GST Part 2

Readings: John McLaren (ed), Advanced Taxation Law (Thomson Reuters,

2015) Chapter 28
Miscellaneous Taxation Ruling MT 2006/1
Please, note any further reading instructions set out in the individual
presentation slides.

1
S13.5 of GSTA

(1) You make ataxable importationif:

(a) goods areimported; and
(b) you enter the goods for home consumption (within the meaning of the
Customs Act 1901).

(2) However, the importation is not a taxable importation to the extent that it is a * non-
taxable importation.
Note: There is no registration requirement for taxable importations, and the importer
need not be carrying on an enterprise.

(3) However, an importation of * money is not an importation of goods into the indirect tax
zone.

2
S 13.10 of GSTA

An importation is anon-taxableimportationif:
(a) it is a non-taxable importation under
Part3-2; or
(b) it would have been a supply that was *
GST-free or * input taxed if it had been a supply

3
S 15.5 of GSTA

You make acreditable importationif:

(a) you import goods solely or partly for a
* creditable purpose; and
(b) the importation is a * taxable
importation; and
(c) you are * registered, or * required to
be registered.

4
C) Third requirement connection with
Australia s 9-25
(1) A supply of goods isconnected withthe indirect tax zoneif the goods are
delivered, or made available, in the indirect tax zone to the recipient of the supply.

(2) A supply of goods that involves the goods being removed from the indirect tax
zone isconnected withthe indirect tax zone.

(3) A supply of goods that involves the goods being brought to the indirect tax zone
isconnected withthe indirect tax zoneif the supplier imports, installs or
assembles them into/ in the indirect tax zone.

(4) A supply of * real property isconnected withthe indirect tax zoneif the
real property, or the land to which the real property relates, is in the indirect tax
zone.
5
Example 6 - Goods delivered in
Australia
121. Richard, a computer wholesaler in Perth, sells computers to JB
Co, a computer retailer in Adelaide. The computers are delivered to
the premises of JB Co in Adelaide. This supply of goods is connected
with Australia as the computers (goods) are delivered to JB in
Australia.
122. Subsection 9-25(1) does not apply to goods where the supply is a
supply of goodsfrom Australiaorto Australia. Supplies of this kind are
covered by subsections 9-25(2) and (3) respectively (refer paragraphs
126 and 131 respectively).
123. However, this does not mean that the goods, the subject of a
supply wholly within Australia, have to be domestic goods only. The
goods being supplied may be domestic or imported goods. This is
illustrated in the example below.
6
Example 7 - Supplies of imported goods wholly within
Australia

124. Joe goes to a car dealer in Perth and, after driving a

demonstration model, agrees to purchase an Italian manufactured car
of a particular model. The car dealer does not have that model car in
stock. The car dealer orders and purchases the car from the Italian
manufacturer and imports the car into Australia. When the car dealer
receives the imported car, Joe is contacted and told that the car is
ready for delivery.
125. Even though the car is imported by the car dealer, the supply
from the car dealer to Joe is wholly within Australia. This supply is
connected with Australia as the car is delivered to Joe in Australia.
126. This example illustrates that although the goods are supplied
wholly within Australia, the goods themselves may be imported goods.

7
Supply of goods - from Australia
133. A supply of goods is connected with Australia if
that supply involves the goods being removed from
Australia. 'Removed' in subsection 9-25(2) has its
ordinary meaning. 'Remove' means to move from a
place, to move or shift to another place, or to displace
from a position.Goods being removed from Australia
means the goods are physically taken out of Australia.
134. Subsection 9-25(2) is about a supply that involves
the removal of the goods from Australia. The subsection
does not apply where removal is not part of the supply.

8
Example 10 - Goods removed from
Australia
135. BrisCo, a Brisbane company, sells souvenirs to
overseas retailers. The souvenirs are to be shipped to
their overseas purchasers. The souvenirs are removed
from Australia by export. The supply is connected with
Australia.
137. A supply of goods by way of lease may involve the
goods being removed from Australia. This is illustrated
in the following example.

9
Example 11 - Goods supplied by
way of lease
138. Aust Co is an Australian biscuit manufacturer. It
leases specialised manufacturing equipment to its
subsidiary in New Zealand. The equipment is
manufactured in Australia and exported to New
Zealand. The supply of those goods by way of lease to
the New Zealand subsidiary involves the goods being
removed from Australia and, therefore, the supply is
connected with Australia under subsection 9-25(2).
As the goods are used outside Australia, the supply of
those goods is GST-free under section 38-187.

10
Example 12 - Goods imported into Australia by supplier

140. US Co, a US company sells a tractor to Tract Co, an Australian

earthmoving operator, on a DDP basis. US Co has to import the
tractor into Australia. The supply made by US Co to Tract Co is a
supply connected with Australia as the tractor (goods) is brought to
Australia and it is US Co (the supplier) that imports it into Australia.
141. If a supply of goods involves the goods being delivered, or
made available, to the recipient outside of Australia and the
recipient subsequently imports the goods into Australia, the supply
is not connected with Australia. The supply is not a taxable supply
under section 9-5. However, the importation is a taxable
importation and the recipient is liable to pay GST on the taxable
importation

11
Example 13 - Goods imported into Australia by recipient

142. If in Example 12 US Co sells the tractor to Tract Co

on an FOBbasis, the tractor is imported into Australia
by the recipient and the supply of the tractor is not
connected with Australia under paragraph 9-25(3)(a). As
the tractor is not delivered, or made available, in
Australia to Tract Co, the supply of the tractor is not
connected with Australia under subsection 9-25(1).
However, the supply is a taxable importation made by
Tract Co and Tract Co is liable to pay GST on the taxable
importation.

12
Example 14 - Goods imported into Australia by recipient
through a permanent establishment

143. Aust Cork Ltd, an Australian resident cork importer, has a

permanent establishment in Portugal and contracts for the
supply of cork from a Portuguese cork supplier. The cork is
delivered to the permanent establishment of Aust Cork Ltd in
Portugal and Aust Cork Ltd then imports the cork into Australia.
144. The supply of cork from the Portuguese cork supplier to Aust
Cork Ltd is not connected with Australia because the
arrangement between them does not involve the cork being
brought to Australia and the supplier is not the party which
imports the goods into Australia. However, the importation of the
cork into Australia by Aust Cork Ltd is a taxable importation. [44]

13
Example 15 - Goods imported into Australia by recipient
and assembled in Australia by supplier

146. Aero Lite , an Australian resident, decides to buy a light aircraft

manufactured by Flight UK in the UK. The light aircraft parts need to be
imported into, and assembled in, Australia. Flight UK agrees to supply
and assemble the aircraft in Australia on the basis that Aero Lite
arranges for the importation of the aircraft parts. Aero Lite imports the
goods on a FOB basis.[45]

147. The supply of the aircraft is connected with Australia because the
supply involves the aircraft parts being brought to Australia and the
supplier assembling the aircraft in Australia. This is so regardless of the
fact that it is the recipient who imports the parts of the aircraft into
Australia.
14
Example 15 cont
Flight UK makes a taxable supply to Aero Lite and GST is
payable by Flight UK on the taxable supply made to
Aero Lite. The importation of the parts of the aircraft
into Australia by Aero Lite is a taxable importation and
Aero Lite is liable to pay GST on the importation.[46]Aero
Lite is entitled to an input tax credit for the GST payable
on the importation provided the importation is a
creditable importation.[47]

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Example 19 - taxable supply/taxable importation
157. Tracey operates a business in New Zealand. Tracey regularly imports things into Australia.
Bruce operates a business in Australia. Tracey and Bruce are both registered. Tracey sells some
goods to Bruce which he is going to use in his business in Australia. The sale is done under a
supply and install contract, so Tracey imports the goods and also installs them at Bruce's
factory.
158. The importation of the goods by Tracey is a taxable importation. GST is charged on the
importation, but she is entitled to an input tax credit for the importation because the
importation is also a creditable importation. [56]Under paragraph 9-25(3)(a) the supply of the
goods is connected with Australia and is a taxable supply. Bruce is entitled to an input tax credit
for the creditable acquisition of the goods.
159. Bruce pays Tracey a GST inclusive price of $110,000 under the contract for the supply and
installation of the goods. This is the consideration for the supply. GST on a supply is charged in
relation to the consideration for the supply. GST on an importation is charged on the customs
value of the goods, plus the transport and insurance costs, plus the customs duty. Here, the
customs value plus the transport and insurance costs plus the duty adds up to $70,000.
160. Tracey pays $7,000 GST on the importation (10% of $70,000) and is entitled to an input
tax credit of $7,000 on the importation, netting out to zero GST.
161. Tracey also pays $10,000 GST (1/11 of the price of $110,000) on the supply. Bruce is
entitled to an input tax credit of $10,000 on the acquisition.
162. This means that Tracey pays $7,000 GST on the importation, which she gets back as an
input tax credit and accounts for $10,000 GST for the supply, which Bruce gets back as an input
tax credit.
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Supplies connected with
Australia
real property is defined in s195-1
For the purposes of para(b) of Section9-25(5), s9-
25(6) provides that an enterprise is carried on in
Australia by reference to the definition of permanent
establishment in the ITAA 1936 but without the
exclusions to that definition applying.

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Example 22A - Contractual right
exercisable over or in relation to
land
167A. A non-resident tour operator acquires Australian
holiday packages from Australian tour operators and
supplies those tour packages to non-resident
individuals. The supply of the tour package by the non-
resident tour operator includes a supply of rights to
accommodation in Australia. The supply of rights to
accommodation in Australia is a supply of a contractual
right exercisable over or in relation to land in Australia
and is therefore a supply of real property that is
connected with Australia.
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Example 39A - Supply of rights or options to things
connected with Australia

225B. Cuisineworld is a non-resident entity in the United Kingdom (UK) that specialises in
supplying cooking classes at renowned restaurants around the world, along with
accommodation and bus tours. Cuisineworld has no business operations outside of the UK.
Cuisineworld acquires the Australian holiday cooking package on a GST inclusive basis from Oz
Travel, a resident tour wholesaler in Sydney. [64A]The Australian holiday cooking packages are on-
sold by Cuisineworld to tourists as rights or options to acquire cooking classes and
accommodation at selected five star hotels and to take bus tours in Australia.
225C. The supply by Cuisineworld of rights or options to acquire accommodation in Australia, is
a contractual right that is exercisable over or in relation to land in Australia. It is therefore a
supply of real property that is connected with Australia under subsection 9-25(4).
225D. The supply by Cuisineworld of rights or options to acquire cooking classes (training
services) and bus tours (services) is the supply of things other than goods or real property. It is
therefore necessary to consider subsection 9-25(5). Neither paragraph 9-25(5)(a) nor (b) is
applicable as the supply of the rights is done in the UK and Cuisineworld does not carry on an
enterprise in Australia. As the rights or options are to acquire cooking classes and bus tours in
Australia and those services would be connected with Australia under either paragraphs 9-25(5)
(a) or (b), the supply of the rights or options to acquire those services is connected with
Australia under paragraph 9-25(5)(c).

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Deposits s 99 -5
Giving a deposit as security does not constitute
consideration
(1) A deposit held as security for the performance of an
obligation is not treated as consideration for a supply,
unless the deposit:
(a) is forfeited because of a failure to perform the
obligation; or
(b) is applied as all or part of the consideration for a
supply.
(2) This section has effect despite section9-15 (which is 20
Commissioner of Taxation v Reliance
Carpet
Co Pty Limited [2008] HCA 22
The option agreement stipulated that upon receipt by Reliance Carpet of a written
notice exercising the option, together with a payment of $297,500 representing the
deposit, Reliance Carpet were bound to sell and the purchaser bound to purchase the
property on the terms annexed to the option agreement.
The deposit was paid on 5 February 2002 and a contract was executed and exchanged.
Pursuant to the sale contract the balance of the purchase price was to be paid on
settlement.
On 27 February 2002 Reliance Carpets solicitors released the deposit to it.
The purchaser ultimately failed to complete the contract by the scheduled settlement
date and did not remedy the default.
Contract was rescinded, which resulted in the forfeiture of the deposit to Reliance
Carpet.
Court held that Reliance Carpet Co Pty Ltd (the taxpayer) was liable to account for GST
for supplies made by it in connection with the retention of a forfeited deposit.

21
Commissioner of Taxation v Reliance
Carpet
Co Pty Limited [2008] HCA 22
The GST Act contains rules dealing with the attribution
(or timing) of GST.
For an accruals taxpayer, these rules provide that the
taxpayer will have a GST liability in the tax period
(typically a month or quarter) in which:
a. it first received any consideration for the supply; or
b. if before it receives any consideration, an invoice is issued
for the supply.

22
Commissioner of Taxation v Reliance
Carpet
Co Pty Limited [2008] HCA 22
For an accruals taxpayer, where a taxpayer receives a part
payment for a supply, the taxpayer is liable for the entire GST
amount on that supply in that tax period.
In other words the GST liability is not confined to 1/11th of the
amount actually received, but 1/11th of the total consideration
payable for the supply.

But:
Division 99 - deposits.
a deposit will not be treated as consideration for a supply
unless it is ...

23
Commissioner of Taxation v Reliance
Carpet
Co Pty Limited [2008] HCA 22
The approach that has been adopted by the House of Lords in the
context of European VAT.
Requires regard to be had to:
The essential features of the transaction to see whether it is
several distinct principal services or
a single service and
that what from an economic point of view is in reality a single service should not be
artificially split.
It seems that an overall view should be taken and over-zealous dissecting and analysis
of particular clauses should be avoided.
Consistent with the above approach was the approach of the Federal Court:
When the applicant entered into the contract for sale with the purchaser it
entered into a contract for the supply of real property; nothing more and
nothing less.

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Commissioner of Taxation v Reliance
Carpet
Co Pty Limited [2008] HCA 22
Held by High Court that the forfeited deposit was
consideration for, or in connection with, a supply that
was made by the taxpayer, and the taxpayer had made
a taxable supply.
In doing so the court found that, on forfeiture, the deposit was
consideration for a supply which was the making of the
contract.

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Deposits Division 99
The term 'deposit' is not defined in the GST Act.
However, judicial decisions have indicated that the term
'deposit' has a particular meaning in a commercial
context.

26
Deposits Division 99
InFederal Commissioner of Taxation v. Reliance Carpet Co Pty
Ltd[2008] HCA 22; (2008) 2008 ATC 20-028; (2008) 68 ATR 158
(Reliance Carpet) the High Court noted at paragraphs 22 to 27 of
the decision that the term 'deposit' had several aspects. These
aspects include that a deposit:
could be counted towards the payment of the purchase price;
be brought into account in assessment of damages;
be a token provided by the purchaser as 'an earnest to bind the
bargain';
and provide a form of security for performance by the purchaser.

27
Div 99 - Whether a payment is a
security depositCharacteristics ATO
will look for:
Is it held as a security for the performance of an obligation of
the payer?
Is the contract, conduct and intent of the parties to the
contract consistent with the payment being a security deposit?
Is it intended to act as an earnest to ensure the contract is
completed?
Is it at risk of forfeiture upon failure to perform the obligation?
Is it a reasonable amount?

See - GSTR 2006/2

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Deposits Division 99 - GSTR
2006/2
An amount ceases to be a security deposit when that
amount is applied as consideration, or forfeited,
regardless of whether it is held by the supplier or a third
party at that time.
However, there are occasions where a deposit may be
released without it being considered to be applied.
The accounting treatment may be evidence that a
deposit has been either forfeited or applied as
consideration for a supply.
For example, a deposit that is recognised as revenue because
it is no longer refundable is indicative of a deposit that is no
longer held as security because it has been applied as 29
Deposits Division 99 - GSTR
2006/2
40. A pre-contract deposit may be paid by a potential recipient
to demonstrate the potential recipient's keen interest in
entering into a purchase contract or hire arrangement.
Because there is no contract the 'pre-contract deposit' is held
on trust for a specified purpose but remains the beneficial
property of the potential recipient.
41. A so called 'deposit' may also be paid by a potential
recipient under an agreement, prior to entering into a
purchase contract or hire agreement, in return for rights of
pre-emption, or for a covenant.
42. In the circumstances described in paragraphs 40 and 41,
even though these payments are often called deposits, the
Commissioner does not regard them as security deposits for
the purposes of Division 99. Neither payment has the
characteristics of a security deposit as outlined in this Ruling. 30
Deposits Division 99 - GSTR
2006/2
43. The pre-contract deposit referred to in paragraph 40
is not a security deposit because it remains the property
of the potential recipient. At the time of payment:
it is not paid for a supply that is to occur between the
parties.
It is not subject to forfeiture, and
It does not secure any contractual obligations between
the parties, because, at the time of payment, none are
in existence.

31
Multiple Choice Question

Hajar wants to buy real property. She approaches the real estate agent who suggests
she pays $10 000 as a good faith gesture, before contacting the owner. Choose the
most correct statement.
Select one:
A. Hajar's deposit is a security deposit for the purposes of Division 99 of the Goods and
Services Tax Act of 1999.
B. Hajar's deposit is not a security deposit for the purposes of Division 99 of the Goods
and Services Tax Act of 1999.
C. Hajar's deposit is not treated as consideration as a result of the operation of Division
99 of the Goods and Services Tax Act of 1999.
D. Hajar's deposit is treated as consideration as a result of the operation of Division 99
of the Goods and Services Tax Act of 1999.
E. Both B and D.

32
Deposits Division 99 - GSTR
2006/2
70. In Reid Motors Ltd v. Wood and Another
Mr Wood and another purchaser agreed to purchase cars from Reid Motors. At the time,
New Zealand finance regulations required a purchaser to pay a deposit of at least 50%
if the balance was to be financed under a hire purchase arrangement. Both purchasers
paid at least this amount but subsequently repudiated their agreements to purchase
the cars. Reid Motors rescinded the contract and treated the deposits as forfeited.
The court found that the deposits were not reasonable and not subject to forfeiture.
Coates J made the following observation:

In the normal course of business, a deposit as security for completion of the

transaction is usually in the vicinity of 10 percent of the total price. It would be most
unusual for a deposit to be as high as 50 percent of the contract price, let alone to
exceed that figure.

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Deposits Division 99 - GSTR
2006/2
77. ... It is the Commissioner's view that for a deposit
that exceeds 10% in a purchase contract to be accepted
as a security deposit to which Division 99 applies,
suppliers must be able to show that they are at a higher
risk of significant losses in the event of default. In
Coates v. Sarich and Hoobin, Re;Perpetual Executors
and Trustees Association of Australia Ltd v. Hoobin, the
major risks turned upon the length of time of the
contract and the loss in value of the asset faced by the
supplier in the event of mismanagement of an
associated enterprise, neglect, breach of law and other
allied factors. 34
Composite supplies

A composite supply is a supply that appears to have many parts but

its essentially a supply of one thing.

The Tax Office considers that it contains a

(1)dominant part and
(2)includes something that is integral, ancillary or incidental to that
part: GSTR 2001/8, para 17

()A mixed supply is essentially a supply of a mixture of taxable and

non-taxable supplies.

()Distinguishing between a mixed supply and a composite supply is a

question of fact, which should be done with a common sense
approach: GSTR 2001/8, para 20. 35
Composite supplies para 28.60
McLaren
See
British Airways Plc v Customs and Excise Commissioners
(1990) 5 BVC 97; [1990] STC 643.
Was in-flight catering a separate supply to the flight?

ATS Pacific Pty Ltd v FCT[2014] FCAFC 33.

Supplying rights to accommodation to the non-resident
tourists (which were subject to GST), but also supplying
booking services for that accommodation (which would be
GST-free)

36
Composite supplies
ATS Pacific Pty Ltd v FCT[2014] FCAFC 33.
The Full Court concluded that there was only one supply
namely, the supply of the promise by the taxpayer to the non-
resident tourists that there would be accommodation and other
non-accommodation components (such as car hire or meals). If
the supply of this promise embodied a supply of arranging
services, it was part and parcel of the promised package for
which there is a single indivisible consideration. The further
supply (if any) was to be regarded as ancillary and incidental to
the main supply. This effectively amounted to a composite supply.
The High Court refused leave to appeal against the decision.
37
Mixed Supply
Contains taxable and non-taxable parts.
See
Sea Containers Services Ltd v Customs and Excise Comm
issioners
[2000] BVC 60.
Day train excursions were provided with elaborate fine
wining and dining
Heavy emphasis - advertising.
Transport or transport and catering?
Was the element significant in its own right or was it merely
ancillary to the provision of transport?
Ancillary: providing support to the primary activities. 38
Mixed Supply
Sea Containers Services Ltd v Customs and Excise Commissioner
s
[2000] BVC 60.
It was decided that the proper approach was to see whether the
catering element was significant in its own right or whether it
was merely ancillary to the provision of transport.
Keene J said:
The evidence shows that it [the catering] constituted a very
important element in its own right in what was being provided
by the appellant. Its significance in these transactions went well
beyond the point where it could be seen merely as a way of
better enjoying the transport
39
Mixed Supply
Sea Containers Services Ltd v Customs and Excise Commi
ssioners
[2000] BVC 60.
element. it constituted for customers an aim in itself.
Not, of course, the sole aim but, given its prominence in
the marketing literature, clearly a separate aim from the
travel element. The emphasis upon this aspect of the
facilities provided is very striking. The fine meals and
wines were a vital part of what the customer was paying
for, whether by way of a separate or an all-inclusive
price (at 67)
40