Edited version of private advice

Authorisation Number: 1051649459611

Date of advice: 08 July 2020

Ruling

Subject: GST and supply of services to a non-resident company

Questions

Is the supply of services by you to a non-resident company GST-free under item 2 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Is the supply of services by you to a non-resident company GST-free under item 5 in the table in subsection 38-190(1) of the GST Act?

Is the supply of goods by you to a non-resident company GST-free under subsection 38-185(1) of the GST Act?

Answers

We consider that the supply of services by you is integral, ancillary or incidental to the supply of goods.

Had the supply been a separate supply, the supply would be GST-free under item 2 in the table in subsection 38-190(1) of the GST Act.

We consider that the supply of services by you is integral, ancillary or incidental to the supply of goods.

Had the supply been a separate supply, the supply would not be GST-free under item 5 in the table in subsection 38-190(1) of the GST Act.

No. The supply of goods by you to a non-resident company is not GST-free under subsection 38-185(1) of the GST Act.

Relevant facts and circumstances

A non-resident company is incorporated overseas. It is not registered with ASIC.

It is not registered for GST and does not have an ABN.

It does not own or lease premises in Australia. It does not have any agent in Australia.

You entered into an agreement with a non-resident company under which:

a.    Non-resident company has asked and you have agreed to enclose non-resident company's products in a capsule system;

b.    Non-resident company will supply you with its filling materials;

c.     You will manufacture capsules and fill them for the non-resident company on the terms of the agreement.

The agreement specifies your obligations as follows:

1.    During the term and in consideration of the fee to manufacture and provide the capsule, fill the capsule with Product and individually seal each capsule in accordance with the specifications of non-resident company according to the agreement at your premises on the terms of the document using filling materials supplied by non-resident company.

2.    Upon receipt of each delivery of non-resident company's filling materials;

Conduct tests to make sure the filling materials have not been affected during transport according to the agreement (Appendix 2).

Depending upon the order:

                                          i.    Pack the capsules in a protective foil and package them in boxes, an IFU, and a Short Instruction, and enclose a filling protocol according to the agreement; and/or

                                         ii.    Pack the capsules in a protective covering and package them in sealed bags and enclose a filling protocol according to the agreement.

Deliver the capsules Ex-Works; and

3.    You confirm orders two days after order placing.

The obligations of non-resident company are as follows:

1.    Deliver filling materials for its Products in a safe transport mode. Title will remain with non-resident company and you will store them on behalf of non-resident company.

2.    Provide the artwork to be applied to the foil pouches, boxes, IFU, and Short Instruction.

Include your wording on the covering and box of the Product as per the agreement.

Pay an upfront non-refundable set-up fee.

Pay the Fee for the capsulated Products by telegraphic transfer within 45 days of the invoice date.

Place orders for a minimum quantity of 100,000 capsules per each single order. Place orders of at least 300,000 capsules per year.

Non-resident company shall submit in writing to you in November of each year a forecast of its expected requirements for the months from January to December of the following calendar year. These forecasts are not binding and shall only facilitate the planning process of your company

Non-resident company shall submit a 12-month rolling forecast with firm orders for the next 3 months. Orders shall be placed by non-resident company on the basis of the agreement in such a way that there will be a time span between placement of orders and requested date of supply of at least 6 weeks. Orders shall be binding only if they are confirmed in writing by you to non-resident company. Your company will use commercially reasonable efforts to deliver the ordered quantities of contract products on the delivery dates as confirmed by the respective order placed.

Title to the manufactured and filled capsules will pass to non-resident company upon payment in full of the respective order. Non-resident company, however, will be entitled to sell the capsules to third parties in its ordinary course of business and to transfer title to its customers even prior to payment of the Fee to your company.

It is proposed that non-resident company will sell the filled capsules to its customers under Ex-Works terms; that is, the purchasers will collect the capsules from your company's warehouse and be responsible for insurance, freight and import costs.

It is unlikely that non-resident company's customers will alter the goods or use them in any way except to the extent necessary to prepare them for export.

The goods will be exported within 60 days (or such further period as the Commissioner allows) of receiving consideration or giving an invoice, whichever is earlier.

Your company and non-resident company will ensure that the goods have been entered for export by the customers and will obtain the necessary documents to substantiate that the goods were in fact exported.

At this stage, non-resident company is not aware if its customers are registered or required to be registered for GST.

Non-resident company sells a small amount of stock to customers in Australia.

Your company also has its own filling materials that it can sell to its customers or to use in filling in its capsules to compete with non-resident company's products.

Your company will also supply applicators used in conjunction with the filled capsules.

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

Reasons for decision

GST is payable on a taxable supply.

Section 9-5 of the A New Tax System (Goods and Services tax) Act 1999 (GST Act) states:

You make a taxable supply if:

(a)  you make the supply for *consideration; and

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

(c)   the supply is *connected with the indirect tax zone; and

(d)  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 term defined under section 195-1 of the GST Act)

In determining whether the requirements in section 9-5 of the GST Act are satisfied, the supply must first be properly characterised.

The agreement provides that your company will encase non-resident company's products by manufacturing capsules, filling them in with non-resident company's filling materials, and packaging them. For all these, non-resident company pays specified fees. Your company retains title to the filled capsules until non-resident company pays the fees. Your company has its own filling materials which it can use to fill its capsules to compete with non-resident company's products.

Based on the information above, we consider that the supply made by your company to non-resident company under the agreement is a supply of the filled capsules and that the supply of capsules manufactured by your company and the supply of services are necessary to make the supply.

Item 2

Item 2 in the table in subsection 38-190(1) of the GST Act (item 2) provides that a supply of anything, other than goods or real property, made to a non-resident who is not in in the indirect tax zone when the thing supplied is done is GST-free if:

a.    the supply is neither a supply of work physically performed on goods situated in the indirect tax zone when the work is done nor a supply directly connected with real property situated in the indirect tax zone; 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.

However, in accordance with subsection 38-190(3) of the GST Act, a supply covered by item 2 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 the indirect tax zone; and

(c)   for a supply other than an input taxed supply - none of the following applies:

(i)    the other entity would be an Australian-based business recipient of the supply, if the supply had been made to it;

(ii)   the other entity is an individual who is provided with the supply as an employee or officer of an entity that would be an Australian-based business recipient of the supply, if the supply had been made to it; or

(iii)  the other entity is an individual who is provided with the supply as an employee or officer of the recipient, and the recipient's acquisition of the thing is solely for a creditable purpose and is not a non-deductible expense.

We consider that the supply of services by your company is integral, ancillary or incidental to the supply of the filled capsules.

Had the supply of services by your company been a separate supply, it would be GST-free under item 2 as:

·   the supply is made to a non-resident that is not in Australia; and

·   non-resident company acquires the services in carrying on its enterprise but is not registered or required to registered for GST; and

·   the supply is not provided or required to be provided to another entity in Australia.

Item 5

Item 5 in the table in subsection 38-190(1) of the GST Act (Item 5) provides that a supply that is constituted by the repair, renovation, modification of treatment of goods from outside the indirect tax zone whose destination is outside the indirect tax zone.

Goods and Services Tax Ruling GSTR 2005/2 is about the operation of item 5 and explains the requirements for a supply to be GST-free under the item.

The terms 'repair', 'renovation', 'modification' and 'treatment', and their derivatives are not defined in the GST Act and therefore take their ordinary meaning.

Paragraphs 34 to 37 of GSTR 2005/2 state:

34. The ordinary meaning of 'repair' is 'to restore to a good or sound condition after decay or damage; mend'. Repairing includes replacing defective or worn parts or re-attaching parts that have become detached.

35. The ordinary meaning of 'renovate' is 'to make new or as if new again; restore to good condition; repair'. Renovation changes the character or enhances efficiency of function, while a repair merely restores the character or efficiency of function.

36. The ordinary meaning of 'modify' is 'to change somewhat the form or qualities of; alter somewhat'.

37. The ordinary meaning of 'treat' is 'to subject to some agent or action in order to bring about a particular result, for example, to treat a substance with an acid'. Processes such as cleaning, sterilising, waterproofing or rust proofing goods are examples of treating goods.

A process which may appear to be, for example, a treatment or renovation, is not covered by item 5 if the process amounts to the manufacture of new goods.

The ordinary meaning of manufacture is 'the making of goods or wares by manual labour or machinery, especially on a large scale; the making of anything.

Manufacture commonly results in a change in the identity of goods. Their essential character is altered in such a way that they can no longer be considered the same goods. The original goods being components, ingredients, raw materials or similar, are subsumed into new goods with their own identity.

Had the supply of services by your company been a separate supply, the supply would not be GST-free under item 5 as:

·   the filling products are not imported into Australia for repair, renovation, modification or treatment; rather, they are imported to be placed in a capsule;

·   once the filling products are placed in the capsule system new goods are created; thus, the goods imported are not the same goods that were exported.

Supply of goods

The supply of the filled tablets and applicators by your company satisfies the requirements in paragraphs 9-5(a) to 9-5(d) of the GST Act as:

·   the supply is for a fee; and

·   the supply is made in the course of running your enterprise; and

·   the supply is connected with Australia because the goods are made available in Australia to a non-resident company; and

·   your company is registered for GST.

Therefore, the supply of the filled capsules and applicators is a taxable supply unless it is GST-free.

Subsection 38-185(1) of the GST Act provides that supplies covered by any of the items in the table in that subsection is GST-free.

Item 2 in the table covers a supply of goods that are exported by the supplier from Australia before, or within 60 days (or such further period as the Commissioner allows) after:

·   the day on which the supplier receives any consideration for the supply; or

·   if, on an earlier day, the supplier gives an invoice for the supply - the day on which the supplier gives the invoice.

Under subsection 38-185(3) of the GST Act, the supplier of goods covered by item 2 is treated as having exported the goods from Australia if:

(a)  before the goods are exported, the supplier supplies them to an entity that is not registered or required to be registered for GST; and

(b)  that entity exports the goods from Australia; and

(c)   the good have been entered for export within the meaning of section 113 of the Customs Act 1901; and

(d)  since their supply to that entity, the goods have not been altered or used in any way, except to the extent (if any) necessary to prepare them for export; and

(e)  the supplier has sufficient documentary evidence to show that the goods were exported; and

(f)    if that entity is covered by paragraph 168-5(1A)(c) of the GST Act, the supplier has a declaration by that entity stating that:

(i)       payment has not been sought under section 168-5 for the supply; and

(ii)      if the goods are wine - a payment has not been sought under section 25-5 of that Act for the supply.

Goods and Services Tax Ruling GSTR 2002/6 explains the requirements for a supply of goods to be a GST-free export under items 1 to 4A listed in the table in subsection 38-185(1) of the GST Act.

It is proposed that non-resident company will sell the filled capsules to its customers on Ex Works terms; that is, the customers will collect the filled capsules from your company's warehouse and export them.

Under such arrangement, there are two supplies of the goods namely: the supply from your company to non-resident company, and the supply from non-resident company to its customers. In chain sales or back to back sales, paragraph 167 of GSTR 2002/6 provides that each supply in the chain is examined individually.

In the first supply, your company being the supplier does not export the goods as the sale is made under Ex Works terms. Your company would be treated as having exported the goods for the purpose of item 2 if all the requirements in subsection 38-185(3) of the GST Act are satisfied.

Non-resident company, being the recipient in the first supply, will not export the goods. Instead, non-resident company's customers will export the goods on terms under which the second supply is made. Therefore, your company will not be treated as having exported the goods in the first supply. The supply will not be GST-free under item 2.

In the second supply, non-resident company being the supplier would be treated as having exported the goods for the purpose of item 2 if all the requirements in subsection 38-185(3) of the GST Act are satisfied.