ATO ID 2002/530: GST and receipt of consideration for the export of wool
Date of decision: 21 January 2001
Business line: Indirect Tax

Issue
Is the entity, a wool exporter, receiving consideration for its supply of wool on the day that it receives a conditional letter of credit from the purchaser, for the purposes of determining the commencement of the 60 days referred to in item 1 in the table in subsection 38-185(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Decision
No, the entity is not receiving consideration for its supply of wool on the day that it receives a conditional letter of credit from the purchaser, for the purposes of determining the commencement of the 60 days referred to in item 1 in the table in subsection 38-185(1) of the GST Act (Item 1). The entity receives consideration when it draws on the letter of credit.

Facts
The entity is a wool exporter. The entity enters into a sale agreement with an overseas buyer. This initial agreement specifies the approximate quantity and quality of wool that is to be sold and exported to the overseas buyer. The entity later provides the buyer with written advice of the exact details of the quantity and quality of the wool available and the total price. The overseas buyer then issues a letter of credit to the entity. A letter of credit is a letter written by one banker or merchant to another, requesting an extension of credit to the person named therein, up to a specified amount. The letter of credit issued to the entity, is subject to various conditions that do not permit the entity to draw on the letter of credit until the entity supplies the overseas buyer's financial institution with formal export documentation (such as an on board bill of lading, a signed commercial invoice for the wool and details of marine insurance of the vessel). The wool is then loaded for export and the entity prepares a commercial invoice. At this point, the entity also provides the overseas buyer's financial institution with the relevant export documentation and draws on the letter of credit. The wool is then delivered to the overseas buyer. The entity is registered for goods and services tax (GST).

Reasons for decision
Summary: Item 1 provides that a supply of goods is GST-free, if the supplier exports the goods from Australia before, or within 60 days (or such further time as the Commissioner allows) after: Therefore, it must be determined whether the entity is receiving consideration when it receives a letter of credit that is not able to be drawn upon until the entity provides the overseas buyer's financial institution with the relevant export documentation. A conditional letter of credit is merely proof given to the supplier that funds will be available for the anticipated purchase. These funds can only be accessed by the supplier when the conditions of the letter of credit are fulfilled. GSTR 2003/12 discusses when consideration is provided and received, for various payment instruments and other methods of payment. In relation to 'direct credit' arrangements (which are initiated by the recipient of the supply), paragraph 33 of GSTR 2003/12 states that consideration is provided on the date the the payment is authorised by the recipient, and consideration is received when the payment is credited to the supplier's account. As a letter of credit is sufficiently similar to a direct credit arrangement, the principle in paragraph 33 of GSTR 2003/12 may be equally applied. The letter of credit does not authorise payment to the entity until the entity fulfils certain requirements. Therefore, the entity did not receive consideration when it received the letter of credit, because payment was not authorised at that stage. The entity received consideration when it presented the overseas buyer's financial institution with the relevant export documentation, and was then allowed to draw on the letter of credit. Therefore, the entity is not receiving consideration for its supply of wool on the day that it receives a conditional letter of credit from the purchaser, for the purposes of determining the commencement of the 60 days referred to in Item 1. The entity receives consideration when it draws on the letter of credit.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 subsection 38-185(1) table item 1
Related public rulings and determinations: GSTR 2003/12
Related ATO interpretative decisions: ATO ID 2002/531
Subject references: Goods & services tax Exports Export of goods GST supplies & acquisitions GST consideration