Edited version of private advice

Authorisation Number: 1051910964627

Date of advice: 5 November 2021

Ruling

Subject: GST and the supply of Infrastructure services

Questions

1.    Is an Australian entity (entity 1) making a GST‐free supply to another Australian entity based in Australia (entity 2) under item 1 in the table in subsection 38‐190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it supplies services under an infrastructure contract?

2.    Is the supply of goods by entity 1 to entity 2 under the infrastructure contract a taxable supply under section 9‐5 of the GST Act?

Decision

The supply made by entity 1 to entity 2 under the contract is a single supply of an infrastructure supply of services. Accordingly, it is not necessary to analyse the GST treatment of supply of goods and services separately. The supply made by entity 1 to entity 2 is GST-free (including those services performed in Australia to the extent they relate to goods or real property situated outside the Indirect Tax Zone).

Relevant facts and circumstances

Entity 1 is an Australian entity registered for GST.

Entity 1 and entity 2 have entered into an infrastructure contract (contract)

Under the contract entity 1 is required to supply both goods and services in relation to a project that is outside the Indirect Tax Zone.

Entity 1 undertakes some of the services in Australia.

Goods supplied as part of the contract will be affixed to or incorporated into the construction site or a building at the site outside the Indirect Tax Zone

Payment for the supply made by entity 1 is a fixed amount payable monthly by entity 2.

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

A taxable supply is defined in section 9-5 of the GST Act as follows:

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.

(terms marked with asterisks (*) are defined in section 195-1 of the GST Act)

The following is an analysis of these requirements of section 9-5 of the GST Act.

9-5(a) - supply for consideration

•         Supply

A supply is defined in subsection 9-10(1) of the GST Act as any form of supply whatsoever.

In regard to building and construction projects the Commissioner states the following in Goods and Services Tax Ruling GSTR 2000/18 Goods and services tax: construction and building services which span 1 July 2000.

10.  In most circumstances a supply of construction and building services is entered into to provide a given result. We consider that, for the purposes of this Ruling, this kind of supply is a supply of a service only. Any materials used in producing the given result are ancillary or integral to the provision of the service (refer paragraph 19).

...

16.  In some circumstances a supplier may enter into an agreement to design and construct. Where these services are supplied under the same agreement then the design component is considered to be part of the construction and building service.

Single supply

19.  Where you are engaged to produce a given result, we consider the substance of the agreement is to perform a service. Any materials used in producing the service are ancillary or integral to the work that must be performed to provide the finished job. In such circumstances, you are making a single supply, being a supply of a service.

20.  However, for these materials to be characterised as being used, they must be affixed to or incorporated into the construction site or building on which you are performing your service.

Applying this view in GSTR 2000/18, to the infrastructure contract under which entity 1 is required to deliver a 'result' to entity 2, it is our view that the supply made by entity 1 is a single supply of services. The supply of goods included in the contract is ancillary or incidental to the supply of services. The supply made by entity 1 to entity 2 is a composite supply of services.

•         Consideration

The consideration is the fixed amount payable by the entity 2 to entity 1.

9-5(b) - the supply is made in the course of an enterprise

This requirement is satisfied as entity 1 makes the supply in the course of their enterprise.

9-5(c) - connected with the Indirect Tax Zone

Section 9-25 of the GST Act defines when a supply is connected with the Indirect Tax Zone.

In relation to services subsection 9-25(5) states the following:

A supply of anything other than goods or * real property is connected with the indirect tax zone if:

(a) the thing is done in the indirect tax zone; or

(b) the supplier makes the supply through an * enterprise that the supplier * carries on in the indirect tax zone; 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 the indirect tax zone; or

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

Example:

A holiday package for a trip to Queensland that is supplied by a travel operator in Japan will be connected with the indirect tax zone under paragraph (5)(c).

Note:

A supply that is connected with the indirect tax zone under this subsection might be GST-free if it is consumed outside the indirect tax zone: see section 38-190. For more rules about supplies that are GST-free, see Division 38.

Given that entity 1 makes the relevant supply under the contract through their enterprise carried on in Australia, the supply is connected with the Indirect Tax Zone.

9-5(d) - registered or required to be registered for GST

Entity 1 is registered for GST

GST-free or input taxed

•         Input taxed

The supply made by entity 1 to entity 2 is not input taxed under any of the provisions of the GST Act.

•         GST-free

It has been contended that the works undertaken by entity 1 outside the Indirect Tax Zone and in Australia fall under item 1 in the table in subsection 38-190(1) of the GST Act which provides that a supply that is directly connected to goods or real property outside the indirect tax zone is GST-free.

Work performed by entity 1 outside the Indirect Tax Zone

It is our view that work physically performed outside the Indirect Tax Zone is directly connected with goods or real property situated outside the Indirect Tax Zone.

Work performed by entity 1 in Australia

Goods and Services Tax Ruling GSTR 2003/7 Goods and services tax: what do the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods' mean for the purposes of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999? provides guidance in relation to this issue.

Relevantly, GSTR 2003/7 states the following:

31.  In determining whether there is a direct connection between a supply and particular goods or real property, the location of the recipient of a supply is not relevant. Rather, the issue is one of determining whether the relationship between the supply and the goods or the real property is sufficiently close to be directly connected .......

Supplies of things directly connected with goods or real property

32.  As explained above, we consider that the expression 'directly connected with' contemplates a very close link or association between the supply and particular goods or real property.

33.  We consider that such a close link or association between the supply and particular goods or real property exists where, for example, the direct object of the supply is the goods or real property in the sense that:

•       the supply changes or affects the goods or real property in a physical way; or

•       there is a physical interaction with the goods or real property but without changing the goods or real property; or

•       the supply establishes the quantity, size, other physical attributes or the value of the goods or real property; or

•       the supply affects (or its purpose is to affect) or protects the nature or value (including indemnity against loss) of the goods or real property; or

•       the supply affects, or is proposed to affect, the ownership of the goods or real property including any interest in, or right in or over goods or real property.

34.  This is not an exhaustive list of the situations where, in our view, a direct connection exists. There may be some supplies that are directly connected with goods or real property that do not readily fit into one of these categories.

The supply affects (or its purpose is to affect) or protects the nature or value (including indemnity against loss) of the goods or real property

41.  Supplies that affect (or its purpose is to affect) or protect the nature or value of particular goods or real property may depending on what the supply is for, include management services, advisory, consulting or other professional services that commonly do not involve physically dealing with goods or real property.

42.  Specific examples of supplies of this kind include:

•         a supply of architectural or design engineering services for particular real property;

•         town planning consultancy services in relation to rezoning, subdividing or planning permission for a particular site;

•         a supply of insurance of goods or real property; and

•         services of managing particular real property where the manager takes overall responsibility for managing the property on behalf of the landlord including a range of functions such as rent collection, ensuring that the property is properly maintained or secured (and obtaining tenants or arranging repairs if ancillary to the supply of property management).

Each of these supplies is directly connected with goods or real property.

Further, at paragraphs 163-182 of GSTR 2003/7 a list of examples of what are and what are not considered to be supplies directly connected with goods or real property are provided.

Accordingly, to the extent the work performed by entity 1 in Australia come within the explanation and examples provided by the Commissioner in GSTR 20037, such services are considered to be directly connected with goods or real property situated outside the Indirect Tax Zone.

Any services that are performed in Australia that are not directly connected with goods or real property situated outside the Indirect Tax Zone are not GST-free and as such are taxable supplies. Where any of the services performed are not considered to be GST-free, entity 1 will be required to make an assessment of the extent of these services and pay GST that is attributable to this portion. GSTR 2003/7 provides an explanation about apportioning the consideration where a supply is partly GST-free and partly taxable at paragraphs 154-155.