Edited version of your private ruling

Authorisation Number: 1012526263492

Ruling

Subject: Goods and services tax (GST) and acquisition of software applications

Question

Are you entitled to input tax credits on your acquisition of access to the software applications?

Answer

No.

Relevant facts and circumstances

You are registered for GST.

You are incorporated in Australia.

You do not have a presence such as a head office or branch in Australia from which you carry on your business.

You have an office in an overseas country.

You hold an Australian licence.

You no longer derive Australian taxable income since the sale of your Australian based client servicing rights on a certain date, but you continue to exist essentially because your licence backs an overseas country something recently issued by the relevant regulatory agency in that country.

However, for practical purposes, you maintain for the time being some of your Australian client management operating and other software, for which you continue to pay subscription fees.

You acquire access to specific software applications from a website of another entity via the internet in return for subscription fees. The software is client management software.

Your staff, access the software applications.

You nominated an Australian law firm as your 'registered office'.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1)

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

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

Reasons for decision

Summary

You are not entitled to input tax credits on your acquisition of access to the software applications, because the supplies made to you are not subject to GST.

The supplies made to you are GST-free because:

· the supplies are supplies of things other than goods or real property

· the supplies are made to a recipient who is not in Australia in relation to the supplies when the things supplied are done

· effective use or enjoyment of the supplies takes place outside Australia

· the supplies are not supplies of work physically performed on goods situated in Australia when the thing supplied is done, and

· the supplies are not directly connected with real property situated in Australia.

Detailed reasoning

You are entitled to input tax credits on your creditable acquisitions.

You make a creditable acquisition where you satisfy the requirements of section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

(c) you provide, or are liable to provide, *consideration for the supply; and

(d) you are *registered or *required to be registered.

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

Taxable supplies

In accordance with paragraph 9-5(b) of the GST Act, one of the requirements for an entitlement to an input tax credit to arise is that the supply made to the acquirer is a taxable supply.

An entity makes a taxable supply where it meets the requirements of section 9-5 of the GST Act, which 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

(b) the supply is *connected with Australia; and

(c) 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.

GST is payable on taxable supplies.

GST-free supplies of things consumed overseas

In accordance with item 3 in the table in subsection 38-190(1) of the GST Act (item 3) a supply of something other than goods or real property is GST-free where:

· the supply is of something other than goods or real property; and

· the supply 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.

In your case, the supply made to you is a supply of access to specific software applications. This is a supply of something other than goods or real property.

Recipient not in Australia when the thing supplied is done

Paragraphs 31, 64 and 65 of Goods and Services Tax Ruling GSTR 2004/7 provide the Australian Taxation Office (ATO) view on determining whether a supply is made to a recipient who is not in Australia for the purposes of item 3. They state:

31. The requirement that the non-resident in item 2, or the recipient in item 3, is not in Australia when the thing supplied is done is a requirement, in our view, that the non-resident or recipient is not in Australia in relation to the supply when the thing supplied is done.

64. A company is in Australia if it is incorporated in Australia. If the company is not incorporated in Australia, the company is in Australia (irrespective of the residency status of that company) if the company carries on business (or in the case of a company that does not carry on business, carries on its activities) in Australia:

(a) at or through a fixed and definite place of its own for a sufficiently substantial period of time; or

(b) through an agent at a fixed and definite place for a sufficiently substantial period of time.

65. A company is in Australia in relation to the supply if the supply is solely or partly for the purposes of the Australian presence, for example, its Australian branch, representative office or agent if it is a non-resident company or the Australian head office if it is an Australian incorporated company. If the supply is not for the purposes of the Australian presence but that Australian presence is involved in the supply, the company is in Australia in relation to the supply, except where the only involvement is minor.

Paragraphs 181 to 184 of GSTR 2004/7 provide the reasoning behind the ATO view in paragraph 31 of GSTR 2004/7. They state:

181. The requirement that a supply is made to a non-resident (item 2), or recipient (item 3), who is 'not in Australia' 'when the thing supplied is done' is in effect a proxy test for determining where the supply to that entity is consumed. The presumption is that if the non-resident or other recipient of the supply is 'not in Australia' when the thing supplied is done, the supply of that thing is for consumption outside Australia and is GST-free, provided the other requirements of the item are met.

182. A strict literal interpretation of the 'not in Australia' requirement merely requires a presence of that entity in Australia when the thing supplied is done for that requirement not to be satisfied. A literal approach would mean, for example, that a supply made to a non-resident individual who happens to be in Australia on holidays when the thing supplied is done fails the not in Australia requirement even though his or her presence in Australia is completely unrelated to the supply.

183. A literal approach would also mean, for example, that a supply provided to the offshore branch of an Australian resident company would not be GST-free under item 3 due to the presence of the Australian resident company in Australia. Subsection 38-190(4) could not apply to treat the supply as made to a recipient that is not in Australia as paragraph 38-190(4)(b) requires the supply to be provided to another entity, which a branch is not. A literal approach, therefore, does not give effect to the policy intent to only tax supplies consumed in Australia.

184. As the Australian location of the entity to which the supply is made at the relevant time is a proxy test for identifying when consumption occurs in Australia, we consider that the expression 'not in Australia' should be interpreted in the context of the supply in question. The expression 'not in Australia' requires, in our view, that the non-resident or other recipient is not in Australia in relation to the supply. This means that a non-resident or other recipient of a supply may satisfy the 'not in Australia' requirement if that entity is in Australia but not in relation to the supply. We examine this more fully when considering the application of items 2 and 3 and paragraph (b) of item 4 to specific entity types in Part III.

You are incorporated in Australia. Therefore, you are in Australia. However, we need to determine whether you are in Australia in relation to the supply.

The supply of the access to the software applications is not for the purposes of an Australian presence such as a head office you maintain in Australia. The supply is for the purposes of your overseas country presence. Additionally, you do not have an Australian presence such as a head office that is involved with the supply. Therefore, you are not in Australia in relation to the supply.

Effective use or enjoyment takes place outside Australia

Paragraphs 124 and 125 of Goods and Services Tax Ruling GSTR 2007/2 provide the ATO view on determining whether effective use or enjoyment takes place outside Australia. They state:

124. If a company, partnership, corporate limited partnership or trust has a presence in Australia and outside Australia, we consider that effective use or enjoyment of the supply by the entity takes place outside Australia if the supply is provided to that entity outside Australia. The supply is provided to that entity outside Australia if the supply is for the purposes of the entity's presence outside Australia. Paragraph (b) of item 3 is satisfied and the supply is GST-free under item 3 if the other requirements of item 3 are satisfied. (See Flowchart 4, page 36.)

125. If the supply is provided to that entity in Australia, effective use or enjoyment of the supply by that entity does not take place outside Australia. The supply is provided to that entity in Australia if the supply is for the purposes of the entity's presence in Australia. Paragraph (b) of item 3 is not satisfied and the supply is not GST-free under item 3. (See Flowchart 4, page 36.)

In your case, the supply is not for the purposes of an Australian presence such as a head office you maintain in Australia. The supply is for the purposes of your overseas country presence. Therefore, the supply is provided to an entity outside Australia. Hence, effective use or enjoyment of the supply takes place outside Australia.

The supply is not 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.

As all of the requirements of item 3 are met, the supply made to you is GST-free. Therefore, the supply is not taxable. Hence, you are not entitled to an input tax credit on your acquisition of the access to the software applications because the requirement of paragraph 11-5(b) of the GST Act is not met.

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