Edited version of your private ruling

Authorisation Number: 1012560290864

Ruling

Subject: Goods and services tax (GST) and internet marketing

Question

Is GST payable by you on the on-charge of the certain amount a week cost of the advertising space where:

· you are liable to pay the internet search entity for the advertising space

· your customer is a resident company that is based in Australia only, and

· your marketing service results in your customer's website appearing on the right hand side of the first page when certain words are searched on the internet search engine?

Answer

Yes.

Relevant facts and circumstances

You are registered for GST.

You are a company.

You supply marketing services.

You have offices in Australia only.

One of the services you supply is search engine marketing whereby you use advertising space purchased from an internet search engine entity to have your customer's website appear on the right hand side of the first page when certain words are searched on the internet search engine.

The internet search engine entity charges a certain amount a week for the advertising space. Under the arrangement in question, you have an account with the internet search engine entity for the advertising space; you are liable to pay the internet search engine entity this amount and the internet search engine entity invoices you for this amount. You on-charge this amount to your customer. You also charge this customer a certain amount plus GST per week for your service of utilising the advertising space to the maximum benefit to your customer.

Your Australian presence accepted the purchase order for the supplies that you make to the customer and entered into the contract with your customer.

Your customer is a resident company that is based in Australia only.

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 subsection 9-25(5)

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-25(6)

A New Tax System (Goods and Services Tax) Act 1999 section 9-40

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190(1)

Reasons for decision

Summary

GST is payable on the on-charge of the advertising space cost because:

· this on-charge is part of the consideration for your supply of marketing services

· you supply the marketing services in the course or furtherance of an enterprise that you carry on

· these supplies are connected with Australia

· you are registered for GST, and

· this supply is not GST-free or input taxed.

Detailed reasoning

GST is payable by you on your taxable supplies.

You make a taxable supply where you satisfy the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (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

(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.

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

There is no requirement in the GST Act that a supplier who buys and on-sells a product must have added value to the product in order to have a GST liability on its on-sale of the product.

There is no rule in the GST Act that where a supply to a reseller is not taxable, the on-sale by the reseller can't be taxable.

You meet the requirements of paragraphs 9-5(a), 9-5(b) and 9-5(d) of the GST Act. This is because:

· you supply marketing services for consideration (which includes the on-charge amounts in question)

· you supply these services in the course or furtherance of an enterprise that you carry on, and

· you are registered for GST.

The certain amount you charge your customer forms part of the consideration for your supply of marketing services because it is an on-charge of a cost you incur in order to provide the marketing services.

There are no provisions in the GST Act under which these supplies are input taxed.

Therefore, what remains to be determined is whether these supplies are connected with Australia and whether these supplies are GST-free.

Connected with Australia

Subsection 9-25(5) of the GST Act states:

A supply of anything other than goods or real property is connected

with Australia if

(a) the thing supplied is done in Australia; or

(b) the supplier makes the supply through an *enterprise that the

supplier *carries on in Australia; or

(c) all of the following apply:

(i) neither paragraph (a) nor (b) applies in respect of the thing;

(ii) the thing is a right or option to acquire another thing;

(iii) the supply of the other thing would be connected with Australia.

In accordance with subsection 9-25(6) of the GST Act, an enterprise is carried on in Australia if the enterprise is carried on through a permanent establishment in Australia.

Paragraph 86 of Goods and Services Tax Ruling GSTR 2000/31 sets out factors that indicate that a supply is made through a permanent establishment. It states:

86. There is no specific set of circumstances which must be satisfied before a supply is connected with a permanent establishment. Rather, each case will be determined on the basis of the individual facts and circumstances. However, some factors that will usually indicate that the supply is made through a permanent establishment include:

· the permanent establishment has the authority to sign contracts or accept purchase orders for the supply;

· the permanent establishment has the authority to make important decisions in respect of the supply;

· the permanent establishment physically makes for example, manufactures or produces, the supply;

· if the supply is a service, the service is provided by the permanent establishment;

· if the supply is the provision of advice or information such as a legal opinion, the permanent establishment provides that advice or information;

· if the supply is the grant, creation, assignment, transfer or surrender of a right, the permanent establishment grants, creates, assigns, transfers or surrenders that right.

Your supply of the marketing services is a supply of something other than goods or real property. Your supply of the marketing services is connected with Australia because you supply these services through a permanent establishment you maintain in Australia. You do not have a permanent establishment overseas. Your Australian presence accepted the purchase order for the supplies that you make to the customer in question and entered into the contract with the customer.

Your supply of the marketing services to your customer is connected with Australia even if the work involved in making the advertising space available is performed by the internet search engine entity staff overseas.

As your supplies of the marketing services are connected with Australia, you meet the requirement of paragraph 9-5(c) of the GST Act.

GST-free supplies of things consumed outside Australia

Item 3 in the table in subsection 38-190(1) of the GST Act (item 3) provides that a supply of something other than goods or real property is GST-free if:

(a) the supply is made to a recipient who is not in Australia when the thing supplied is done, and:

(b) effective use or enjoyment of the supply 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.

Goods and Services Tax Ruling GSTR 2004/7 provides guidance on determining whether the recipient of a supply is in Australia for the purposes of item 3.

Paragraphs 64 and 65 of GSTR 2004/7 explain how to determine if a company is in Australia in relation to a supply. They state:

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.

Your customer in question is based in Australia only. You arranged to have your customer's website appear on the right hand side of the first page when certain words are searched on the internet search engine. Therefore, the marketing services are solely for the purposes of your customer's Australia presence. Hence, your customer is in Australia in relation to your supply for the purposes of item 3. Therefore, the requirement of paragraph (a) of item 3 is not met.

Effective use and enjoyment

Paragraphs 39 to 45 of Goods and Services Tax Ruling GSTR 2007/2 provide guidance on determining where effective use and enjoyment takes place. They state:

39. Paragraph (b) of item 3 requires the place of effective use or enjoyment of a supply to be determined (that is, whether the place is outside Australia). As paragraph (b) refers to the 'effective' use or enjoyment of the supply, it is necessary to inquire as to the entity that has the actual use or enjoyment of the supply.

40. The requirement in paragraph (a) of item 3 refers to the recipient of the supply. The recipient of the supply is the entity to which the supply is made. A supply that is made to a recipient entity may be provided to another entity. If a supply is made to a recipient and provided to another entity, the entity that actually uses or enjoys the supply is that other entity. For example, if a supply of travel services is made to a company (recipient) and the travel is undertaken by an employee of the recipient, the supply is provided to the employee and it is the employee that actually uses or enjoys the supply.

41. A supply is made to a recipient and provided to another entity if in the performance of a service (or in the doing of some thing) the actual flow of that supply is to an entity that is not the recipient entity with which the supplier made the agreement for the supply. That is, while the contractual flow of the supply is to the recipient entity, the actual flow of the supply is to another entity.

42. Thus in determining where a supply is used or enjoyed it is first necessary to establish the entity to which the supply is provided (the providee entity). The providee entity is also the recipient if the supply is not provided to some other entity. However, if the supply is provided to some other entity that other entity is the providee entity.

43. Having determined the providee entity it is then necessary to consider whether use or enjoyment of the supply by that providee entity takes place outside Australia.

44. Both the heading to section 38-190 and the table in subsection 38-190(1) refer to '[s]upplies of things...for consumption outside Australia'. Thus in the context of subsection 38-190(1) use or enjoyment of a supply takes place outside Australia if the supply is for consumption by an entity outside Australia.

45. In our view, a supply is for consumption, and thus used or enjoyed, outside Australia if there is provision of the supply to the providee entity outside Australia.

Paragraphs 116 to 119 of GSTR 2007/2 discuss the situation where the providee is a company. They state:

116. To determine whether effective use or enjoyment of a supply by a providee that is a company, partnership, corporate limited partnership or trust takes place outside Australia, we determine whether there is provision of the supply to that entity in Australia or outside Australia. Only if there is provision of the supply to the entity outside Australia does effective use or enjoyment take place outside Australia.

117. To determine whether there is provision of a supply to a company, partnership, corporate limited partnership or trust in Australia or outside Australia we consider whether that entity has a presence in Australia.

118. If a company, partnership, corporate limited partnership or trust does not have a presence in Australia (that is, it only has a presence outside Australia), the supply is provided to that entity outside Australia and effective use or enjoyment of the supply takes place 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.

119. If a company, partnership, corporate limited partnership or trust only has a presence in Australia (that is, it has no presence such as a branch office outside Australia), the supply is provided to that entity in Australia and effective use or enjoyment of the supply takes place in Australia. Paragraph (b) of item 3 is not satisfied and the supply is not GST-free under item 3.

Your customer is a company. That company is the providee because you arranged to have their website appear on the right hand side of the first page when certain words are searched on the internet search engine. That company has a presence in Australia only. Therefore, the supplies you make to that company are provided to that company in Australia. Hence, effective use and enjoyment of the supply takes place in Australia. Therefore, the requirement of paragraph (b) of item 3 is not met.

As you do not make meet the requirements of paragraphs (a) and (b) of item 3, you do not make a GST-free supply under item 3.

You do not make a GST-free supply under any provision of the GST Act.

Therefore, as all of the requirements of section 9-5 of the GST Act are met, you make taxable supplies to the customer in question. The certain amount a week you receive from your customer forms part of the consideration for these taxable supplies.

Hence, GST is payable by you on the amounts you receive from your customer, including the certain amount a week.

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