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Edited version of your written advice
Authorisation Number: 1013030970125
Date of advice: 9 June 2016
Ruling
Subject: GST and the supply of rights
Question 1
Does the Trust make a GST-free supply when it supplies services to resident clients in Australia for overseas intellectual property (IP) rights?
Answer
Yes.
Question 2
Does the Trust make a GST-free supply when it supplies services to non-resident clients for Australian IP rights?
Answer
Yes.
Question 3
Does the Trust make a GST-free supply when it supplies services to resident clients for international IP rights applications?
Answer
Yes, provided the intended use of the right is for outside of the indirect tax zone (Australia).
Relevant facts and circumstances
The Trust operates a business of which part of the business involves providing services to clients in protecting their IP rights.
The services include providing advice and preparing and filing IP rights applications for rights inside and outside of Australia.
An international application including a provisional international application is treated as a patent application in a number of countries (including Australia).
Before filing an application, the Trust will generally also file a provisional international application in Australia.
The Trust sometimes files a separate application in Australia for clients who also file international applications. However these cases might only be for clients who are seeking an early grant in Australia for such reasons as a concern of infringement.
These are applications for Australian clients; however, there must also be a separate Australian registration or an application that proceeds to registration in Australia.
The Trust provides services to clients based in Australia, as well as clients that reside outside Australia.
The Commissioner is requested to assume that non-resident clients are not in the indirect tax zone when the thing is done for the purposes of section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999.
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 9-80,
A New Tax System (Goods and Services Tax) Act 1999 section 38-190, and
A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190.
Reasons for decision
GST is payable on a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). From the facts provided, you satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:
(a) you make the supply of services for consideration,
(b) the supply is made in the course or furtherance of an enterprise that you carry on,
(c) the supply is connected with the indirect tax zone as the services are provided/performed in the indirect tax zone, and
(d) you are registered for GST.
However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.
In this circumstance, the supply of your services is not input taxed. However, we need to determine whether the supply satisfies the GST-free provisions. In particular section 38-190 of the GST Act.
This section specifies the circumstances where the supply of things other than goods or real property for consumption outside Australia is GST-free. Of most relevance to the supply of your services in relation to securing of IP rights to an entity is item 4 in the table in subsection 38-190(1) of the GST Act (Item 4).
A supply is GST-free under Item 4 where it is:
a supply that is made in relation to rights if:
(a) the rights are for use outside the indirect tax zone; or
(b) the supply is to an entity that is not an Australian resident and is outside the indirect tax zone when the thing supplied is done.
For Item 4 to apply there is a requirement that the supply must be made in relation to rights. Goods and Services Tax Ruling GSTR 2003/8 addresses the supply of rights.
Under GSTR 2003/8, a supply of a thing is a 'supply that is made in relation to rights' if it fits within one of the following three categories:
1. supply identified in paragraph 9-10(2)(e) of the GST Act;
2. supply of things that derive their value exclusively, or almost exclusively, from rights; and
3. supply of services directly connected with rights.
A supply of services (including provision of advice or information) that is directly connected with rights is a supply that is made in relation to rights for the purposes of Item 4. Paragraphs 28 and 28A of GSTR 2003/8 state:
28. A supply of services (including provision of advice or information) that is directly connected with rights is a supply that is made in relation to rights for the purposes of item 4. A supply of services has a direct connection with rights if for example:
• the service facilitates a dealing in or exercise of the rights; or
• the service affects (or its purpose is to affect) or protects the nature or value (including indemnity against loss) of the rights.
28A. Item 4 only applies to a service that facilitates a dealing in rights if the essential character or substance of the dealing is one of rights. Similarly, item 4 only applies to services that affect or protect the nature or value of a thing if the essential character or substance of that thing is rights.
Question 1
Summary
The Trust makes a GST-free supply when it supplies services to resident clients in the indirect tax zone for overseas IP rights due to the services relating to rights that are intended for use outside of the indirect tax zone.
Detailed reasoning
In this situation, your services are services that involve, amongst other things, preparing and filing international and national applications for the purpose of securing IP rights. Therefore, your supply will have a direct connection with those rights. Accordingly, the supply of your services in relation to securing of the IP rights is a 'supply that is made in relation to rights'.
A supply that is made in relation to rights is GST-free under paragraph (a) of Item 4 if the rights are for use outside Australia.
Paragraphs 108A and 123A of GSTR 2003/8 state:
108A. A supply does not fall within item 4 simply on the basis that the essential characteristics of the rights demonstrate that they may be used outside Australia. It is the intended use of those rights that determines if the supply that is made in relation to the rights falls within item 4. The extent to which the supply is taxable or GST-free is not affected by the actual use of the rights, other than as potential evidence of the intended use.
In this circumstance, you will supply services in relation to securing of IP rights for use outside the indirect tax zone. Item 4(a) is applicable as the IP rights are intended for use outside of the indirect tax zone.
Therefore, your supply of services to an Australian resident in relation to the protection of rights for use outside of the indirect tax zone will be GST-free due to Item 4 in the table in subsection 38-190(1) of the GST Act being satisfied.
Summary
The Trust makes a GST-free supply when it supplies services to non-resident clients for Australian IP rights due to the services relating to rights to a non-resident who is not in the indirect tax zone when the service is performed.
Detailed reasoning
In this situation, your services are services that involve, amongst other things, preparing and filing international and national applications for the purpose of securing IP rights. Therefore, your supply will have a direct connection with those rights. Accordingly, the supply of your services in relation to securing of the IP rights is a 'supply that is made in relation to rights'.
A supply that is made in relation to rights is GST-free under paragraph (a) of Item 4 if the rights are for use outside Australia.
As the rights will be for use in the indirect tax zone paragraph (a) of Item 4 will not be satisfied, however, we need to consider the application of paragraph (b) of Item 4. This paragraph provides for a supply that is to an entity that is not an Australian resident and is outside the indirect tax zone when the thing supplied is done.
There is a condition that the non-resident must not be in the indirect tax zone when the supply is done. A supply of services, are done when they are provided/performed.
Goods and Services Tax Ruling GSTR 2004/7 discusses when an entity is not in Australia when the thing supplied is done. There are different tests to determine whether an entity is in Australia depending on the type of entity.
Supply to a non-resident individual
Under paragraph 35 of GSTR 2004/7, a non-resident individual is in Australia if that individual is physically in Australia. If a non-resident individual is physically in Australia and in contact (other than contact which is only of a minor nature) with the supplier, that presence is in relation to the supply.
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 individual is in contact with the supplier while in Australia and that contact is not minor (eg. a 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, eg. 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.
Supply to a non-resident company
Under paragraph 37 of GSTR 2004/7, a non-resident company is in Australia if that company carries on business (or in the case of company that does not carry on business, carries on its activities) in Australia through:
(a) a fixed and definite place of its own for a sufficiently substantial period of time; or
(b) an agent at a fixed and definite place for a sufficiently substantial period of time.
Where a non-resident company has no fixed and definite place of its own in Australia, but may still carry on business in Australia through an agent from some fixed and definite place. Paragraph 278 of GSTR 2004/7 provides that the key issue in this kind of situation is whether the non-resident company is itself carrying on business in Australia through a duly appointed agent, or whether the business being conducted is the agent's own business, the non-resident company merely being one of its customers.
In addition, if a non-resident company is determined to be in Australia on the basis of the above test, it is necessary to determine if the company is in Australia in relation to the supply, when the supply is done (that is, provided/performed).
Paragraphs 41 and 65 of GSTR 2004/7 provide that a (non-resident) 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.
The different tests for other entity types (such as partnerships and trusts) can be found in paragraphs 43 to 51 of GSTR 2004/7.
You have requested the Commissioner assume that non-resident clients are not in the indirect tax zone when the thing is done.
In this circumstance, the supply of your services is made to a non-resident entity that is not in the indirect tax zone in relation to the supply when the services are performed/provided. Therefore, the condition that the non-resident must not be in Australia, when the thing supplied is done is satisfied. Hence, paragraph (b) of Item 4 is satisfied.
Consequently, your supply of services to a non-resident in relation to the protection of rights for use outside of the indirect tax zone will be GST-free due to Item 4 in the table in subsection 38-190(1) of the GST Act being satisfied.
Question 3
Summary
The Trust makes a GST-free supply when it supplies services to resident clients for international applications but only in circumstances where they file a separate Australian application. Otherwise the supply will need to be apportioned between the taxable and the non-taxable portion using a reasonable method.
Detailed reasoning
In this situation, your services are services that involve, amongst other things, preparing and filing international and national applications for the purpose of securing IP rights. Therefore, your supply has a direct connection with those rights. Accordingly, the supply of your services in relation to securing of the IP rights is a 'supply that is made in relation to rights'.
A supply that is made in relation to rights is GST-free under paragraph (a) of Item 4 if the rights are for use outside Australia.
Paragraphs 108A and 123A of GSTR 2003/8 state:
108A. A supply does not fall within item 4 simply on the basis that the essential characteristics of the rights demonstrate that they may be used outside Australia. It is the intended use of those rights that determines if the supply that is made in relation to the rights falls within item 4. The extent to which the supply is taxable or GST-free is not affected by the actual use of the rights, other than as potential evidence of the intended use.
In this circumstance, you will supply services in relation to securing of IP rights both for use outside the indirect tax zone and for use in the indirect tax zone.
Where the use is intended for outside of the indirect tax zone it will satisfy paragraph (a) of Item 4 in the table in subsection 38-190(1) of the GST Act being satisfied. However, as an application involving an international application will include Australia the supply will only be GST-free to the extent the supply in relation to rights is for use outside of the indirect tax zone.
An example of this is provided in paragraphs 130 to 132 of GSTR 2003/8 as follows:
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 of 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.
Paragraph 129 of GSTR 2003/8 provides factors that may be relevant to forming a judgement as to the extent of intended use of rights for the purpose of paragraph (a) of Item 4 of which some are as follows:
• 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,
• projected use of the right in and outside of Australia based on market research.
The Trust, before filing an international application, may file an application in Australia in such situations where the client is concerned about an infringement. Where that is the case the application in Australia will provided IP right protection. Therefore, in such a circumstance it is clear that the supply in relation to rights under the international application is for use outside of the indirect tax zone.
Hence, the issue of apportionment will only occur where an international application is made without a prior application being made in Australia. If that is the case the supply is not considered to be a composite supply due to there being a provision (Item 4) that applies to the supply. Which in this instance specifies that the use of the rights must be for outside of the indirect tax zone.
Therefore, the supply of services by you to an Australian resident in relation to the protection of rights for use outside of the indirect tax zone will be GST-free due to paragraph (a) of Item 4 in the table in subsection 38-190(1) of the GST Act being satisfied.
However, where your supply of services is to an Australian resident in relation to the protection of rights for use inside and outside of the indirect tax zone it will only be GST-free due to paragraph (a) of Item 4 in the table in subsection 38-190(1) of the GST Act to the extent of the use of the right outside of the indirect tax zone. Accordingly, you will be required to apportion the supply under section 9-80 of the GST Act between the taxable and non-taxable portion.
To work out the taxable portion a conclusion as to the value of the taxable part of the supply has to be made.
Paragraph 81F of GSTR 2001/8 provides the following:
The Court referred to the decision of the High Court in IAC (Finance) Pty Limited v Courtenay, and drew a conclusion as to the operation of section 9-80 derived from its intent. It was held that the proportion 'must be determined by the decision maker taking into account the relevant circumstances of the particular case.' The Court added that 'in doing so the decision maker must reach a conclusion as to value and the relationship it has to the price of the supply in question.'
The Trust has stated that the protection provided for Australian IP rights by the provisional international application and the international application is incidental and has no separate value that can be apportioned.
We disagree as you have stated that a client will discuss the jurisdictions that they want to have IP rights protection so it could be used as a reasonable basis to apportion the supply between taxable and non-taxable portions.
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