Edited version of your private ruling

Authorisation Number: 1012520902270

Ruling

Subject: GST and supply of software online

Question

What is the goods and services tax (GST) status of your supply of software to Country A individuals under the Agreement you have with a non-resident company and their subsidiaries?

Advice

Under the Agreement you have with non-resident company and their subsidiaries, you have a section 153-50 arrangement with the Australian subsidiary of the non-resident company for the supply of software to Country A individuals for GST purposes. In this instance, you and the Australian subsidiary will treat the supply of the software that you make to Country A individuals through the Australian subsidiary as two separate supplies and you and the Australian subsidiary will be treated to be acting as principal to principal for GST purposes.

Accordingly, under the 153-50 arrangement you have with the Australian subsidiary, your supply of software to the Australian subsidiary is GST-free and the supply of software from the Australian subsidiary to Country A individuals is GST-free since based on the information received, your supply of software to Country A customers through the Australian subsidiary is GST-free under paragraph (a) of item 2 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Relevant facts

You are an Australian company and registered for GST.

You develop and sell software under a developer Program License Agreement (Agreement) with a non-resident company and their subsidiaries. You have provided us with a copy of the Agreement.

You advised that all applications are targeted towards individuals except for one which may be used by individuals or companies. You consider your supply of the applications is made to non-resident individuals only and they are not in Australia at the time of the supply.

The Agreement provides the following:

· You appoint the non-resident company and their subsidiaries as your agent for the marketing and delivering of the Licensed Applications to end-users located in the countries listed in the Agreement.

· The non-resident company and their subsidiaries shall be entitled to a commission for sales of the Licensed Applications to end-users located in the countries listed in the Agreement.

· The parties acknowledge and agree that the non-resident company and their subsidiaries shall not acquire any ownership interest in or to any of the Licensed Applications or licensed Application information, and title, risk of loss, responsibility for, and control over the Licensed Applications shall, at all times remain with you. The non-resident company and their subsidiaries may not use any of the Licensed Applications or Licensed Application information for any purposes or in any manner, except as specifically authorised in the Agreement.

· You appoint the Australian subsidiary of the non-resident company as your agent for the marketing and end-user download of the Licensed Applications by end-users located in Australia and Country A.

· You and the Australian subsidiary agree to enter into an arrangement for the purposes of section 153-50 of the GST Act. You and the subsidiary further agree that for taxable supplies made by you, through the Australian subsidiary as agent, to any end user:

(a) the Australian subsidiary will be deemed as making supplies to any end-user;

(b) you will be deemed as making separate, corresponding supplies to the Australian subsidiary;

(c) the Australian subsidiary will issue to any end-user, in their own name, all tax invoices and adjustment notes relating to supplies made under paragraph (a);

(d) you will not issue to any end-user any tax invoices or adjustment notes relating to taxable supplies made under paragraph (a);

(e) the Australian subsidiary will issue a recipient created tax invoice to you in respect of any taxable supplies made by you to the Australian subsidiary under this Agreement, including taxable supplies made under paragraph (b); and

(f) you will not issue a tax invoice to the Australian subsidiary company in respect of any taxable supplies made by you to the non-resident company under this Agreement, including taxable supplies made under paragraph (b).

· If you are a resident of Australia, it is a condition of this Agreement, that you have an Australian Business Number ('ABN') and are registered for GST or have submitted an application to register for GST to the Commissioner with an effective GST registration date of no later than the date of this Agreement. You will provide the non-resident company with satisfactory evidence of your ABN and GST registration.

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 153-50

A New Tax System (Goods and Services Tax) Act 1999 Section 153-55

A New Tax System (Goods and Services Tax) Act 1999 Section 38-190

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

Reasons for decision

Characterisation of Supply

Before we consider the GST status of your supply under your agreement with the non-resident company we need to determine the character of the supply you are making and to whom the supply is made.

In regard to software being supplied in an intangible form, for example by downloading it from the internet, our view is the supply of the software in this form is not a supply of goods as there is no tangible property supply.

Further, we consider that where the software downloaded is a standard or 'off-the-shelf' software, what is supplied is the computer program, subject to restrictions on its use. If the essential nature of the transaction is the supply of the computer program, subject to restrictions on its use, the fact that a 'licence' relating to the supply of the software is couched in terms of a licence 'to use' the software will not in itself mean that the substance of the supply is a supply of a right to use the software.

For more information on the characterisation of software please refer to Goods and Services Tax Ruling GSTR 2003/8 which is available at www.ato.gov.au

From the facts given, the Licensed Applications you sell are softwares that are not developed for a specific customer where the customer owns the copyright. In this instance we consider that you are making a supply of software as intangible property (supply of software).

To whom are you making the supply?

In the Agreement you appoint the Australian subsidiary of the non-resident company as your agent for the marketing and end-user download of the software by end-users located in Country A. You and the Australian subsidiary agree to enter into an arrangement for the purposes of section 153-50 of the GST Act.

Section 153-50 of the GST Act states:

153-50 Arrangements under which intermediaries are treated as supplier or acquirer

1. An entity (the principal) may, in writing, enter into an arrangement with another entity (the intermediary) under which:

(a) the intermediary will, on the principal's behalf, do any or all of the following:

(i) make supplies to third parties;

(ii) facilitate supplies to third parties (including by issuing *invoices relating to, or receiving*consideration for, such supplies);

(iii) make acquisitions from third parties;

(iv) facilitate acquisitions from third parties (including by providing consideration for such acquisitions); and

(b) the kinds of supplies or acquisitions, or the kinds of supplies and acquisitions, to which the arrangement applies are specific; and

(c) for the purposes of the GST law:

(i) the intermediary will be treated as making the supplies to the third parties, or acquisitions from the third parties, or both; and

(ii) the principal will be treated as making corresponding acquisitions from the intermediary, or both; and

(d) in the case of supplies to third parties:

(i) the intermediary will issue to the third parties, in the intermediary's own name, all the *tax invoices and *adjustment notes relating to those supplies; and

(ii) the principal will not issue to the third parties any tax invoices and adjustment notes relating to those supplies; and

(iii) the arrangement ceases to have effect if the principal or the intermediary, or both of them cease to be *registered.

2. For the purposes of subsection (1), an entity can be an intermediary whether or not the entity is the agent of the principal.

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

Section 153-55 of the GST Act explains the effect of an arrangement under section 153-50 of the GST Act and state:

153-55 The effect of these arrangements on supplies

1. A *taxable supply that the principal makes to a third party through the intermediary is taken to be a supply that is a taxable supply made by the intermediary to the third party, and not by the principal, if:

(a) the supply is of a kind to which the arrangement applies; and

(b) the supply is made in accordance with the arrangement; and

(c) both the principal and intermediary are *registered.

2. In addition, the principal is taken to make a supply that is a *taxable supply to the intermediary. This supply is taken:

(a) to be a supply of the same thing as is supplied in the taxable supply (the intermediary's supply) that the intermediary is taken to make; and

(b) to have a *value equal to 10/11 of the amount that is payable to the principal by the intermediary in respect of the intermediary's supply.

The intermediary is taken to make a corresponding *creditable acquisition from the principal.

3. If the principal pays, or is liable to pay, an amount, as a commission or similar payment, to the intermediary for the intermediary's supply to the third party:

(a) for the purpose of paragraph (2)(b), the amount payable by the intermediary to the principal is taken to be reduced by the amount the principal pays, or is liable to pay, to the intermediary; and

(b) the supply by the intermediary to the principal, to which the principal's payment or liability relates, is not a *taxable supply.

4. However, this section no longer applies, and is taken never to have applied, if the principal issues to the third party, in the principal's own name, any *tax invoice or *adjustment note relating to the supply.

5. This section has effect despite section 9-5 (which is about what are taxable supplies), section 9-75 (which is about the value of taxable supplies) and section 11-5 (which is about what are creditable acquisitions).

Goods and Services Tax Ruling GSTR 2000/37 (available at www.ato.gov.au) explains the application of section 153-50 of the GST Act and the effects of a section 153-50 arrangement.

Paragraphs 74 and 76 of GSTR 2000/37 state:

74. Section 153-50 provides that entities may enter into an arrangement under which an agent is treated as a separate supplier and/or acquirer. That is, the agent is treated as a principal in its own right. Further, nothing in this section prohibits supplies that are not taxable supplies and acquisitions that are not creditable acquisitions from being included in such an arrangement. This includes supplies and acquisitions that are GST-free, input taxed or subject to the determination of the Treasurer under Division 81 from being included in such an arrangement. Also, the nature of these supplies and acquisitions, as between the principal and the third party, is not changed by entering into a Subdivision 153-B arrangement. For example, an acquisition by a principal from a third party that is either not a creditable acquisition or an exempt tax, fee or charge under Division 81 will not be deemed to be a creditable acquisition because of the arrangement.

74A. Even though supplies that are not taxable supplies may be included in a Subdivision 153-B arrangement, section 153-55, which is about the effect of these arrangements on supplies, only applies to the taxable supplies covered by the arrangement. Similarly, section 153-60, which is about the effect of these arrangements on acquisitions, only applies to the creditable acquisitions covered by the arrangement. For supplies other than taxable supplies and acquisitions other than creditable acquisitions, the parties account for them as being from principal to principal for GST purposes. As sections 153-55 and 153-60 do not apply in this circumstance, the parties need to account for those supplies and/or acquisitions in the arrangement separately from the supply of agency services. These consequences are explained in this Ruling at paragraphs 83A to 83M for supplies and paragraphs 91A to 91L for acquisitions.

76. To enter this arrangement there must be a written agreement under which:

· the agent arranges to make supplies and/or acquisitions to or from third parties on behalf of the principal;

· the kinds of supplies and/or acquisitions to which the arrangement applies are specified;

· the agent is treated for the purposes of GST law as a principal in making supplies or acquisitions;

· the agent will issue all tax invoices and adjustment notes relating to those supplies to third parties in the agent's name and the principal will not issue such documents; and

· both parties must be registered.

In this instance, as a result of the section 153-50 arrangement you have with the Australian subsidiary, you and the Australian subsidiary will treat the supply of the software that you make to Country A individuals through the Australian subsidiary as two separate supplies and you and the Australian subsidiary will be treated to be acting as principal to principal for GST purposes (refer to par 77 to 83 of GSTR 2000/37 for more information on the effect of a section 153-50 arrangement).

Accordingly, we need to determine the GST status of the software you make to a Country A individual customer through the Australian subsidiary since, where you make a taxable supply of software through the Australian subsidiary to a Country A individual customer, you are taken to have made a taxable supply to the Australian subsidiary of the same software that the Australian subsidiary has supplied to the Country A individual customer under the section 153-50 arrangement.

Further where you make a non-taxable supply of software through the Australian subsidiary to a Country A individual customer, you are taken to have made a non-taxable supply to the Australian subsidiary and the Australian subsidiary is taken to have made a non-taxable supply to the Country A individual customer.

GST status of supply of software to Country A individual customer through the Australian subsidiary

GST is payable on a taxable supply. To be a taxable supply, the supply must meet the conditions under section 9-5 of the GST Act. This section provides that 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 for GST.

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

From the information received, you satisfy paragraphs 9-5(a) to 9-5(d) of the GST Act when you sell the software as:

(a) you make the supply for consideration; and

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

(c) the supply of the software is connected with Australia as you are making the supply through a business that you carry on in Australia; and

(d) you are registered for GST.

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

Your supply of software is not input taxed under any provision in the GST Act. The next step is to consider whether the supply is GST-free.

GST-free

Under section 38-190 of the GST Act certain supplies other than supplies of goods or real property for consumption outside Australia are GST-free.

Of particular relevance to the supply of software is item 2 in the table in subsection 38-190(1) of the GST Act (Item 2).

Item 2 appears as follows:

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

For a supply to be within the scope of Item 2, the supply must be made to a non-resident who is not in Australia when the thing supplied is done. The expression 'not in Australia' requires that the non-resident is not in Australia in relation to the supply.

Not in Australia in relation to the supply

In the case of supplies made to an individual, we consider the physical location of the individual establishes whether that individual is in Australia when the thing supplied is done.

An individual is in Australia if that individual is physically in Australia. An individual is in Australia in relation to the supply if the individual is involved with the supply while in Australia.

A non-resident individual is in Australia in relation to the supply if the non-resident individual is involved with the supply while in Australia. A non-resident individual is involved with the supply where the non-resident is in contact with the supplier while in Australia and that contact is not minor (for example courtesy call or checking on the progress of the supply).

If a non-resident individual is in Australia for a purpose that is not related to the supply, for example the individual is on holiday in Australia and has no contact with the supplier or only has minor contact, the non-resident individual is not considered to be involved with the supply and is therefore not in Australia in relation to the supply.

Application of facts to item 2

From the facts given, you supply the software to Country A individuals who are not in Australia at the time of supply. In this instance your supply of software is GST-free under paragraph (a) of Item 2 as:

· the individual is a non-resident and is not in Australia in relation to the supply when the supply is made; and

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

Subsection 38-190(3) of the GST Act

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.

Based on the information received, subsection 38-190(3) of the GST Act is not applicable as the non-resident individuals are not requesting you to provide your supply of software to another entity in Australia.

Accordingly, your supply of software to the non-resident individuals is GST-free under paragraph (a) of item 2.

For more information on Item 2 and subsection 38-190(3) of the GST Act please refer to the Goods and Services Tax Rulings GSTR 2003/7, 2004/7 and 2005/6 which are available at www.ato.gov.au

Summary

Based on the information received, your supply of software to Country A individuals is GST-free under paragraph (a) of item 2 in the table in subsection 38-190(1) of the GST Act.

In this instance under the 153-50 arrangement you have with the Australian subsidiary, your supply of software to the Australian subsidiary is GST-free and the supply of software from the Australian subsidiary to the Country A individual is GST-free.

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