Not all exports are GST-free - Brief Article

Business Asia, Sept, 2001 by Greg Hill

A recent ATO draft ruling emphasises the need for exporters to be clear of their obligations, says Greg Hill(*), partner, Andersen Tax Services.

DESPITE FEDERAL Treasurer Peter Costello's pre-election assurances that all exports would be GST-free, an 85 page draft ruling released by the Australian Tax Office (ATO) for public comment last month highlights some of the stringent requirements that exist in the legislation that Australian exporters need to be aware of.

The draft ruling is in relation to the export of goods, as distinct from services, and clarifies some key issues impacting Australia's export industry.

But the draft also emphasises the need for Australian exporters to be clear of their obligations, as there are a number of ways where an exporter could be found to have illegally sold produce overseas GST-free.

One of the most contentious issues highlighted in the draft has been the 60-day rule, whereby the supply of goods is GST-free only if the goods leave Australia within 60 days after the receipt of payment or issue of an invoice to the purchaser.

For example, let's assume an Australian automotive parts manufacturer has received an order for a shipment of brake pads and an invoice has been issued to the purchaser. The brake pads must be delivered to a ship or an aircraft, which has been engaged to carry these goods to an overseas destination, within 60 days, otherwise the brake pads lose their GST-free status.

Note -- these brake pads must be delivered to a ship or an aircraft engaged to carry the goods overseas. This means the delivery of the brake pads to a bonded warehouse, for example, is not sufficient for the 60-day requirement to be met.

However, the acceptance by the ATO that the 60 day timing requirement is satisfied when the goods are delivered on board a ship or to an airport operator marks a major concession for exporters. Prior to the ruling, the treatment for exporters was uncertain where transport from Australia may not be available within a 60 day period. This was of particular concern, especially in the case of shipping, where because of the ship docking at multiple ports (for example Sydney, Melbourne and Newcastle, before departing for Hong Kong), the 60-day requirement may not have been met.

Export only legally occurs when the ship or aircraft departs its final Australian port or airport and clears Australian territorial limits. Therefore the placement of goods on board a ship or aircraft does not constitute the export of goods.

Also, for a voyage or flight to have a destination outside Australia, a ship must "lay anchor", or an aircraft must land at a location outside Australia. It is not enough that the ship or aircraft merely pass through international waters or airspace.

The various terms of trade will also affect the GST-free status of exported produce. According to the draft, for the supply of goods to be GST-free, the supplier has to be the entity that exports these goods. The supplier is legally the exporter if the goods are sent from Australia to another country pursuant to a contract of sale, the terms of which are, for example, FOB (Free On Board), CIF (Cost Insurance Freight) or DDP (Delivered Duty Paid). This is because under these terms, the supplier is responsible for delivering the goods on board a ship, or to an aircraft that has been engaged to carry those goods to an overseas destination.

However, if the terms of trade are FAS (Free Alongside Ship), meaning the seller is responsible for placing the goods alongside a ship, or Ex-works, meaning the seller places the goods at the disposal of the buyer at the seller's premises, the supplier is not the legal exporter. Instead, the exporter is the overseas acquirer of the goods.

It is important for exporters to understand the various terms of trade because the supplier must be the entity that exports the goods if the produce is to be sold GST-free.

Suppliers must have a complete understanding of the definitions contained in the ruling or run the risk of being faced with a GST liability if they mistakenly assume that an export is GST-free. The ATO will seek to recover lost revenue, plus interest, if they find that an exporter has illegally sold goods GST-free to an overseas customer, regardless of whether or not payment of the GST shortfall by the customer is forthcoming.

As a support measure exporters should also look closely at their export contracts and consider including in them GST recovery clauses in case of any future liabilities.

The ATO is expected to rule on the export of services, which is an even more contentious and unclear area of the GST law, some time in 2002.

(*) Greg Hill is a Tax Partner at Andersen, Sydney:
For Inquiries
(tel) 61 2 9993 6432
(email) gregory.a.hill@au.andersen.com
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