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Edited version of your written advice
Authorisation Number: 1051247901009
Date of advice: 24 July 2017
Subject: GST and supply of software development consulting work for a non-resident company (NR)
Are you making a GST-free supply of software development services under the agreement with NR?
Yes, your supply of software development services to NR is a GST-free supply under item 2 in the table in subsection 38-190(1) (Item 2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)
Relevant facts and circumstances
You are registered for GST.
NR develops software and sells software licences to Oz Co.
Oz Co is a completely separate company from NR.
Oz Co acts like a dealership. The personnel of Oz Co go to business owners in Australia and find out the requirements for computer application software (software) and sign contracts with them to supply the software, install the hardware, support services, configuration, etc.
Oz Co contracts NZ to buy software licences.
NR contracts you and others to develop software (which is different from a license to use the software). The software you develop is “general purpose” for an industry, and the local dealers buy the licence to configure the software for the specific businesses that the software is being installed at.
Your role is a developer helping to build software. You are not involved with the actual licensing– who should be sold what license and at what cost.
Consultancy Agreement (Agreement) between you and NR
According to the Agreement, you supply software development services to NR. You are not an employee, worker, agent or partner of NR. You are paid a fee per hour.
You state that you are a software developer/computer programmer by trade. You design, develop, test and implement software according to the functional specifications and related information provided to you by NR. You conduct your supply of software development services as follows:
● You receive a requirement for development by from NR ;
● You use electronic means to conduct regular planning meetings with NR. You discuss the exact extent of the work, how it should be done and the timelines for completing the work;
● You then download the relevant customer code (you have access to a server controlled by NR, and located overseas), do your development work on a computer (supplied by NR and located on a workstation at the premises of Oz Co.) and upload the updated code back to NR’s server.
Oz Co does not attend these planning meetings, nor do they have the ability to dictate to NR what software to develop.
You agree to travel overseas at the request of NR, with associated expenses paid by NR.
All the software /intellectual property which you create will be solely owned by NR who sell licenses to use the software to Oz Co, but NR retains all Intellectual Property rights/ownership of the software.
You give NR written or oral advice or information in relation to your software development services. You also give advice on what functionality will improve and what functionality will hinder the software owned by NR.
You report to XY of NR, who is based overseas.
You submit your invoices to NR, and XY of NR chooses whether to pay you and whether to continue offering you more work.
Your understanding is that NR is a foreign resident entity that is not required to register for GST in Australia.
Oz Co is not owned/related to NR through subsidiary or otherwise. If Oz Co ever wanted to use your services, they would have to contract with you directly and you would invoice Oz Co separately.
You work at Oz Co’s workstation (using their facilities) on a full time basis on Oz Co’s premises. NR supplies you with the computer and tools used to develop NR's software.
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 38-190
A New Tax System (Goods and Services Tax) Act 1999, Section 195-1
Reasons for decision
GST is payable on a taxable supply under section 9-5 of the GST Act, which states:
You make a taxable supply if:
a) you make the supply 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, 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.
(* denotes a defined term in section 195-1 of the GST Act)
The supply of software development services by you to NR satisfies the requirements under paragraphs 9-5(a), 9-5(b), 9-5(c) and 9-5(d) because:
● the supply is made for consideration;
● the supply is made in the course or furtherance of your business which you carry on;
● the supply is connected with the indirect tax zone because it is made through an enterprise (business) that you carry on in the indirect tax zone; and
● you are registered for GST.
However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.
From the facts provided, your supply of software development services is not input taxed. We need to determine whether the supply satisfies the GST-free provisions.
Section 38-190 specifies the circumstances where the supply of things other than goods or real property for consumption outside Australia is GST-free. Of relevance to the facts provided is item 2 in the table in subsection 38-190(1) (Item 2).
Goods and Services Tax Ruling GSTR 2000/31, Goods and Services Tax Ruling GSTR 2003/7, Goods and Services Tax Ruling GSTR 2004/7, and Goods and Services Tax Ruling GSTR 2005/6 address the operation of Section 38-190.
Item 2 provides that a supply of a thing (other than goods or real property) made to a non-resident is GST-free if it is a supply that is made to a non-resident that is not in Australia when the thing supplied is done, and:
a) the supply is neither a supply of work physically performed on goods situated in Australia when the work is done, nor a supply directly connected with real property situated in Australia; or
b) the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered for GST.
Goods and Services Tax Ruling GSTR 2004/7 (available on the legal database of www.ato.gov.au) provides guidance on Item 2.
241. We consider, therefore, that a non-resident company is in Australia for the purposes of item 2 and paragraph (b) of item 4 if that 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.
242. In addition to producing an outcome that is more aligned with the policy intent to tax supplies consumed only in Australia, this approach also means that guidance on the application of these criteria for presence in Australia of a non-resident company can be found in the jurisdictional case law.
243. This approach is also supported by the broader framework of section 38-190. If a supply is made to a non-resident company that is not in Australia (because it does not have a presence in Australia as determined under the test in paragraph 241) but the supply is provided to a representative in Australia such as an employee, the presence of that employee in Australia is addressed by means of subsection 38-190(3). That subsection negates the GST-free status that would otherwise apply to an item 2 supply, if that supply is provided to another entity in Australia, such as an employee. Thus, although presence of the non-resident company in Australia is determined by whether the company is carrying on business in Australia, another provision takes into account the presence of representatives in Australia if the non-resident company does not carry on business in Australia
Following the above, we do not consider that NR carries on business/activities in Australia. Nor do we consider that Oz Co is a representative/agent of NR in Australia. NR supplies software licences, while Oz Co installs, configures and gives support services to business owners to enable the use of the licence.
The fact that you use a workstation and relevant facilities from Oz Co does not mean that NR carries on business in Australia 'at or through a fixed and definite place of its own for a sufficiently substantial period of time.'
On the basis of the facts provided, the supply of software development services by you to NR will satisfy the precondition and paragraph (a) of Item 2 because:
● you supply of software development services to NR, who is a non-resident entity that is not in Australia (and has no representative in Australia) in relation to your services; and
● the supply of software development services is neither a supply of work physically performed on goods situated in Australia, nor a supply directly connected with real property situated in Australia.
We note that since you state that NR acquires your software development services in carrying on its enterprise of supplying software licences, and is neither registered nor required to be registered for GST in Australia, hence the requirements of paragraph (b) of Item 2 would also be satisfied.
Having met the requirements of either paragraph (a) or (b) of Item 2, the supply of software development services made by you to NR is GST-free under item 2 to the extent that the supply is not negated by subsections 38-190(2), 38-190(2A) and 38-190(3) of the GST Act.
From the information received, subsections 38-190(2) and 38-190(2A) of the GST Act are not applicable to your supply of software development services because:
● your supply is not a supply of a right or option to acquire something the supply of which would be connected with Australia and would not be GST-free under subsection 38-190(2) of the GST Act;
● the acquisition of your supply does not relate (whether directly or indirectly or wholly or partly) to the making a supply of real property that would be wholly or partly input taxed under subsection 38-190(2A) of the GST Act.
The next step is to consider whether subsection 38-190(3) of the GST Act will apply to your supply of software development services to NR.
Subsection 38-190(3) of the GST Act
The issue is: According to your arrangements with NR, are you required to provide your software development services to another entity in Australia?
Subsection 38-190(3) of the GST Act has been amended with the addition of paragraph (c). The application date of the amendment is 1 October 2016. Subsection 38-190(3) of the GST Act provides that without limiting subsection 38-190(2) or (2A), a supply covered by item 2 in that table is not GST-free if:
a) it is a supply under an agreement entered into, whether directly or indirectly, with a non-resident; and
b) the supply is provided or the agreement requires it to be provided to another entity in Australia; and
c) for a supply other than an input taxed supply – none of the following applies:
i. the other entity would be an Australian-based business recipient of the supply, if the supply had been made to it;
ii. the other entity is an individual who is provided with the supply as an employee or officer of an entity that would be an Australian-based business recipient of the supply, if the supply had been made to it; or
iii. the other entity is an individual who is provided with the supply as an employee or officer of the recipient, and the recipient’s acquisition of the thing is solely for a creditable purpose and is not a non-deductible expense
From the information received, your supply will satisfy paragraph (a) of subsection 38-190(3) as your supply is under an agreement with a non-resident.
In respect of paragraph (b) of subsection 38-190(3), paragraphs 277 and 285 of GSTR 2005/6 state:
277. A clear understanding of the exact nature of the supply is essential to determining whether that supply is provided to another entity. By determining what is in substance and reality being supplied, it is possible to identify to which entity the supply is provided.
285. In situations where the contractual flow of the supply is to an entity (other than an individual), and it is necessary to determine whether the actual flow of the supply is to another entity (other than an individual), we consider that a strong indicator that the supply is provided to another entity is that the contracting entity has no further interaction with, or participation in, the provision of the supply beyond contracting and paying for the supply…
From the fact provided, NR decides which software to develop and what features the software will have, gives you functional specifications and related information to enable you to design the software. NR has planning meetings with you, decides the exact extent of the work, how it should be done and the timelines for completing the work; and pays you directly.
Therefore, following the above view, you supply to NR. We do not consider that your supply is provided to another entity in Australia. Nor does the agreement with NR require your supply to be provided to another entity in Australia.
Since paragraph (b) of subsection 38-190(3) of the GST Act is not satisfied, there is no need to discuss paragraph (c) of subsection 38-190(3) of the GST Act.
Hence subsection 38-190(3) of the GST Act will not negate the GST-free status of your supply under Item 2.
Accordingly, your supply of software development services to NR will be GST-free under paragraph (a) or (b) of Item 2.
For more information on subsection 38-190(3) of the GST Act please refer to Goods and Services Tax Ruling GSTR 2005/6.
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