Edited version of your written advice

Authorisation Number: 1013110943228

Date of advice: 20 October 2016

Ruling

Subject: GST and web based application

Question 1

Is the supply of the Web Application made by the software company to you a taxable supply for the purposes of paragraph 11-5(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Advice

Yes, the supply of the Web Application made by software company to you is a taxable supply under section 9-5 of the GST Act for the purposes of paragraph 11-5(b) of the GST Act.

Question 2

What will be the goods and services tax (GST) status of the supply of access to your Web Application by you to users located either in or outside Australia at the time of the supply?

Advice

Your supply of access to your Web Application to users located either in or outside Australia at the time of the supply will be a supply of services for GST purposes.

Where you will be required to be registered for GST and your supply of services will be made to users (resident and non-resident of Australia) located in Australia at the time of the supply, your supply of services will be a taxable supply under section 9-5 of the GST Act.

Where you will be required to be registered for GST and your supply of services will be made to users (resident and non-resident of Australia) located outside Australia at the time of the supply, your supply of services will be a GST-free supply under item 3 in the table in subsection 38-190(1) of the GST Act.

Where you will not be required to be registered for GST, your supply of services to users (resident and non-resident of Australia) located in and outside Australia will be outside the scope of GST. GST will not be applicable to the supply in this instance.

Relevant facts

You are an Australian company and are not currently registered for GST.

You have not started your business activity because you are currently waiting for a software company to develop on your behalf a software web application which you will use for your business. Once the software web application is developed, you will supply online access to the software web application.

Contract with software company

You have entered into an agreement with a software developer in which the software developer has agreed to develop a Web Application for you.

Payment for the development of the web based application to the software developer will be made in milestones, the first payment to be paid immediately after the agreement is signed. You have made the first payment and GST was included in the payment.

The IP and code developed by the software developer on your behalf will remain the property of the software developer until such time as milestone payments are received by the software developer, thereafter each milestone IP will be transferred to you. Once full payment has been received for the developed software, the software developer will transfer all rights and intellectual property and program code to you for your exclusive ownership.

The software developer, is registered for GST.

Supply of the Web Application

After the Web Application is developed, you will supply online access to your Web Application. The users will have to subscribe to gain access to the Web Application from your website.

The subscription to the users will be a one-off subscription payment to the service via an internet based payment gateway system which will be embedded in your web site.

The access, use and terms and conditions will be outlined in the Privacy Policy and Disclosure sections and will be included in the web site. According to the Draft Privacy Policy and Disclosure document you have given to us, the website is owned and operated by you. Personal information that visitors submit to your site is used only for the purpose for which it is submitted or for such other secondary purposes that are related to the primary purpose, unless you disclose other uses in this Internet Privacy Policy or at the time of collection. Copies of correspondence sent from the web site, that may contain personal information, are stored as archives for record-keeping and back-up purposes only.

The supply of access will be provided from your web site. The online access will be given to users located in or outside Australia and will be the same access wherever the users are located.

Anyone will be able to view your website but only certain people will be able to access the service via the registration process. An overseas user will be able to share their access to the Web Application to someone located in Australia only if they will provide their registration account credentials for example email address and password to that person.

Since you have not started your business it is difficult for you to estimate your annual GST turnover of your business.

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 paragraph 11-5(c)

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

Reasons for decisions

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.

Question 1

Summary

The supply of the Web Application made by software developer to you Ltd is a taxable supply under section 9-5 of the GST Act for the purposes of paragraph 11-5(b) of the GST Act.

Detailed reasoning

Under section 11-20 of the GST Act an entity is entitled to input tax credit (GST refund) for any creditable acquisitions it makes under section 11-5 of the GST Act.

One of the conditions for a creditable acquisition is the supply of the thing to the entity is a taxable supply (paragraph 11-5(b) of the GST Act).

You have contracted a software company to develop a software application for you. Before we determine whether the supply of the developed software application to you is a taxable supply for the purposes of paragraph 11-5(b) of the GST Act, we must first determine the character of the supply made by the software company to you.

Characterisation of supply

Goods and Services Tax Ruling GSTR 2003/8 provides guidance in determining the character of supplies relating to software.

In regard to the development of software, paragraphs 91-94 in GSTR 2003/8 state:

91. Where a one-off solution is developed by a computer programmer for a client, the correct analysis of the supply will depend on all the facts and circumstances, including the terms of the contract between programmer and client. For example, a one-off program may be developed as a solution to a particular information technology problem at great expense over a period of months.

92. Where, under the terms of the agreement, copyright in the program will vest upon its creation in the client, whether the program is delivered to the client electronically or on disk, the supply is a supply of services. There is no right supplied in these circumstances.

93. If the programmer contracts to develop a solution and make it available for the client, on terms that copyright in the program, once developed and accepted by the client, will be assigned to the client, the supply will be a mixed supply, comprising the development and a supply of the program and assignment of copyright in the program. Assignment of the copyright is the supply of a right, but supply of the program is not. The supply of the program is not a supply of goods even if it is delivered in tangible form on a disk.

94. Apportionment of the consideration between the development and supply of the program, and the assignment of the copyright, may be required in such cases. The program may be highly customised to the client's requirements, such that it is unlikely to be suitable for other commercial exploitation. It may therefore be unlikely that the client will wish to do things which would otherwise breach copyright, or that there would be significant commercial value to the programmer in retaining copyright. In that case, it is to be expected that little or no consideration would be apportioned to the assignment of the copyright.

Based on the above, we consider the software company is making a supply of services to you when developing the Web Application. Since the program for the software is highly customised to your requirements, it is considered that the assignment of the copyright to you after the application is done will be for no consideration. The consideration of the supply of services to you will therefore be the total amount you agreed to pay to the software company.

The next step is to determine the GST status of the supply of services to you.

GST status of supply of services

GST is payable on a taxable supply. Under section 9-5 of the GST Act, an entity makes a taxable supply if:

a) the supply is made for consideration; and

b) the supply is made in the course or furtherance of an enterprise that the entity carries on; and

c) the supply is connected with Australia; and

d) the entity is registered for GST.

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

All of the above must be satisfied for your supplies to be taxable supplies.

From the facts given, the supply of the Web Application to you satisfies all the requirements in section 9-5 of the GST Act as:

● the supply to you is made for consideration; and

● the supply is made in the course or furtherance of an enterprise (business) that the software company carries on;

● the supply of services is connected with Australia as the services are done in Australia and made through a business that the software company carries on in Australia; and

● the software company is registered for GST; and

● the supply of services made by the software company to you is neither an input taxed nor a GST-free supply.

The supply of the services made by the software company to you is therefore a taxable supply under section 9-5 of the GST Act.

Question 2

Characterisation of supply

From the facts given you will not supply any rights to the copyright or any other intellectual property rights of the Web Application when you supply the users with access to your Web Application. Accordingly, your supply of online access to your Web Application will be a supply of services for GST purposes.

The next step is to determine the GST status of your supply of services to the users.

GST status of your supply of services

Taxable supply

GST is payable on a taxable supply. Under section 9-5 of the GST Act, an entity makes a taxable supply if:

a) the supply is made for consideration; and

b) the supply is made in the course or furtherance of an enterprise that the entity carries on; and

c) the supply is connected with Australia; and

d) the entity is registered for GST.

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

All of the above must be satisfied for your supplies to the users to be taxable supplies.

The facts indicate that you will satisfy paragraphs 9-5(a), (b) and (c) of the GST Act when you will supply your services to users since:

● you will make your supply of access to your online web application for consideration,

● your supply will be made in the course of a business that you carry on in Australia; and

● your supply of services will be connected with Australia as you will provide the access through a business that you carry on in Australia.

We will now consider the remaining criteria for a taxable supply.

Paragraph 9-5(d) of the GST Act - GST registration

Under section 23-5 of the GST Act, an entity is required to be registered for GST if:

a) the entity carries on an enterprise; and

b) the entity's GST turnover (current and/or projected) meets the GST registration turnover threshold (currently $A75,000 and $A150,000 for non-profit organisation).

The entity can choose to register for GST if its GST turnover is less than $A75,000.

Goods and Services Tax Ruling GSTR 2001/7 (available at www.ato.gov.au) provides guidance on the meaning of GST turnover.

The current annual turnover is the sum of the values of all supplies made in a particular month plus the previous 11 months. The projected annual turnover is the sum of the value of all supplies made in a particular month plus the next 11 months.

The GST turnover is the gross business income (not the profit), excluding any:

● supplies that are input taxed;

● supplies that are not for consideration (and are not taxable supplies under section 72-5);

● supplies not made in connection with an enterprise that you carry on;

● supplies that are not connected with Australia;

● supplies that are connected with Australia because of paragraph 9-25(5)(c) of the GST Act;

● supplies (other than supplies that are not connected with Australia and supplies that are connected with Australia because of paragraph 9-25(5)(c) of the GST Act) of a right or option to use commercial accommodation in Australia ;

● where the supplies are not made in Australia and are made through an enterprise that the supplier does not carry on in Australia; and

● supplies made from one member of a GST group to another member of that GST group.

Currently you are not registered for GST. Where your expected GST annual turnover will be $75,000 or above you will be required to be registered for GST. In this instance your supply will be a taxable supply to the extent that it will not be GST-free or input taxed.

Where your expected GST annual turnover will be below $75,000 you will not be required to be registered for GST. In this instance your supply will be outside the scope of GST. However you may choose to register for GST.

If you register for GST you will be required to account for the taxable supplies you made and you will be entitled to claim back any GST you have paid for acquisitions that relate to your business activity. More information on 'GST' is available at www.ato.gov.au

Input taxed supply

There is no provision under the GST Act that will make your supply of services (access to the Web Application) input taxed.

GST-free supply

Where you will be required to be registered for GST, relevant to your supply of services is item 3 in the table in subsection 38-190(1) of the GST Act (item 3).

Item 3 appears as follows:

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

For your supply of services to be GST-free, you must satisfy both paragraphs (a) and (b) of item 3, and the supply of services is not work physically performed on goods or directly connected with real property in Australia.

Paragraph (a) of item 3

Goods and Services Tax Rulings GSTR 2004/7 (available at www.ato.gov.au) provides guidance on the application of paragraph (a) of item 3.

To be GST-free, paragraph (a) of item 3 requires that the recipient is not in Australia in relation to the supply when the thing supplied is done. In regard to supply of services, a supply of services is done where the services are performed.

A recipient in relation to a supply is the entity to whom the supply was made. It is not a requirement of item 3 that the recipient is a non-resident entity. This means that even if the recipient of a supply is an Australian resident, the supply may be GST-free under item 3 if the resident entity is not in Australia when the thing supplied is done and the requirements of item 3 are met.

A resident individual who is physically in Australia when the thing supplied is done is in Australia in relation to the supply.

A non-resident individual who is physically in Australia when the thing supplied is done is in Australia in relation to the supply to the extent that the non-resident is in contact (other than contact which is only of a minor nature) with the supplier while in Australia.

Contact is minor if it is limited to contact of a simple administrative nature, such as checking on the progress of the supply or a courtesy call on the supplier. If this is the only contact between the non-resident individual and the supplier we consider that the individual is not in Australia in relation to the supply.

Where paragraph (a) of item 3 is satisfied it is necessary to consider paragraph (b) of item 3.

Paragraph (b) of item 3

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).

To work out whether effective use or enjoyment of a supply takes place outside Australia, we apply the following two step approach:

● Determine the entity to which the supply is provided (the providee entity);

A supply is provided to an entity if in the performance or doing of the supply, the service or thing supplied flows to that entity. For example a supply of online access is provided to the entity that subscribes for the online access. The actual flow of the online access is to that entity.

● Determine whether provision of the supply to the providee entity is outside Australia.

Effective use or enjoyment of the supply takes place outside Australia if there is provision of the supply to the providee entity outside Australia.

Supply provided to a resident individual in Australia or outside Australia

A supply is provided as and when the thing supplied is done. Therefore this is the relevant time for determining whether a supply is provided to an individual in or outside Australia.

A supply is provided to a resident individual in Australia if that individual is physically in Australia when the thing supplied is done; or is physically outside Australia when the thing supplied is done but that presence outside Australia is not integral to, but is merely coincidental with, the provision of the supply.

A supply is provided to a resident individual outside Australia if that individual is physically outside Australia when the thing supplied is done and, that presence outside Australia is integral to, as distinct from being merely coincidental with the provision of the supply.

Indicators that the presence of the individual outside Australia is integral to the provision of the supply include:

● the need for the supply arises from the resident individual's presence outside Australia, for example a supply of legal services in relation to an office committed by that individual while outside Australia; or

● the presence of the resident individual outside Australia is integral to the performance, receipt or delivery of the supply, for example training, entertainment or travel services.

Where the supply is provided to a resident individual in Australia effective use or enjoyment of the supply does not take place outside Australia. The supply is not GST-free.

Where the supply is provided to a resident individual outside Australia effective use or enjoyment of the supply takes place outside Australia. The supply is GST-free if the other requirements of item 3 are met and subsections 38-190(2) and (2A) do not apply.

Supply provided to a non-resident individual outside Australia or in Australia

A supply is provided to a non-resident individual outside Australia if that individual is physically outside Australia when the thing supplied is done; or is physically in Australia when the thing supplied is done but that presence in Australia is not integral to, but is merely coincidental with, the provision of the supply.

A supply is provided to a non-resident individual in Australia if that individual is physically in Australia when the thing supplied is done and that presence in Australia is integral to, as distinct from being merely coincidental with the provision of the supply.

Where the supply is provided to a non-resident individual in Australia effective use or enjoyment of the supply does not take place outside Australia. The supply is not GST-free.

Where the supply is provided to a non-resident individual outside Australia effective use or enjoyment of the supply takes place outside Australia. The supply is GST-free if the other requirements of item 3 are met and subsections 38-190(2) and (2A) do not apply.

Applying facts to item 3

Your supply of services will neither be a supply of work physically performed on goods situated in Australia when the thing supplied will be done nor a supply directly connected with real property situated in Australia.

Further your supply of services will be done when it will be delivered to the user. The presence of the user will therefore be integral to the receipt of access to your Web Application

Accordingly, where your supply of services will be made to a user (resident and non-resident of Australia) located in Australia; your supply will be a taxable under section 9-5 of the GST Act.

Where your supply of services will be made to a user (resident and non-resident of Australia) located outside Australia, your supply is GST-free under item 3 to the extent that subsections 38-190(2) and (2A) do not apply.

Based on the facts received, subsections 38-190(2) and (2A) will not apply to your supply of services to the users.

For more information on paragraph (b) of item 3 please refer to Goods and Services Tax Ruling GSTR 2007/2.

Summary

Where you will be required to be registered for GST and your supply of services will be made to a user (resident and non-resident) located in Australia, your supply will be a taxable under section 9-5 of the GST Act.

Where you will be required to be registered for GST and your supply of services will be made to a user (resident and non-resident of Australia) located outside Australia, your supply will be GST-free under item 3.

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