Private ruling: GST and apportioning consideration - supply that has taxable/non-taxable parts
Published: September 2013

Ruling: Q1: Is the apportionment methodology set out below a fair and reasonable method to apportion the milestone payments between taxable and non-taxable components of the supply so as to allow entity A (A) to correctly account for GST? | A1: Yes, provided the percentage weighting allocated to the supplies that are not connected with Australia correctly reflects the value of the non-taxable portion of the total supplies made by A to entity B (B).

Relevant facts and circumstances: A is registered for GST. A, is a non-resident entity based overseas. A entered into a contract (Contract) with B for engineering, procurement and construction of a specified plant. The contract price is approximately $X exclusive of GST, import taxes and duties. The contract price for the construction of the plant is to be paid in a number of instalments when certain milestones are met. Previous ruling request A applied for a private ruling on a specified date. We issued a private ruling to A on a specified date (previous ruling) in which we ruled that: · GST is applicable to the milestone payments that have been determined by the parties to the Contract as relating to onshore supplies · GST is not applicable to milestone payments that have been determined by the parties to the Contract as relating to offshore supplies, and · Division 156 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) would apply to the milestone progress payments that relate to onshore supplies. The previous ruling stated that the following supplies are connected with Australia and therefore taxable supplies: · Supplies of services or things other than goods (materials) or real property which are done in Australia · Supplies of goods wholly within Australia (that is supplies of materials procured from within Australia), and · Supplies of materials procured from offshore for the plant where A installs or assembles the materials in Australia. Further, the previous ruling provided that the following supplies by A are not connected with Australia and are non-taxable supplies: · A's specified services as these services are performed overseas rather than in Australia or through an enterprise that A carries on in Australia, and · A's overseas supplies of materials to B, when shipped on FCA terms, if A neither imports the goods nor installs or assembles the goods in Australia. The previous ruling accepted that A's overall supply under the Contract is within the ambit of subsection 96-5(1) of the GST Act as some supplies by A are connected with Australia and other supplies are not. Therefore, subsection 96-5(2) of the GST Act would apply to treat the supplies listed above that are connected with Australia as if they were a separate supply that is connected with Australia and subject to GST. Subsection 96-5(3) of the GST Act would treat the supplies listed above that are not connected with Australia as if they were a separate supply that is not connected with Australia. The previous ruling also provided that as the elements of section 156-5 of the GST Act are satisfied, the GST payable will be attributable in accordance with section 29-5 of the GST Act as if each progressive component of the supply was a separate supply. Further the ruling stated that each milestone payment could reflect payment for both onshore and offshore supplies. The previous ruling request provided an outline of the contract and some excerpts. A copy of the Contract has not been provided to the Australian Taxation Office (ATO). Current private ruling request In the current ruling request it is submitted that as each milestone payment could reflect both onshore and offshore supplies (and thus both taxable and non-taxable components), A has determined the following methodology to be a reasonable and practical methodology to apportion the GST across each milestone payment. Attached to the ruling request is Appendix C. The table in Appendix C shows that A has determined the supply and module value of all materials procured from offshore that will be installed and assembled in Australia to be $X. A has applied a percentage weighting to the supplies that it makes under the Contract as set out in the table in Appendix C. The ruling request does not provide details of how those percentages were calculated. According to the table in Appendix C, A has classified the supplies that it makes under the Contract as: · Specified services - offshore supplies and not connected with Australia as these services are performed overseas rather than in Australia or through an enterprise that A carries on in Australia. · Manufacturing - refers to the supplies by A of the materials that are installed and assembled by A in Australia as part of the plant. Part of the manufacturing of the materials is completed offshore and part of the supply is completed onshore. · Yard construction - refers to supplies of assembly work done on the materials at the yard. · Site preparation and site construction are supplies of services provided by A in Australia. The table shows the weighting allocated to each component of the supply. The weighting allocated to the specified services is X% of the total supply. It is proposed that the percentage of the consideration that relates to these supplies are applied to the milestone payments based on whether the supplies are onshore or offshore. The proportion of the milestone payments that relate to offshore materials that will be installed and assembled in Australia (and thus subject to GST) will be determined by the percentage completion of the offshore materials. It is submitted that based on the manufacturing progress reports, the value of the offshore materials that have been constructed to date (and will be assembled and installed in Australia) is determined by having regard to the manufacturing progress of the materials as well as the assembly works that occur at the site by percentage of completion (manufacturing and yard construction). The ruling request provides that for example, in Appendix C, A has determined the overall percentage of completion of the offshore materials to date to be Y%. The value of the offshore materials completed to date is then reduced by the value of the specified services completed to date as the value of the specified services is fully embedded in the value of the offshore materials completed to date. As these services are not connected with Australia, the supplies of the specified services should not be subject to GST. In respect of the proposed apportionment methodology, the proportion of the milestone payment that relates to the specified services will not be subject to GST. The ruling request provides that the value of the offshore materials completed to date (less the value of the specified services completed to date) is the GST-exclusive value of the supply of the goods that will be installed and assembled in Australia and to which GST will apply. The value of any onshore manufacturing work completed to date will also be subject to GST as the supply is connected with Australia. The ruling request provides that if the Commissioner rules that the apportionment methodology set out above is fair and reasonable, going forward the GST on the offshore materials to be assembled and installed in Australia for the month will be calculated by determining the percentage completion that occurred during that month. Further clarification was provided in relation to the proposed apportionment method as follows: · All the supplies made by A to B are connected with Australia other than the specified services. That is, offshore materials installed/assembled in Australia, yard construction, site preparation and site construction are connected with Australia. · A does not supply any goods to B that are neither imported nor installed or assembled by A in Australia. · The specified service is a subset of the manufacturing component which is a subset of the total project. · The specified services have been estimated by A as X% of the total project (as shown in the table in Appendix C). The X% weighting is 'realistic'. A has not provided details of how the X% was calculated. · The apportionment difficulty is incorporating the specified services into the milestone payments. The X% is not applied to the milestone payments equally because the specified services represent upfront services performed early in the project - therefore it is a greater proportion of the earlier payments (but will be X% of the total). The early milestone payments will have a higher non-taxable component and the later payments will have a lower non-taxable component. The calculations/allocation of the specified services to each milestone is determined by A. · Although a specified percentage of the manufacturing work is completed, a higher percentage of the specified services are complete. That is a larger percentage of the X% non-taxable component has already been removed/incorporated into the milestone payments. A has confirmed that the specified services is the only component that is offshore and not subject to GST. Correcting GST mistakes It is also submitted the milestone payments invoiced to date by A in regards to the supplies of materials to be installed and assembled in Australia have not been treated as taxable supplies and subject to GST. Once the Commissioner confirms that the apportionment methodology proposed by A is a fair and reasonable methodology, A will liaise with the ATO to amend its business activity statements to correct the GST treatment of the milestone payments.

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 29-5 | A New Tax System (Goods and Services Tax) Act 1999 section 96-5 | A New Tax System (Goods and Services Tax) Act 1999 section 96-10 | A New Tax System (Goods and Services Tax) Act 1999 section 156-5

Reasons for decision: Summary: The apportionment methodology proposed by A is considered to be a fair and reasonable method to apportion the milestone payments between taxable and non-taxable components of the supply provided the X% weighting allocated to supplies that are not connected with Australia correctly reflects the value of the non-taxable portion of the total supplies made by A to B. | Detailed Reasoning - Detailed reasoning: The previous rulings provided that A's specified services are not connected with Australia as these services are performed overseas rather than in Australia or through an enterprise that A carries on in Australia. The previous ruling accepted that A's overall supply under the Contract is within the ambit of subsection 96-5(1) of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) as some supplies by A are connected with Australia and other supplies are not. Therefore, subsection 96-5(2) of the GST Act would apply to treat the supplies that are connected with Australia as if they were a separate supply that is connected with Australia and subject to GST. Subsection 96-5(3) of the GST Act would treat the supplies listed above that are not connected with Australia as if they were a separate supply that is not connected with Australia. Section 96-10 of the GST Act provides how to work out the value of the part of the supply that is connected with Australia. The value of the part of the supply that is connected with Australia is the proportion of the whole supply that is connected with Australia multiplied by the value of the whole supply. Section 96-10 of the GST Act states: | Detailed Reasoning - 96-10 The value of the taxable components of supplies that are only partly connected with Australia: If a supply (the actual supply ): (a) is, because of section 96-5, to be treated as separate supplies; and (b) the part of the actual supply that is *connected with Australia is a *taxable supply, or is partly a *taxable supply and partly a supply that is *GST-free or *input taxed; the value of that part of the actual supply is worked out as follows: (c) work out the value of the actual supply, under section 9-75, as if it were solely a taxable supply; and (d) work out the proportion of that value of the actual supply that the taxable supply represents; and (e) multiply that value by the proportion in paragraph (d). (2) If that part of the actual supply is partly a *taxable supply and partly a supply that is *GST-free or *input taxed, this section does not affect the operation of section 9-80 in working out the value of so much of that part of the actual supply as is a taxable supply. (3) This section has effect despite section 9-75 (which is about the value of taxable supplies). To work out the proportion of the value of the actual supply that the taxable supply represents a conclusion as to the value of the taxable supply has to be made. Goods and Services Tax Ruling GSTR 2001/8 (GSTR 2001/8) is about apportioning the consideration for a supply that includes taxable and non-taxable parts. GSTR 2001/8 provides that the value of the taxable part of the supply has to be determined by having regard to the facts and circumstances and taking a particular commonsense approach. Paragraphs 92 to 95 of GSTR 2001/8 state: | Detailed Reasoning - Reasonable methods of apportionment: 92. Where, as in the case of supplies covered by section 9-75, there is no legislative provision specifying a basis for apportionment, you may use any reasonable method to apportion consideration to the separately identifiable taxable part of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances and be undertaken as a matter of practical commonsense. 93. What is a reasonable method of apportioning the consideration for a mixed supply depends on the circumstances of each case. In some cases, there will be only one reasonable method you may use. 94. Depending on your circumstances, you may use a direct or indirect method when apportioning the consideration for a mixed supply. 95. The method you choose should be based on a consideration of all the circumstances and not because it gives you a particular result. … A has determined that the value of supplies that are not connected with Australia is X% of the total value of the contract price. Further it was submitted for A, that the X% is not applied to the milestone payments equally because the non-taxable part is a greater portion of the earlier milestone payments. That is, the early milestone payments will have a higher non-taxable part and the later milestone payments will have a lower non-taxable part. We consider that the apportionment method that A proposes to use to determine the price of the taxable and non-taxable part of each milestone payment is fair and reasonable provided the X% weighting allocated to supplies that are not connected with Australia correctly reflects the value of the non-taxable part of the total supply.