestic air travel to them is a taxable component of your supply.

As discussed, you make supplies of domestic air travel, supplies of this kind are covered under Item 3 of the table in subsection 38-355(1) of the GST Act as quoted above. Your supply is GST-free to the extent that the passengers are non-residents and the supply was purchased while the passengers are outside the indirect tax zone. Your supply of domestic air travel to your clients' Australian resident passengers on the chartered flight does not satisfy Item 3.

As your supply of domestic air travel, is partly for non-resident passengers who purchased the transport while they are outside the indirect tax zone, and partly for Australian resident passengers, the supply would contain taxable and GST-free components. Your supply of domestic air travel is a mixed supply and not a composite supply. You would need to apportion the value of the taxable component.

Section 9-40 of the GST Act provides that an entity is liable for GST on the taxable supplies that it makes. Generally, an entity's GST liability is calculated as 1/11^th of the consideration for the supply. Where the supply is a mixed supply, the GST liability will only be calculated on the taxable portion as determined in section 9-80 of the GST Act.

Section 9-80 of the GST Act provides a method for calculating the value of supplies that are partly GST-free or input taxed.

Subsection 9-80(1) of the GST Act provides that if a supply is:

• partly a taxable supply; and
• partly a supply that is GST-free or input taxed;

the value of the part of the supply that is a taxable supply is the proportion of the value of the supply that the taxable supply represents.

Subsection 9-80(2) of the GST Act provides that the value of the mixed supply that represents the actual supply is calculated in accordance with the following formula:

(Price of the supply * 10) / (10 + Taxable proportion)

where:

'Taxable proportion' is the proportion of the value of the supply that represents the value of the taxable supply (expressed as a number between 0 and 1).

Goods and Services Tax Ruling GSTR 2001/8 considers apportioning consideration for a supply that includes taxable and non-taxable parts. Paragraphs 25-26 of GSTR 2001/8 advise how to apportion the value of the taxable component as follows:

Apportionment of the consideration for a mixed supply

25. GST is payable on a mixed supply that you make, but only to the extent that the supply is taxable. You need to apportion the consideration for a mixed supply between the taxable and non-taxable parts to find the consideration for the taxable part.

26. Apportionment must be undertaken as a matter of practical commonsense. You can use any reasonable basis to apportion the consideration. Depending on the facts and circumstances of the supply, a direct or indirect method may be an appropriate basis upon which to apportion the consideration and ascertain the value of the taxable part of the supply. The basis you choose must be supportable in the particular circumstances.

27. You should keep records that explain the basis used to apportion the consideration between the taxable and non-taxable parts of a supply