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Ruling

Subject: GST and supply of access to an online software product by non-resident recipients

Question

Is the supply of access to an online software product by you to recipients that are not in Australia, a taxable supply?

Answer

No, the supply of access to an online software product is not a taxable supply and not subject to GST where the recipients are not in Australia because the supply is GST-free.

Relevant facts and circumstances

You are an Australian resident entity. Your company is registered for goods and services tax (GST) in Australia.

Your primary activities are the design of computer software.

You have recently launched a website that allows users to log in and create and download PDF documents.

The website is owned by you and development of the website is done locally by your entity.

The website itself is physically located on servers in a foreign country that are owned and operated by a non resident entity. You advise that you lease server space from them and have no other connection to this non resident entity.

When a user accesses your software product online they log in and download the PDF files for no fee. In addition the user can purchase a paid version of the software product which allows them to customise the PDF file before they download the files.

The user is not permitted to modify, adapt, customise or copy any part of the actual software product itself.

You advise that non-resident individuals will predominantly purchase this online software product. However non-resident companies may also purchase this application and you advise that these corporations would not have a presence in Australia, nor would the supply be for the benefit of a recipient in Australia.

Access to the paid features of the software product is granted instantly once payment notification arrives from the online payment processing provider. There are no contracts involved besides the user signifying that they accept the terms and conditions of use of the website.

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 9-25.

A New Tax System (Goods and Services Tax) Act 1999, Sub-section 38-190(1).

A New Tax System (Goods and Services Tax) Act 1999, Sub-section 38-190(3).

A New Tax System (Goods and Services Tax) Act 1999, Sub-section 38-190(4).

A New Tax System (Goods and Services Tax) Act 1999, Section 195-1.

Reasons for decision

Section 9-40 of the GST Act provides that you must pay the GST payable on any taxable supply that you make.

A supply is a taxable supply if it meets all the requirements of section 9-5 of the GST Act. Section 9-5 states:

You make a taxable supply if:

· you make the supply for *consideration; and

· the supply is made in the course or furtherance of an *enterprise that you *carry on; and

· the supply is *connected with Australia; and

· you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

(* denotes a term defined in section 195-1 of the GST Act)

Your supplies of access to the online software product (software) satisfy the requirements of paragraphs 9-5(a), 9-5(b) and 9-5(d) of the GST Act as:

· you make the supplies for consideration

· the supplies are made in the course or furtherance of an enterprise that you carry on, and

· you are registered for GST.

Now we need to determine whether the supplies of access to the online software product made by you are connected with Australia under paragraph 9-5(c) of the GST Act.

Connected with Australia

Section 9-25 of the GST Act provides different tests for determining whether a supply is connected with Australia according to whether the supply is a supply of goods, real property, or any other thing. You have advised that your users access your software product from your website, which is hosted on a server in a foreign country. When a user accesses your software product online they log in and download the PDF files. The user does not modify, adapt, customise or copy any part of the actual software product itself.

Supplies involving software are discussed in Goods and Services Tax Ruling GSTR 2003/8 which states that where a one-off solution is developed by a computer programmer for a client, the correct analysis of the supply will depend on all of tha foreign countrye facts and circumstances, including the terms of the contract between the programmer and the client (Para 33). GSTR 2003/8 also provides that computer software supplied in intangible form, for example, by downloading it from the Internet, is not a supply of goods (as no tangible property is supplied) and is not necessarily a supply of rights even where the recipient also receives a 'click-wrap' licence, but a supply of the copyright in a program which allows the recipient to modify, adapt, or copy the program for commercial purposes is a supply that is made in relation to rights (Paragraphs 89 -90). Paragraphs 91-93 of GSTR 2003/8 also state:

91. Where a one-off solution is developed by a computer programmer for a client, the correct analysis of the supply will depend on all the facts and circumstances, including the terms of the contract between programmer and client. For example, a one-off program may be developed as a solution to a particular information technology problem at great expense over a period of months.

92. Where, under the terms of the agreement, copyright in the program will vest upon its creation in the client, whether the program is delivered to the client electronically or on disk, the supply is a supply of services. There is no right supplied in these circumstances.

93. If the programmer contracts to develop a solution and make it available for the client, on terms that copyright in the program, once developed and accepted by the client, will be assigned to the client, the supply will be a mixed supply, comprising the development and a supply of the program and assignment of copyright in the program. Assignment of the copyright is the supply of a right, but supply of the program is not. The supply of the program is not a supply of goods even if it is delivered in tangible form on a disk.

You develop software, and supply access to that software to your users, but do not grant any copyright in that software to the users. Under the terms and conditions the purchaser can pay a fee to access the software and download a customised file. Based on the discussion in GSTR 2003/8 set out above we consider that the supply made by you is not the supply of a right but the supply of services.

Subsection 9-25(5) of the GST Act provides that a supply of anything other than goods or real property is connected with Australia if the thing is done in Australia or the supplier makes the supply through an enterprise that the supplier carries on in Australia.

In relation to the 'thing is done in Australia' test, Goods and Services Tax Ruling GSTR 2000/31 states:

65. If the 'thing' being supplied is a service, the supply of that service is typically done where the service is performed. If the service is performed in Australia, the service is done in Australia and the supply of that service is connected with Australia under paragraph 9-25(5)(a). This is the case even if the recipient of the supply is outside Australia.

66. However, the supply of a service to an offshore recipient may be GST-free under section 38-190.

The ATO's Fact Sheet Trading over the Internet discusses a scenario where a New Zealand company develops virus protection software in New Zealand and then sells it online using a server located in New Zealand to a purchaser in Australia who downloads the software. In relation to the question of whether the supply of the software is a thing done in Australia the Fact Sheet states:

A computer program is essentially encoded instructions designed to cause a computer to perform a particular task or to produce a particular result. It is, in substance, knowledge or information (that is, intellectual property).

We consider that the supply of the computer program is the supply of information. As the supply of information involves work to develop the information, the supply is one of performance of services. The computer program or supply of information is 'done' where the information is developed.

Therefore, as the computer program is developed in New Zealand and not in Australia, the thing (that is, the computer program) is not done in Australia.

You developed the online software in Australia. Applying the reasoning in the ATO's Fact Sheet, the supply of the access to the online software product by you is done in Australia and therefore connected with Australia in terms of paragraph 9-25(5)(a) of the GST Act.

In our view, notwithstanding that the software is located on a server in the United States, the supply of access to the online software product by you to the users may be connected with Australia as being a thing done in Australia on the basis that there is a supply of a service and the relevant software product was developed in Australia. Accordingly, your supply satisfies paragraph 9-5(c) of the GST Act.

Section 9-5 also provides that a supply is not taxable to the extent that it is input taxed or GST-free. Supplies of access to the online software product are not input taxed supplies under the GST Act or a provision of another Act. Therefore, what remains to be determined is whether the supplies are GST-free.

GST-free

Under section 38-190 of the GST Act, certain supplies of things, other than goods or real property, for consumption outside Australia are GST-free. Of particular relevance to your case are items 2 and 3 in the table in subsection 38-190(1) of the GST Act.

Item 2 in the table in subsection 38-190(1) of the GST Act (Item 2) provides that a supply of a thing, other than goods or real property, made to a non-resident is GST-free if the non-resident is not in Australia when the thing supplied is done and:

· the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia, or

· the non-resident acquires the thing in carrying on the non-resident's enterprise, but the non-resident is not registered or required to be registered for GST.

However, the scope of Item 2 is limited by subsection 38-190(3) of the GST Act which provides that a supply covered by Item 2 is not GST-free if:

· it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident, and

· the supply is provided, or the agreement requires it to be provided, to another entity in Australia.

· Item 3 in the table in subsection 38-190(1) of the GST Act (Item 3) states that a supply of a thing, other than goods or real property, is GST-free if it is a supply:

· that is made to a recipient who is not in Australia when the thing supplied is done, and

· the effective use or enjoyment of which takes place outside Australia;

· other than a supply of work physically performed on goods situated in Australia when the thing supplied is done, or a supply directly connected with real property situated in Australia.

Subsection 38-190(4) of the GST Act extends the scope of Item 3 by treating a supply that is made to a recipient who is in Australia in relation to the supply as being made to a recipient who is not in Australia if:

· the supply is made under an agreement entered into, whether directly or indirectly, with an Australian resident, and

· the supply is provided, or the agreement requires it to be provided, to another entity outside Australia.

As stated above, one of the requirements of both Items 2 and 3 is that the supply is neither a supply of work physically performed on goods situated in Australia when the thing supplied is done nor a supply directly connected with real property situated in Australia. We consider that the supplies of access to the online software product meet this requirement.

The supplies of access to the online software product must also meet the other requirements of either Item 2 or Item 3 for them to be GST-free. Goods and Services Tax Ruling GSTR 2004/7 examines these requirements. It explains, amongst other things, for an entity (the recipient) that is an individual, company, partnership, corporate limited partnership or trust:

· when a supply is made to an entity that is a non-resident for the purposes of Item 2

· when a supply is made to an entity for the purposes of Item 3

· when an entity is not in Australia or is outside Australia when the thing supplied is done for the purposes of Item 2 and Item 3.

Generally, if a supply is provided or required to be provided to an individual who is physically in Australia (that is the presence of the individual in Australia is integral to the provision of the supply), consumption of the supply does not take place outside Australia. In this instance the supply will not be GST-free.

If a company, partnership or trust does not have a presence in Australia (that is, it only has a presence outside Australia) and the supply is provided or required to be provided to that entity outside Australia, consumption of the supply takes place outside Australia. In this instance the supply will be GST-free.

To work out whether the supplies provided are for consumption outside Australia and therefore GST-free, the supplier needs to ascertain certain information at the time the thing supplied is done.

In Chapter 1 of the Electronic Commerce Industry Partnership - Issues Register, the ATO provides guidance on how to determine if a low value supply of things other than goods or real property made over the internet is for consumption outside Australia. It provides the details that you must obtain from each recipient of your supply in order to determine the GST status of each supply that you make. These are:

Individual recipient

The supplier must obtain the following information if the recipient of the supply is an individual:

· the residential status of the individual and their physical location at the time of the supply

· confirmation that the individual is not a member of the Australian Public Service or Australian Defence Forces

· the use of the supply

· if they are a non-resident and are in Australia, whether their presence is in relation to the supply, and

· if they are a resident of Australia and are outside Australia, whether their presence is integral to (as distinct from being merely coincidental with) the provision of the supply.

Company, partnership or trust recipient

The supplier must obtain the following information if the recipient of the supply is a company, partnership or trust:

· the residential status of the company, partnership or trust and their physical location at the time of the supply

· the use of the supply

· if the company, partnership or trust has no presence either through an agent or permanent establishment in Australia

· that the company, partnership is not controlled or run by Australian residents

· if the non-resident company, partnership or trust has a presence in Australia, whether it is in relation to the supply.

Where the purchaser does not provide the required information, you will not have sufficient records to demonstrate that the supply was a GST-free supply under section 38-190 of the GST Act. In these circumstances the supply of access to the online software product will be a taxable supply. Hence, you will be liable to pay GST on the supply.

Other Information

All publications mentioned in this ruling are available on our website at www.ato.gov.au

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