ATO ID 2012/34: Intra-group supply of services that is partly performed after the recipient leaves the GST group
Date of decision: 29 March 2012
Business line: Indirect Tax

Issue
Does subsection 48-40(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply to a supply of services made from Entity A to Entity B, to the extent that the services are performed at a time when they are in the same GST group, despite the fact that some part of the services are performed when Entity B is no longer a member of the GST group?

Decision
Yes, subsection 48-40(2) of the GST Act 1999 applies to Entity A's supply of services to Entity B such that it is not a taxable supply, but only to the extent that the supply was performed at a time when both entities were members of the GST group. To the extent that the supply is performed after Entity B leaves the GST group it will be a taxable supply under section 9-5 of the GST Act 1999.

Facts
In tax period 1 Entity A and Entity B are both members of the same GST group. In tax period 1 Entity A enters into an agreement to make a supply of services to Entity B. The services will be performed over the course of tax period 1 and tax period 2. At the end of tax period 1, Entity B ceases to be a member of the GST Group. As previously agreed Entity A continues to supply the services to Entity B. In tax period 2 the supply of services is completed. But for subsection 48-40(2) of the GST Act 1999 the supply of services would be a taxable supply. Subparagraphs 48-40(2)(a)(i) of the GST Act 1999 and 48-40(2)(a)(ii) of the GST Act 1999 do not apply to the supply of services.

Reasons for decision
Summary: All legislative references are to the GST Act 1999. Division 48 enables two or more entities to form a GST group provided that certain requirements are satisfied. Section 48-1 indicates that the purpose of Division 48 is to allow one member of the GST group to deal with all GST liabilities and entitlements, and (in most cases) exclude intra-group transactions from the GST. Relevantly, subsection 48-40(2) provides that in certain circumstances intra-group supplies are treated as if they are not taxable supplies. Paragraph 48-40(2)(a) states that: To determine if a potential intra-group supply is to be treated as if it were not a taxable supply the key issue is the interpretation given to the phrase 'supply that an entity makes to another member of the same GST group' in paragraph 48-40(2)(a). Hence it is apparent that both entities need to be members of the relevant GST group at the relevant time - being the time of the supply - for the provision to take effect. It follows that when one of the relevant members either leaves or joins the GST group, there is a need to determine when the supply was made relative to the membership of the GST group changing. If the supply was only performed and therefore made when both Entity A and B were members of the GST group, subsection 48-40(2) would apply and the supply would not be treated as a taxable supply. In this instance the supply is a service partly performed in that time period, but continues to be performed after Entity B ceases to be a member of the GST group. The issue is therefore whether the phrase 'A supply that an entity makes to another member of the same GST group' only applies to a supply of services 'to the extent' that the supply is made when both entities are members. At the time immediately following Entity B leaving the GST group, Entity A is still making a supply by continuing to perform the service, however from this point in time there is no longer 'a supply that an entity makes to another member', because Entity B is not 'another member' for the purposes of paragraph 48-40(2)(a). As such, a reasonable interpretation is that to the extent that the supply of services is performed after the recipient ceases to be a member, paragraph 48-40(2)(a) no longer has application to that part of the supply. Paragraph 48-40(2)(a) can be interpreted in this way, despite the absence of the words 'to the extent' in the provision. This is consistent with the approach taken in determining the extent to which a supply is connected with Australia under section 9-25, and therefore the extent to which a supply is a taxable supply under section 9-5. The subsections that make up section 9-25 do not contain the term 'extent to' or another phrase that explicitly contemplates apportioning a supply into parts for the purposes of determining if a part of the supply is connected with Australia. The Commissioner's view, expressed in paragraph 226 of GSTR 2000/31, is that section 9-25 is to be interpreted to allow apportionment of the supply so that '...the supply is connected with Australia to the extent that that part of the supply is connected with Australia'. More specifically paragraph 9-25(5)(b) which is applicable to a supply of services uses similar terminology to paragraph 48-40(2)(a) as it refers to 'the supplier makes the supply...'. The Commissioner's view on paragraph 9-25(5)(b), expressed in paragraph 94 of GSTR 2000/31 is that apportionment on an extent to basis is contemplated under this particular paragraph. This interpretation of section 9-25 is based on the intent of the GST legislation that supplies not being connected with Australia should be outside the GST system (paragraph 226 of GSTR 2000/31). Similarly to the extent that an entity makes supplies to another group member they should benefit from the concession provided in paragraph 48-40(2)(a), as it is consistent with the stated objectives in section 48-1 to '(... in most cases) exclude intra-group transactions from the GST'. The exceptions referred to by the phrase 'in most cases' are those set out in subparagraphs 48-40(2)(a)(i) & 48-40(2)(a)(ii). The supply of services in this case does not fall into one of those exceptions. Therefore, subsection 48-40(2) applies to Entity A's supply of services to Entity B such that it is not a taxable supply, but only to the extent that the supply of services was performed at a time when both entities were members of the GST group. To the extent that the supply of services was performed after the time at which Entity B ceases to be a member of the GST group, the services are a taxable supply made by Entity A, because paragraph 48-40(2)(a) does not apply to this part of the supply.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 section 9-25 paragraph 9-25(5)(b) Division 48 section 48-1 subsection 48-40(2) paragraph 48-40(2)(a) subparagraph 48-40(2)(a)(i) subparagraph 48-40(2)(a)(ii)
Related public rulings and determinations: Goods and Service Tax Ruling GSTR 2000/31
Related ATO interpretative decisions: ATO ID 2012/33
Subject references: Goods and services tax GST special rules GST groups Taxable supply