Edited version of private ruling

Authorisation Number: 1011686988762

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Ruling

Subject: GST and supply of rights to a non-resident entity

Question:

Is the sale of intellectual property and trademarks by an Australian company (you) to a non-resident company GST-free under item 4 in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer:

Yes, the sale of the intellectual property and trademarks by you to the non-resident company is GST-free.

Relevant facts:

You are an Australian company that is registered for goods and services tax (GST).

You entered into an Agreement with a non-resident company for the sale of assets.

The Agreement between you and the non-resident company was executed outside Australia.

The assets include intellectual property, trade marks and other rights.

In return for the assets, the non-resident company provides you with monetary consideration (the purchase price allocation is predominantly for the intellectual property and trade marks).

The non-resident company is based outside Australia and a non-resident for Australian income tax purposes. You also advised that the non-resident company has no presence in Australia, nor does it carries on business in Australia. It is your understanding that the non-resident company is to be registered for GST and become part of another Australian GST group.

You are an Australian resident for income tax purposes.

You and the non-resident company are unrelated parties.

You will assign to the non-resident company all the rights to the intellectual property, trade marks, and other rights effect from completion. You covenant with the non-resident company that the intellectual property, trade marks and patents are all of the intellectual property rights necessary to allow the non-resident company to use the assets for the development, manufacture, distribution and sale of the products as done by you prior to the date of the Agreement.

You will continue to perform research and development projects in relation to development of products with third parties, and manufacturing of products for third parties.

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). The supply of the intellectual property and trade marks by you to the non-resident company satisfies all the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as follows:

· you make the supply to a non-resident company in return for consideration by way of payments;

· you make the supply in the course or furtherance of your enterprise (business);

· you make the supply through an enterprise that you carry on in Australia (and therefore the supply is connected with Australia); and

· you are registered for GST in Australia.

Hence, the supply by you to the non-resident company is taxable to the extent that it is not GST-free or input taxed.

The supply of the intellectual property and trade marks to the non-resident company does not satisfy the input taxed provisions under the GST Act.

GST-free

Section 38-190 of the GST Act specifies when supplies of things, other than goods or real property, for consumption outside Australia are GST-free. Of relevance to the facts provided is item 4 in the table in subsection 38-190(1) of the GST Act (Item 4).

Under Item 4, a supply that is made in relation to rights is GST-free if:

· the rights are for use outside Australia; or

· the supply is to an entity that is not an Australian resident and is outside Australia when the thing supplied is done.

For the supply to be GST-free under Item 4, the supply must be made in relation to rights and satisfy either paragraph (a) or (b) of Item 4.

Goods and Services Tax Ruling GSTR 2003/8 and the court case, Travelex Ltd v Commissioner of Taxation [2010] HCA 33 (Travelex Case), covers the supply of rights for use outside Australia and a supply that is made in relation to rights.

Supply made in relation to rights

The words 'a supply that is made in relation to rights' mean that all of the types of supplies of rights referred to in paragraph 9-10(2)(e) of the GST Act may be covered by Item 4, that is, the creation, grant, transfer, assignment or surrender of a right.

Further, the Commissioner considers that the decision of the High Court in the Travelex case means that the expression 'a supply that is made in relation to rights' in Item 4 covers the supply of a thing (other than goods or real property) where the thing supplied only has value because of rights that attach to it and those rights are transferred. While the supply of that thing does not need to be characterised as a supply of rights, nevertheless, the supply has to encompass the transfer of rights and the value of the supply needs to be in the rights.

Paragraph 29 of GSTR 2003/8 states:

29. Supplies of intellectual property rights are supplies that are made in relation to rights.

Intellectual property is a generic term describing a variety of rights to control or profit from ideas and information. Intellectual property can be divided into four main areas: forms of expression, scientific advances, reputation, and confidential information. The supplies of intellectual property rights are supplies that are made in relation to rights for the purposes of Item 4.

Accordingly, the supply of the intellectual property and trade marks by you to the non-resident company is a supply made in relation to rights.

Paragraph (a) - Rights used outside Australia

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.

Accordingly, it is the intended use of the rights at the time they are created, granted, transferred, assigned or surrendered that determines whether the rights are for use outside Australia and therefore the extent to which the supply is GST-free.

There are insufficient facts given to determine the extent to which the rights are for use outside Australia, and therefore paragraph (a) of Item 4 will not be addressed.

Paragraph (b) - Non-resident who is outside Australia when the thing supplied is done

Non-resident who is outside Australia

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 fixed and definite place of its own for a sufficiently substantial period of time; or

· an agent at a fixed and definite place for a sufficiently substantial period of time.

Furthermore, a non-resident company is in Australia in relation to a supply if:

· the supply is solely or partly for the purpose of the Australian presence of the company; or

· the presence of the company in Australia is involved in the supply unless the only involvement is minor.

From the facts given, you supply the intellectual property and trademarks to a non-resident company based outside Australia. You state that the non-resident company does not carry on a business in Australia, nor does it have any presence in Australia in relation to the supply of the thing (rights) when the thing supplied is done. The non-resident company is 'not in Australia' for the purposes of Item 4.

When the thing supplied is done

Paragraph 199 of GSTR 2004/7 discusses when a thing supplied is done, and states that if the supply is the creation, grant, transfer, assignment or surrender of a right, the thing supplied is done at the time the right is created, granted, transferred, assigned or surrendered.

Further, Goods and Services Tax Ruling GSTR 2000/31 discusses where a thing supplied is done, and state at paragraphs 74 to 76:

74. If the supply is the creation, grant, transfer, assignment or surrender of a right, the creation of that right in another, the granting, transfer or assignment of that right to another, or the surrender of that right, is done where the right is created in that other person, granted, transferred or assigned to that other person or surrendered respectively.

75. The act that creates that right in another or grants, transfers or assigns that right to another, or surrenders the right, will depend on the facts of each individual case.

76. If, for example, a right is granted under an agreement to another to use certain intellectual property, the granting of that right to another is done where the agreement is made.

Further, paragraph 11 of GSTR 2003/8 states:

11. With a supply of a right or option, the thing that is done is the creation, grant, transfer, assignment or surrender of the right or option. Whether a right or option is created, granted, transferred, assigned or surrendered in Australia will depend on how the creation, grant, transfer, assignment or surrender is effected. For example, if a right to use intellectual property is granted by the execution of a written contract, the grant of the right is done in Australia if the contract is executed in Australia.

From the facts provided, you state that the Agreement for the supply made between you and the non-resident company was executed outside Australia. Accordingly, the granting of the rights to the non-resident company is done outside Australia.

The supply of the intellectual property and trade marks by you to the non-resident company satisfies Item 4 as the supply is made in relation to rights and is supplied to a non-resident entity that is outside Australia when the thing (rights) supplied is done.