Edited version of private advice

Authorisation Number: 1051872903775

Date of advice: 22 July 2021

Ruling

Subject: GST and supply of international sea transport that includes domestic leg

Question 1

Is the supply of the international sea transport that includes a domestic back load and delivery component made by Company A to Company B a GST-free supply under item 5 in the table in subsection 38-355(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Will the demurrage charged by Company A to Company B be subject to GST?

Answer

No. When Company A charges Demurrage to Company B, the demurrage will be consideration for a supply that is not connected with Australia and therefore it is outside the scope of the GST law.

Relevant facts

Company A (you) is a company based outside Australia and is registered for GST. You do not have a permanent establishment, branch or subsidiary in Australia. You supply shipping services internationally.

You entered a contract with Company B which is based outside Australia. Company B is registered for the Australian GST and does not have a physical presence in Australia.

Under the contract with Company B you supplied a single voyage to load and discharge freight according to the following schedule:

1.         Loading x metric tonnes of fuel and x metric tonnes of fuel in an overseas port, port X.

2.         Discharging x metric tonnes of fuel at another overseas port, port Y

3.         Loading x metric tonnes of Gasoil in overseas port Z.

4.         Discharging x of fuel loaded in port X and x metric tonnes of fuel loaded in port Z at port V, Australia.

5.         Loading x metric tonnes of various Gasoline products in port V Australia

6.         Discharging 5000 metric tonnes of the fuel that was loaded in port Ze and the x metric tonnes of Gasoline that was loaded in port V at port S Australia.

7.         Vessel returned home with no cargo.

The contract provides that in the event there is any delay in loading/unloading or for any relevant reason you reserve the right to charge Demurrage to Company B.

Demurrage is calculated based on the entire voyage and not on a particular port All calculations and invoicing for demurrage and its acceptance by Company B will be done outside Australia.

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 subsection 9-25(5)

A New Tax System (Goods and Services Tax) Act 1999 section 38-355

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Reasons for decision

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

Detailed reasoning

Summary

Your supply of the international sea transport which includes domestic leg of loading and discharging of fuel in Australia is GST-free under item 5 in the table in subsection 38-355(1) of the GST Act.

Question 1

Section 9-40 of the GST Act provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 of the GST Act provides 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 for GST.

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

From the information given you satisfy paragraphs (a) to (d) of the GST Act when supplying your sea transport services as:

a)    you make the supply for consideration; and

b)    the supply is made in the course of the business that you carry on overseas; and

c)    the supply of services is connected with Australia as it is done in Australia when you load and discharge the fuel at ports in Australia; and

d)    you are registered for GST.

The supply of the sea transport services is not input taxed.

GST-free supply

Relevant to the supply of transport services is item 5 in the table in subsection 38-355(1) of the GST Act (item 5).

Item 5 applies to the supply of international l transport of goods. Item 5 states the following:

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

Subsections 38-355(2) and 38-355(3) of the GST Act state the following:

2. Paragraphs (a) and (b) of item 5, and item 5A, in the table in subsection (1) do not apply to a supply to the extent that the thing supplied is done in the indirect tax zone, unless:

(a) the *recipient of the supply:

(i) is a *non-resident; and

(ii) is not in the indirect tax zone when the thing supplied is done in the indirect tax zone; or

(b) the supply is done by the supplier of the transport of the goods from or to the indirect tax zone (whichever is relevant).

3. Items 5 and 5A, paragraphs (b) to (d) of item 6, and paragraphs (b) and (c) of item 7, in the table in subsection (1) do not apply to a supply to the extent that:

a)    the supply is, or relates to, the *international transport of goods; and

b)    the supplier is a *redeliverer that is treated as the supplier of the goods under subsection 84-81(4); and

c)    the supply of the goods is a *taxable supply.

Paragraphs 61 to 59 in Goods and Services Tax Ruling GSTR 2003/4 provides guidance on international voyage for the purposes of item 5 and state the following:

61. For the purposes of item 5, the Commissioner accepts that a ship departing from Australia is on a voyage that has a destination outside Australia when the ship is undertaking an international voyage within the meaning of the Customs Act. This is the case even if the particular international voyage involves a journey between places in Australia. However, item 5 is not satisfied when the ship is undertaking a secondary voyage that is not an international voyage within the meaning of the Customs Act. Similarly, the requirement is not satisfied if the ship merely sails through international waters without 'laying' anchor at a place outside Australia.

Example 1 - international voyage that involves a journey between places in Australia.

62. A foreign registered cargo vessel travels on a set route from Singapore to Sydney, discharging overseas cargo on the way in Brisbane and then in Sydney. Foreign bound cargo is loaded in Sydney and the ship returns to Singapore. This entire voyage is an international voyage, even though part of the voyage involves a journey within Australia between Brisbane and Sydney.

63. On the same route the ship loads domestic cargo in Brisbane to be unloaded in Sydney. As the ship still carries overseas cargo to be unloaded in Sydney, the entire voyage retains its international character. The purpose of the international voyage is to unload and load cargo for international trade. While the Brisbane to Sydney leg has an additional purpose, it remains part of the international voyage.

64. Even if the ship discharges all of its overseas cargo in Brisbane and carries domestic cargo to Sydney, the voyage retains its international connection at all times, as the ship is required to travel to Sydney to load cargo for export to Singapore. The journey from Brisbane to Sydney is made as part of the international voyage.

Example 2 - separate voyage that is not an international voyage.

65. A ship from Singapore is bound for Sydney to load cargo for export. The ship does not carry cargo for discharge at an Australian port. The ship arrives at Brisbane and takes on a load of domestic cargo to be discharged in Sydney. The voyage from Brisbane to Sydney is disconnected from the ultimate international voyage, as it is not concerned with the collection or discharge of any international cargo. The transport of domestic cargo within Australia is a purpose separate from the purpose of the international voyage. As there is no international cargo on board, the Brisbane to Sydney leg is a separate voyage disconnected from and not part of the international voyage.

Example 3 - separate voyage that is not an international voyage.

66. On the same route, the Singaporean ship arrives in Brisbane and unloads some international cargo. It travels on to Newcastle and discharges the balance of its international cargo. Whilst in Newcastle it secures a contract for an urgent delivery of domestic cargo to Wollongong. The sole purpose of travelling between Newcastle and Wollongong is to transport domestic cargo. The ship travels from Wollongong to Sydney,and loads goods for export to Singapore. The ship then departs Australia. The journey from Newcastle to Wollongong is disconnected from the international voyage as the diversion is solely for a non-international purpose. This leg of the route is not an international voyage.

After considering the schedules of the sea voyage given to us, we consider that the single sea voyage always retains its international connection despite the domestic leg which involves the loading of fuel in port V and discharging it at port S. The purpose of this sea voyage under the schedules given is to load and unload fuel in overseas countries and Australia and therefore the ship is undertaking an international voyage.

Further based on the information given, subsections 38-355(2) and (3) of the GST Act do not apply to the supply of the international sea transport.

The supply of the international sea transport which includes domestic leg of loading and discharging of fuel is therefore GST-free under item 5.

Question 2

Summary

When you charge Company B for demurrage, the demmurage will be consideration for your supply that is not connected with Australia and therefore it is outside the scope of the GST law.

Detailed reasoning

Characterisation of supply

Before we consider the GST status of the charge of Demurrage, we need to determine the character of the supply.

The Mining and Energy Industry Partnership issue register provides guidance on GST and Demurrage (available at Demurrage: Contract of sale | Australian Taxation Office (ato.gov.au) and states the following:

What is demurrage?

Demurrage is the rate or amount payable to a shipowner by a charterer for failure to load or discharge a ship within the time allowed.

GST on demurrage

Where an Australian supplier makes payment to an overseas customer for demurrage under a free on board FOB contract, the overseas entity surrenders the right to recover money from the Australian supplier. The surrender of the right (a supply) happens upon acceptance of the consideration (the penalty for time delay).

The supply (of the surrender of the right by the offshore entity) would not be connected with Australia under paragraph 9-25(5)(a) of the GST Act, if the acceptance takes place outside Australia (which is usually the case). On the basis that the supplier does not make the supply through a permanent establishment in Australia, the supply would not be connected with Australia under paragraph 9-25(5)(b) of the GST Act.

In this case the demurrage that you will charge to Company B will be consideration for a supply of a surrender of right.

Now we will consider the GST status of this supply.

GST status of the supply

A supply is a taxable supply of the GST Act where all the paragraphs in section 9-5 of the GST Act are satisfied and the supply is neither GST-free nor input taxed.

From the information given you will satisfy paragraphs (a), (b) and (d) of section 9-5 of the GST Act as:

• You receive consideration for the supply (demurrage fee); and.
• The supply is made in the course of the overseas business you carry on; and
• You are registered for GST.

We will now consider paragraph 9-5(c) of the GST Act, that is if your supply is connected with Australia.

Supply connected with Australia

A supply of anything other than goods or real property (for example services) is connected with Australia under subsection 9-25(5) of the GST Act if one of the following is satisfied:

a)    the supply is done in Australia; or

b)    the supplier makes the supply through a business that the supplier carries on in Australia; or

c)    all of the following apply:

                      i.        Neither paragraph (a) nor (b) applies in respect of the thing;

                     ii.        The thing is a right or option to acquire another thing;

                    iii.        The supply of the other thing would be connected with Australia; or

d)    the recipient of the supply is an Australian consumer.

Goods and Services Tax Ruling GSTR 2019/1 provides guidance on when a supply of anything other than goods or real property is connected with Australia under subsection 9-25(5) of the GST Act and is available at https://www.ato.gov.au/law/view/document?docid=GST/GSTR20191/NAT/ATO/00001

According to Paragraph 49 in GSTR 2019/1, a supply can be the creation, grant, transfer, assignment or surrender of a right. In these cases, the 'thing' being supplied is done where the right is created in that other person, granted, transferred or assigned to that other person or surrendered respectively.

From the information given, your invoicing for demurrage and its acceptance by Company B will be done outside Australia. In this instance your supply of the surrender of the right is not connected with Australia since paragraphs (a) to (d) in subsection 9-25(5) of the GST Act are not satisfied.

Your supply is not a taxable supply as paragraph 9-5 (c) of the GST Act is not satisfied and therefore, it is outside the scope of the GST law.