Edited version of private advice

Authorisation Number: 1052125378347

Date of advice: 1 June 2023

Ruling

Subject: GST - supply of data hosting to non-resident customer without a presence in Australia

Question

Is GST payable on the supplies that you make under the Agreement X, Y and Z (the agreements) you entered into with Entity A?

Answer

GST is not payable on the supplies that you have made under the agreements if you have not charged GST to Entity A or have not reported a GST liability amount in your Business Activity Statement (BAS).

However, if you have passed on GST to Entity A in respect of a given invoice and reported the GST in your BAS, GST is payable to the ATO in respect of that invoice unless and until you have refunded the GST to Entity A.

If you have passed on GST to Entity A in respect of a given invoice and reported the GST in your BAS, but you subsequently refunded the GST to Entity A, you can make a 'decreasing adjustment' in your BAS for the tax period in which you give the GST refund to Entity A.

This ruling applies for the following period:

30/03/2020 to 31/05/2027

The scheme commenced on:

30 March 2020

Relevant facts and circumstances

You are registered for GST.

You carry on a data hosting business in Australia.

You supply data hosting services to Entity A which is non-resident company without a presence in Australia. You have been charging Entity A GST.

The agreements that set out the terms of your data hosting arrangement with Entity A are Agreements X, Y and Z.

A clause of Agreement X states:

Unless otherwise stated by (you, the rulee) to the Customer the order of precedence of the documents is (i) Schedule, (ii) Special Conditions, (iii) General Terms and Conditions, (Iv) Service Order Form and (v) annexed documents.

A clause of Agreement X states:

(You, the rulee) provides the Services as an independent contractor and no partnership, agency or joint venture is created between the parties.

A clause of Agreement X states:

"service" means the service provided by (you, the rulee) and/or its licensors and contractors as set forth on the (something) Order or (something).

Agreement Y specifies the services you perform:

Data hosting/colocation

You physically put customers' equipment (in this case Entity A's equipment) like servers in a data centre located in Australia, part of which is leased to you; and connect to power for the servers/equipment to run/power on. The equipment is stored on racks, which are basically cabinets. All you do within the scope of this arrangement is utilise some space and electricity in a data centre in Australia for the customer to connect their equipment to. You charge a fixed monthly fee (referred to as rack rental on your invoices) which covers your rental and electricity costs.

Service inclusions (covered by the data hosting arrangement)

Agreement Y (for a term of a number of years with a commencement date of (date)) states;

You will install lockable cabinet(s), or racks as per contracted scope of service in one of the data halls and contracted power will be provisioned via redundant power distribution units.

Service operational maintenance

You may undertake periodic service testing and maintenance work.

Internet/telco link kinds of services

This service category includes internet or telco links kind of services. As an example, the server that is sitting in your data centre may need to connect to internet and if the customer wants, you then to provide internet service to that server. In some instances, the customer is using another service provider for data centre service, and they just need you to provide internet/connectivity to their services. You charge customers a fixed monthly fee for the service (just like how an internet services provider would charge some companies for providing internet (ISP service) to them).

Cross Connect

This involves Cross Connect cabling between point A (Entity A's server/hardware and point B (the internet). This is necessary for providing your ISP service.

You charge Entity A a monthly fee to have this cable remain in place.

Remote hands services

This service includes any remote assistance the customers need you to provide them. An example is if the server is frozen then the customer may contact you to help restart the device. In that instance, one of your engineers would go to the building/data centre and physically press the button to restart the server. You charge customers an ad-hoc fee based on the time it took you to perform the tasks. You may also supply goods in the course of performing such a service.

Typical remote hands services you may provide include:

1.            Secure cabling to connection

2.            Report of any alarm/warning lights on equipment during the site work/visit

3.            Perform initial inventory of equipment (or upon request)

4.            Providing visual inspections and verifications

5.            Record digital pictures or serial numbers

6.            Power cycling a device (router, server, switch) and hard/soft reboots

7.            Moving equipment within Customer's space and/or cabinets

8.            Ladder racking/pre-wiring of patch panels and equipment

9.            Press a button/toggle on device/set a dipswitch

10.          Equipment installations

11.          Assemble, install and maintain cabling

Further details of your arrangement for storage of Entity A's equipment

You have entered into a contract with Entity A for a term of a number of years.(Agreement X)

The documents pertaining to your arrangements with Entity A do not specify that you are leasing storage space or granting a licence to occupy storage space or granting a licence to store goods.

Each rack is standalone and has castors at the bottom on the rack.

You give a commitment to Entity A that you would not share their rack with servers/hardware belonging to other customers.

Equipment is assigned whatever space you choose to allocate to them, this is mainly to enable you to manage your space most efficiently and so that in case there is an issue for which your technicians need to visit the data centre, then they would know what rack they need to go to.

You are allowed to move a customer's hardware/server to an alternative location within the Data Hall.

Your contract with a customer is for providing them a rack in a specific data centre building (e.g., the owner/operator of the building) - however you do not commit to specific space/rack number to customer mainly to ensure that you can move their rack to a new location if there is any commercial or technical reason for which you need to do so. Your agreements with Entity A do not specify a particular rack number/rack location.

You have in fact initiated with at least (number) customers in the last (number) months flagging with them that in the near future you may need to move their racks to new locations. One of these (number) customers is Entity A.

It will be deemed necessary that you seek permission from a customer each time you wish to move the customer's hardware/server although it is not contractually a requirement that you seek such permission. Permission will be sought as moving of the rack will involve turning power off on current rack - then moving the rack - then turning power back on once it's at the new location. Given that customer's equipment will have to be turned off, it is deemed a major outage hence best practice is to perform this by early coordination with customer + at scheduled time to ensure all parties (your engineers onsite to physically move the rack, customers engineers so they can confirm equipment is back online after migration, etc.)

You advise the Data Hall location of each customer's hardware/server, as illustrated on the sample invoice provided (Invoice Number (number) - Suite: (number) Rack: (number) and Level (number) Suite: (number), on every occasion. However, you don't need to give such advice and can easily remove customer rack location from customer invoice. You have been historically doing it simply as it looks better and more formal.

There is no floorplan of the Data Hall that captures where each customer's equipment is except an internal excel spreadsheet that you maintain to know which customer is in which rack. This is never shared with customers.

There is an option for customers to take on fully dedicated caged area. This is quite rare as it comes at a high premium and you only have 1 customer (company name) who has taken a full dedicated cage with (number) racks.

Except above mentioned (company name) cage, each of your customers' racks are located in a shared Co-location space/data hall/suite. Entity A currently has (number) racks with you in (number) different colocation areas. Reason being that you provisioned their first rack and then (number) years later when they needed 2^nd rack you put the new rack in then available space which was in a different area. Where to put their rack was your decision and you only notified customer of the new rack location for record purpose.

Entity A is permitted to access the data centre for the purpose of maintaining their equipment. This would involve sending their employee from overseas to Australia to perform the work. You would need to get your employee to escort the Entity A employee to the relevant storage unit as they would not know where to go. However, in practice it is not expected that Entity A would ever send an employee to the data centre to do maintenance work, as Entity A is based solely overseas.

(Table of fees you initially charged Entity A)

Agreement Zrefers to an internet service with a monthly charge of (amount). Entity A has recently (last month) cancelled one of their internet links with you so you are not charging Entity A for it now (you hope to sell them internet again in the future though)

You are now charging Entity A a higher amount for monthly rack rental due to cost increase based on electricity cost increase from your suppliers

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 9-25

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

A New Tax System (Goods and Services Tax) Act 1999 Division 142

Reasons for decision

Question

Is GST payable on the supplies that you make under the Agreement X, Y and Z (the agreements) you entered into with Entity A?

You are making a supply of a data hosting service to Entity A. This supply is GST-free under item 2 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) (item 2) because:

• The overall supply is not essentially a supply of goods or real property; and
• The customer is a non-resident who is not in Australia; and
• The essential character of your supply is not a supply of work physically performed on goods situated in Australia when the work is done nor is it directly connected with real property situated in Australia; and
• No exclusions from GST-free treatment under item 2 apply.

However, the supply may be treated under Division 142 of the GST Act as taxable in certain circumstances.

Detailed reasoning

GST is payable on taxable supplies.

Taxable supplies under section 9-5

Section 9-5 of GST Act 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

(a)  the supply is *connected with the indirect tax zone

(b)  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).

The indirect tax zone means Australia (within the meaning of the * ITAA 1997), but does not include any of the following:

(a) the external Territories;

(b) an offshore area for the purpose of the Offshore Petroleum and Greenhouse Gas Storage Act 2006;

other than an installation (within the meaning of the Customs Act 1901) that is deemed by section 5C of the Customs Act 1901to be part of Australia and that is located in an offshore area.

You are supplying a data hosting service under the agreements. This involves storing Entity A's server/equipment and powering this equipment etc and supplying internet. You carry out necessary work to enable the data hosting services to be provided and continue to be provided, where Entity A's machines breakdown etc, and you refer to this work as remote hands services.

You make your supply of data hosting services to Entity A for consideration and in the course or furtherance of an enterprise that you carry on in Australia; you perform the service in Australia and you are registered for GST. Therefore, you meet the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act.

There are no provisions of the GST Act under which your supply of data hosting services is input taxed.

Therefore, what remains to be determined is whether you are making GST-free supplies.

GST-free supplies of services to non-residents

A supply of an intangible (something other than goods or real property) to a non-resident who is not in the indirect tax zone (Australia) is GST-free under item 2 in the table in subsection 38-190(1) of the GST Act (item 2) if:

(a)  the supply is not 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 recipient acquires the thing in carrying on their enterprise but is not registered or required to be registered.

There are exclusions from GST-free status under item 2. These exclusions are contained in subsections 38-190(2), 38-190(2A) and 38-190(3) of the GST Act.

We shall now determine whether for GST purposes, the essential character of the supply you make to Entity A, which is a non-resident company without a presence in Australia, is a data hosting service only or whether it should be considered to be a supply that also consists of a supply of goods or real property to any extent

You are making a supply of data hosting services to Entity A. The transaction involves a bundle of features and acts. Therefore, we need to consider whether you are making a mixed supply or a composite supply.

Paragraphs 16 to 24 of GSTR 2001/8 discuss mixed and composite supplies. They state:

Mixed supply

16. A mixed supply is a supply that has to be separated or unbundled as it contains separately identifiable taxable and non-taxable parts that need to be individually recognised. Paragraphs 45 to 54 explain what are separately identifiable parts.

Composite supply

17. If you make a supply that contains a dominant part and the supply includes something that is integral, ancillary or incidental to that part, then the supply is composite. You treat a composite supply as a supply of a single thing. Paragraphs 55 to 63 explain what are integral, ancillary or incidental parts.

18. A composite supply is either taxable or non-taxable. It may also be a part of a larger mixed supply.

Differentiating between mixed and composite supplies

19. Where a transaction comprises a bundle of features and acts, you must consider all of the circumstances of the transaction to ascertain its essential character. You also need to consider the effect the GST Act has on the supply or any of its individual parts. You can then determine whether the transaction is a mixed supply because it has separately identifiable parts that the GST Act treats as taxable and non-taxable, or whether it is a composite supply because one part of the supply should be regarded as being the dominant part, with the other parts being integral, ancillary or incidental to that dominant part.

20. The distinction between parts that are separately identifiable and things that are integral, ancillary or incidental, is a question of fact and degree. In deciding whether a supply consists of more than one part we take the view that you adopt a commonsense approach.

21. You may choose to treat something (or things taken together) as integral, ancillary or incidental if the consideration that would be apportioned to it (if it were part of a mixed supply) does not exceed the lesser of :

•         $3.00; or

•         20% of the consideration for the total supply.

22. If you choose not to apply this approach, then you need to make an objective assessment about whether the thing is integral, ancillary or incidental.

23. You cannot use this approach where a provision of the GST Act specifically requires you to treat a part of a supply in a particular way, regardless of its scale or connection with the supply. For example, the supply of food as part of an excursion or field trip may otherwise be considered to be integral, ancillary or incidental to the supply of the excursion or field trip, but paragraph 38-90(2)(b) specifies that such food will not be GST-free. This means that the consideration for the field trip requires apportionment.

24. A part of a supply may, on an objective assessment, be something that forms an integral, ancillary or incidental part of the supply even if the consideration for it would exceed the lesser of $3.00 or 20% of the consideration for the total supply.

Paragraphs 100 to 103 of GSTR 2003/7 discuss composite supplies. They state:

100. If you make a supply that contains a dominant part and something that is integral, ancillary or incidental to that part, then the supply is composite. You treat a composite supply as a supply of a single thing. Where, for example, the supply of services is integral, ancillary or incidental to another dominant part of the supply, being a supply of real property, the supply is a composite supply of real property and is treated as a supply of a single thing to which subsection 38-190(1) does not apply.

101. Paragraph 59 of GSTR 2001/8 provides guidance in determining whether a transaction involves a composite supply. It states

No single factor (by itself) will provide the sole test you use to determine whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply. Having regard to all the circumstances, indicators that a part may be integral, ancillary or incidental include where:

•         you would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

•         it represents a marginal proportion of the total value of the package compared to the dominant part; or

•         it is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

•         it contributes to the proper performance of the contract to supply the dominant part.

That is, we consider that a part of a supply will be integral, ancillary or incidental where it is insignificant in value or function, or merely contributes to or complements the use or enjoyment of the dominant part of the supply. It is a question of fact and degree whether a supply is mixed or composite.

102. The following supplies illustrate the importance of this characterisation issue.

Purchase of a ticket to obtain entry to a cinema or sporting event

103. The dominant part of the supply is the presentation of the event or film and the permission to enter upon the land and occupy a particular seat is ancillary. This is not a supply of real property.

Paragraphs 68 and 69 explain that work on goods may form part of a composite supply with the composite supply being characterised as something different to a supply of work on goods. They state:

68. In many cases it is self-evident that a supply is a supply of work physically performed on goods. However, sometimes a supply must be analysed to determine whether it is properly characterised as 'a supply of work physically performed on goods'. If the supply includes work physically performed on goods but that work is ancillary to some other dominant part of the supply that is not work physically performed on goods, then that supply is not characterised as a supply of work physically performed on goods. This depends on the particular facts of each supply.

69. For example, a supply of a report on the results of testing and analysing samples of goods is characterised as a supply of information or advice if the dominant part of the supply is the analysis of data to enable a professional opinion to be provided. The supply is not characterised as a supply of work physically performed on goods. The testing and analysis of samples of goods enables the information to be compiled and is ancillary to the supply of that information.

We consider the following things are integral, ancillary or incidental to your supply of a data hosting service, which is the dominant part of your supply:

• The set up work and set up materials, such as ladder racking
• The replacement parts/consumables and the repair and maintenance work you do on Entity A's servers/hardware
• Cross connect cabling and other cabling
• Other remote hands work

This is because:

• One would reasonably conclude that they are a means of better enjoying the dominant thing supplied (being a data hosting service), rather than constituting for customers an aim in itself;
• They would represent a marginal proportion of the total value of a package compared to the dominant part (being the date hosting service);
• They are necessary and contribute to the supply (the data hosting service) as a whole, but cannot be identified as the dominant part of the supply (being the data hosting service);
• They contribute to the proper performance of the contract to supply the dominant part (being the data hosting service); and
• They merely contribute to or complement the use of enjoyment of the dominant part of the supply (being the data hosting service).

The dominant part of your supply is a data hosting service. That is essentially the reason why Entity A has engaged you under the agreements.

The fitting of the storage containers etc is just a preliminary task you do to enable you to perform the contract to provide date hosting service as the data hosting service contract requires you to store the customers hardware.

If you did not provide power distribution units, connect cabling and provide remote hands services, you would not be able to provide, and continue to provide, your data hosting service. The purpose of providing power distribution units, connecting cabling and providing remote hand services is to enable you to meet your obligations under your contract to provide data hosting services which is the essential character of your overall supply to Entity A under the service schedule agreements.

Therefore, the supply you make to Entity A should be characterised as a composite supply of data hosting service, with any goods installed at the data centre, in the course of performing a remote hands service, pursuant to the agreements, being integral, ancillary or incidental to the data hosting service. Therefore, we do not treat you as making a supply of goods for the purposes of item 2.

Whether you are making a supply of real property

We shall now explain why we consider that you are not making a supply of real property.

In accordance with section 195-1 of the GST Act, real property includes:

(a)  any interest in or right over land

(b)  a personal right to call for or be granted any interest in or right over land

(c)   a licence to occupy land or any other contractual right exercisable over or in relation to land

Goods and Services Tax GSTR 2003/7 distinguishes between storage arrangements that involve a supply or real property and a supply of storage services.

Paragraphs 106 and 107 of GSTR 2003/7 state:

106. Where the supply is of storage services only, there being no right to occupy particular storage space, the real property is merely the setting for the service performed. The supply is the service of storing goods. There is no supply of real property.

107. Where, on the facts of a particular case, it is established that the essential character of a supply of this kind is the supply of a licence to occupy land, the supply is a supply of real property.

We consider that:

• you do not give Entity A a right to occupy a particular space/you are not supplying a right to occupy land to Entity A; and
• the real property you use is merely the setting for performance of a storage service that you supply to Entity A.

This is supported by the following facts:

The agreements do not specify that you are leasing storage space or granting a licence to occupy storage space or granting a licence to store goods.

You have not committed to a particular space to Entity A. The agreements state provider (you) will install lockable cabinet(s), or racks as per contracted scope of service in one of the Data Halls and contracted power in (kW) will be provisioned via redundant power distribution units (PDUs). However, the contract does not specify the specific rack where Entity A's equipment is stored.

It is not contractually a requirement that you seek permission from a customer each time you wish to move the customer's hardware/server. However, the timing of such a move is co-ordinated with the customer to minimise the disruption to the operation of that equipment.

There is no floorplan of the Data Hall that captures where each customer's equipment is except an internal excel spreadsheet that you maintain to know which customer is in which rack. This is never shared with customers.

If Entity A were to send their employee from overseas to Australia to perform maintenance work on their equipment, you would need to get your employee to escort the Entity A employee to the relevant storage unit as they would not know where to go.

Hence, in accordance with paragraphs 106 and 107 of GSTR 2003/7, we conclude that you are not making a supply of real property under the arrangement you have with Entity A.

Work physically performed on goods situated in Australia

We shall now explain why we consider your supply of the data hosting service is not a supply of work physically performed on goods situated in Australia when the work is done.

Paragraph 58 of GSTR 2003/7 explains what work physically performed on goods means. It states:

58. A supply is a supply of work physically performed on goods where something is done deliberately to the goods to change them or to otherwise affect them in some physical way. The repair of goods is an example of work that is physically performed on goods.

Paragraph 39 of GSTR 2003/7 states:

39. Examples of supplies where there is a physical interaction with the goods or real property but without changing the goods or real property include supplies of services of the following kind:

•         transport services - the removal of goods from one place to another;

•         security services in relation to goods or real property; and

•         storage services for goods (which do not involve renting storage space - see paragraph 106 of the Explanation section of the Ruling). (While this supply is directly connected with goods, it is not directly connected with real property - see further paragraph 54 below).

Each of these supplies is directly connected with goods or real property.

Although you may do repairs and maintenance etc on Entity A's equipment, the essential character of the supply you make to Entity A is a data hosting service rather than a supply of work on goods. The work on goods is ancillary to the data hosting service as it enables you to provide and continue to provide a data hosting service to Entity A. As with the example in paragraph 69 of GSTR 2003/7 about testing services, we do not treat you as making a supply of work physically performed on goods, for GST purposes even though you may do work on goods under your contracts with Entity A.

Directly connected with real property

We shall now consider whether you are making a supply directly connected with real property.

Paragraphs 32 to 35 and 51 of GSTR 2003/7 provide guidance on this concept. They state:

32. As explained above, we consider that the expression 'directly connected with' contemplates a very close link or association between the supply and particular goods or real property.

33. We consider that such a close link or association between the supply and particular goods or real property exists where, for example, the direct object of the supply is the goods or real property in the sense that:

•         the supply changes or affects the goods or real property in a physical way; or

•         there is a physical interaction with the goods or real property but without changing the goods or real property; or

•         the supply establishes the quantity, size, other physical attributes or the value of the goods or real property; or

•         the supply affects (or its purpose is to affect) or protects the nature or value (including indemnity against loss) of the goods or real property; or

•         the supply affects, or is proposed to affect, the ownership of the goods or real property including any interest in, or right in or over goods or real property.

34. This is not an exhaustive list of the situations where, in our view, a direct connection exists. There may be some supplies that are directly connected with goods or real property that do not readily fit into one of these categories.

51. If a supply involves the use of real property in circumstances where that use is ancillary to the dominant part of the supply, the real property merely providing the setting for the dominant part of the supply, that supply is not directly connected with real property.

In accordance with paragraph 51 of GSTR 2003/7, as the real property in your case - the data centre merely provides the setting for the dominant part of your supply, which is data hosting services, your supply to Entity A is not directly connected with that real property.

Hence, the preconditions at paragraph (a) of item 2 are met.

Finally, no exclusions from GST-free treatment (as set out in subsections 38-190(2), 38-190(2A) or 38-190(3)) apply.

Hence, you are making a GST-free supply of data hosting services under item 2 in the table in subsection 38-190(1) of the GST Act. Therefore, GST is not payable on your sale of the data hosting services, subject to the overriding rule in Division 142 of the GST Act.

In accordance with Division 142 of the GST Act, if a GST-free supply is incorrectly treated by the supplier as subject to GST and the supplier passed on GST to their customer and reported GST on the supply in their BAS, the supply is treated under the GST Act as subject to GST unless and until the supplier refunds the GST to their customer.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).