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Ruling

Subject: GST and agreement to use images

Question 1

Is the supply made under the agreement (Agreement) with the Purchaser a GST-free supply?

Answer

Partially, please see discussion below.

Relevant facts and circumstances

You have entered into an agreement with the Purchaser (an overseas based company) to allow them to use images of your premises in its interactive software products; that are produced and marketed globally by the Purchaser. As part of the agreement, you have provided access to the premises for the Purchaser to collect data and information.

For the term of the Agreement you have granted the Purchaser the non-exclusive worldwide, 'sublicensable' right to use, reproduce, broadcast, transmit, publicly display, perform and distribute the:

· name and associated logos of the premises; and

· the premises data

Broadly this will be used in the Purchaser's products and in promoting those products.

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 38-180

Reasons for decision

Summary

The supply made under the Agreement with the Purchaser is a GST-free supply to the extent that rights granted will not be exercised in Australia. The supply of rights that will be exercised in Australia is subject to GST.

Detailed reasoning

GST is payable on a taxable supply. Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

You make a taxable supply if:

(a) you make the supply for consideration; and

(b) the supply is made in the course or furtherance of an enterprise that you carry on; and

(c) the supply is connected with Australia; and

(d) 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.

Your supply under the Agreement is considered to be a supply of rights. The supply of access to the premises in order for the Purchaser to gather data is considered to be an integral part of the greater supply of rights.

It is the Commissioner's view as espoused in the Goods and Services Tax Ruling GSTR 2001/8 'Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts' that some supplies include parts that do not need to be separately recognised for GST purposes. In a composite supply, the dominant part of the supply has subordinate parts that complement the dominant part. For this reason, a composite supply may appear, at first, to have more than one part, but is treated as if it is the supply of one thing.

Applying this reasoning to your supply, the data gathering by the Purchaser simply allows it to acquire the rights supplied in a format that is suitable for its purposes. The dominant part of your supply is that of rights.

From the facts given, you have satisfied all the conditions of paragraphs 9-5(a) to (d) of the GST Act as follows:

(a) You make a supply of rights (that is, granting of rights) to the Purchaser and in return you receive consideration;

(b) The granting of the rights will be made in the course or furtherance of your enterprise;

(c) You are granting the rights through an enterprise that you carry on in Australia (and therefore the supply is connected with Australia); and

(d) You are registered for GST.

Hence, the supply of rights to the Purchaser is taxable to the extent that it is not GST-free or input taxed. The supply of rights does not satisfy the input taxed provisions under the GST Act.

However, subsection 38-190(1) of the GST Act lists supplies of anything other than goods or real property that are GST-free. A supply of rights is not goods or real property and therefore comes within the scope of subsection 38-190(1) of the GST Act. Items 2, 3 and 4 in the table in subsection 38-190(1) of the GST Act (Items 2, 3 and 4) all afford GST-free treatment of certain supplies made to non-residents and/or for consumption outside Australia:

38-190 Supplies of things, other than goods or real property, for consumption outside Australia

(1)The third column of this table sets out supplies that are GST-free (except to the extent that they are supplies of goods or *real property):

Supplies of things, other than goods or real property, for consumption outside Australia
Item	Topic	These supplies are GST-free (except to the extent that they are supplies of goods or *real property)...
1	…	….
2	Supply to *non-resident outside Australia.	a supply that is made to a *non-resident who is not in Australia when the thing supplied is done, and: (a) 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 (b) the *non-resident acquires the thing in *carrying on the non-resident's *enterprise, but is not *registered or *required to be registered.
3	Supplies used or enjoyed outside Australia	a supply: (a) that is made to a *recipient who is not in Australia when the thing supplied is done; and (b) 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.
4	Rights	a supply that is made in relation to rights if: (a) the rights are for use outside Australia; or (b) the supply is to an entity that is not an *Australian resident and is outside Australia when the thing supplied is done.

However subsection 38-190(2) of the GST Act restricts the GST-free status conferred by Items 2, 3 and 4 when the rights supplied allow for the acquisition of a supply that would be connected with Australia and would not be GST-free:

(2) However, a supply covered by any of items 1 to 5 in the table in subsection (1) is not GST-free if it is the supply of a right or option to acquire something the supply of which would be connected with Australia and would not be GST-free.

Subsection 38-190(2) of the GST Act is designed to ensure that the supply of a right or option is not GST-free if the right or option can be redeemed for the supply of something else, the supply of which would be a taxable supply. A supply to which subsection 38-190(2) applies is not GST-free even if items 2, 3 or 4 would otherwise apply.

Without subsection 38-190(2), the supply of a thing that is connected with Australia, and not otherwise GST-free, could occur without GST being payable, if all of the consideration were to be provided for the granting of a right or option to acquire the thing, notwithstanding that when the thing itself is supplied it may be consumed in Australia.

The Agreement grants worldwide rights. It follows that a portion of the rights granted that may be exercised in Australia. A supply that is made in relation to rights is GST-free under Items 2, 3 and 4 to the extent that the rights were intended, at the time they were created, granted, transferred, assigned or surrendered, to be used outside Australia.

The Goods and Services Tax Ruling GSTR 2003/8 'Goods and services tax: supply of rights for use outside Australia - subsection 38-190(1), item 4, paragraph (a) and subsection 38-190(2)' discusses, at paragraphs 127 to 132, the apportionment of rights where they are used within and outside Australia. The example apportionment method stated is not prescriptive, but may be used for rights that may be covered by items 2, 3 or 4, unless the outcome is materially distorted.

Reasonable method of apportionment

127. What is a reasonable method of apportioning the consideration for a supply to reflect the extent to which rights are for use outside Australia depends on the nature of the supply and all the surrounding circumstances. In some cases, this may be evident to the supplier of the rights from the contract that the supplier has entered into.

128. However, in many cases it is the recipient of the supply who will have the best information available to it to determine the extent to which the rights are for use outside Australia. It is expected that, in these circumstances, the supplier will consult with the recipient to obtain that information or to be satisfied that the recipient has made a genuine attempt to determine the extent to which the rights are for use outside Australia.

129. Factors that may be relevant to forming a judgment as to the extent of intended use of rights for the purposes of paragraph (a) of item 4 include:

· expectations of the recipient, based on reasonable grounds, as to the likely use of the right over the period for which the right is granted, or if the right has been granted for an unspecified period, the expectations of the recipient as to the likely use over the anticipated period of use;

· economic, social, cultural and political conditions the nature of the right itself, for example, the language of a written work or its relevance to a particular culture, may influence where the right will be used;

· past revenue, royalty or profitability patterns evident from the use of similar rights this may come from industry statistics or from past experience in the recipient's business; and

· projected use of the right in and outside Australia based on market research.

Example 4 - supply of worldwide copyright

130. An Australian resident musician assigns worldwide copyright in music to an Australian resident record company. The relevant contract is signed by the parties in Australia.

131. The supply of copyright is not a supply of goods or real property for GST purposes.

132. The supply of copyright will be GST-free under paragraph (a) of item 4 to the extent that the supply of rights is for use outside Australia. A reasonable basis of apportionment should be used. A reasonable basis may be the proportion of total projected sales or profits that is expected to be generated outside Australia.

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