Edited version of private ruling

Authorisation Number: 1011694331213

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Ruling

Subject: GST and supply of design

Question:

Are the supplies of design (and associated) services by an Australian company (you) to the overseas companies GST-free?

Advice/Answers:

Yes, the supplies of your design (and associated) services for goods to the overseas companies are GST-free.

Relevant facts:

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

You have agreements with overseas companies to provide design services. These overseas companies are the recipients of your services.

You provide designs in relation to certain goods in return for fees.

You provide the design services only, and the activities may include an evaluation (verification) service, and a production support service (provided overseas).

You provide the designs (which include designs of software) via e-mail or in electronic format (upload) to the overseas companies. Sometimes a paper copy is sent by air transport. Occasionally there is an in-country delivery of services and training provided to entities overseas in relation to your designs.

The designs are intellectual property to the overseas companies. No rights are supplied as the overseas companies own all rights and intellectual property from the output of your design services.

The designs for the overseas companies will ultimately be used as (part of the) basis for design of a product or end saleable item (goods).

The product or end saleable items (goods) are not constructed in Australia. The goods are made under instructions from the overseas companies in overseas factories. You have no involvement with the manufacturing of the goods.

A small part of your design services end up in a product(s) that is sold in Australia. However, you are not involved at all in the production of the product(s). You merely provide the design services to the overseas companies, who use the designs to help create goods that are sold worldwide.

You do not provide, and there are no agreements with the overseas companies which require you to provide, your services to another entity in Australia. Some of these companies may have subsidiaries in Australia. However, you do not deal with these subsidiaries in relation to your design services. You have no involvement and interactions with any entity in Australia in relation to your design services. You only deal with the overseas head office.

You are unaware whether the overseas companies are registered for GST in Australia. Based on your search of the Australian business register (ABR), it is your understanding that the overseas companies do not have Australian business numbers (ABN), nor are registered for GST.

You have provided copies of the agreements with the overseas companies in relation to your design (and associated) services.

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), 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

c) the supply is connected with Australia; and

d) 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.

The facts indicate that you satisfy the requirements under paragraphs 9-5(a) to 9-5(d) of the GST Act as:

§ you make the supplies of design services (and any associated services) to the overseas companies for consideration (such as by way of payments).

§ you make the supplies in the course of your business.

§ the supplies of these services are made through an enterprise (business) that you carry on in Australia (and therefore are connected with Australia).

§ you are registered for GST.

We need to characterise your supplies to the overseas companies before applying the relevant GST-free and input taxed provisions.

Characterisation of the supply

A supply may be characterised as consisting of one or more things or parts. Goods and Services Tax Ruling GSTR 2001/8 covers and distinguishes between a mixed supply (which contains separately identifiable parts), and a composite supply (which has one dominant part with other parts that are not treated as having a separate identity because they are integral, ancillary or incidental to the dominant part). It is a question of fact and degree whether a supply is mixed or composite. As provided under paragraph 37 of GSTR 2001/8, if all of the parts in a supply have the same GST treatment, then there is no requirement to separately identify each part.

From the information provided, you provide designs (which include designs of software) for certain goods. Your designs are e-mailed or provided in electronic format (upload) to the overseas companies. In providing your design services, this involves providing evaluation services. No rights are supplied as the overseas companies own all rights and intellectual property from the output of your design services. You may also provide some production support services, which are provided to entities overseas. In return for your services, the overseas companies pay you the fees.

In relation to the designs of software, paragraph 92 of Goods and Services Tax Ruling GSTR 2003/8 provides that where, under the terms of the agreement, copyright in a (software) 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.

Paragraphs 69 and 70 of the Goods and Services Tax Ruling GSTR 2000/31 also provide that sometimes a service may involve both work being done and the creation of a product (for example, a report or plan) for the recipient. However, this does not alter the nature of the supply as one for the performance of a service. The product of the service (the report or plan) is not a separate supply from the supply of that service. This is also confirmed in paragraph 71 of GSTR 2000/31 which provides that if a supply is the provision of advice or information and the supply involves work to create, develop or produce that information or advice to the recipient, the supply is one of the performance of services.

Taking into consideration all the information provided, we consider that you are making supplies of design and associated services to the overseas companies. We will now determine the GST status of these services.

GST-free and input tax supply

The supply of your design and associated services to the overseas companies is not input taxed under any provisions of the GST Act or any other legislation.

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 2 in the table in subsection 38-190(1) of the GST Act (Item 2).

Item 2 provides that a supply of a thing (other than goods or real property) made to a non-resident who 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-residents enterprise, but is not registered or required to be registered.

Accordingly, where the provisions of either paragraph (a) or (b) above are satisfied, the supply will be GST-free if the non-resident entity is not in Australia when the thing supplied is done.

Non-resident not in Australia in relation to the supply

For a supply of services to be GST-free under Item 2, there is a precondition that the non-resident must not be in Australia in relation to the supply when it is provided.

Goods and Services Tax Ruling GSTR 2004/7 discusses when a non-resident is not in Australia when the thing supplied is done. 

Paragraph 37 of GSTR 2004/7 provides that 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.

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 services are done (that is, provided/performed).

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 information provided, you supply the design (and associated) services under contracts with the overseas companies. The designs are provided (electronically) to the overseas companies, who may then use your designs to manufacture goods in overseas factories, and later sell the products worldwide.

These overseas companies may have subsidiaries in Australia. However, you advised that you deal directly with the overseas companies' head office and not these subsidiaries in Australia. You have no involvement and interactions with any entity in Australia in relation to your design (and associated) services. Although your designs may end up in a product(s) which is later sold in Australia (that is, the overseas companies may manufacture product(s) overseas which are sold worldwide), the design services are supplied to and for the purposes of the overseas companies. Therefore, the overseas companies are considered to be 'not in Australia' in relation to your supplies, for the purposes of Item 2.

Accordingly, the supplies of your design (and associated) services are made to the non-resident companies who are not in Australia in relation to the supplies, when the services are provided/performed.

Paragraphs (a) and/or (b) of Item 2

Where a non-resident entity is not in Australia in relation to the supply when the thing supplied is done, it is necessary to determine if the other requirements in either paragraph (a) or (b) of Item 2 are satisfied.

Under paragraph (a) of Item 2, a supply of a thing that is made to a non-resident who is not in Australia when the thing supplied is done is GST-free if the supply is neither a supply of work physically performed on goods situated in Australia nor directly connected with real property situated in Australia when the work is done.

From the information given, you provide designs (and provide associated services in relation to the designs) of certain goods. The supplies of your design (and associated) services are not supplies directly connected with real property situated in Australia.

The supplies must also be analysed to determine whether they are properly characterised as supplies of work physically performed on goods. This is examined in Goods and Services Tax Ruling GSTR 2003/7.

Paragraphs 68 and 69 of GSTR 2003/7 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.

On the basis of the information provided, you provide designs (include designs of software) for certain goods that are sent electronically (or via paper) to the overseas companies. The design services are not supplies of work physically performed on goods situated in Australia when the work is done. Even though your designs and the evaluation (verification) of the designs have some connection to the goods being designed and tested, we consider that this testing is ancillary to your design services. This identified connection to the goods does not alter our view that the supplies are neither work physically performed on goods, or directly connected with real property, situated in Australia.

Accordingly, the supply of your design (and associated) services to the overseas companies satisfy paragraph (a) of Item 2.

Furthermore, where it is established that the overseas companies acquired your design (and associated) services in carrying on their businesses, and are neither registered nor required to be registered for GST in Australia, the supplies of your services will also satisfy paragraph (b) of Item 2.

Subsection 38-190(3) of the GST Act

Having met the requirements of Item 2 it is necessary to consider subsection 38-190(3) of the GST Act. Subsection 38-190(3) of the GST Act states:

Without limiting subsection (2), 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.

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

From the information provided, the supplies of your design (and associated) services are not provided, and there are no agreements with the overseas companies to provide the services, to another entity in Australia. Some associated services (such as the production support and training service) are provided outside Australia.

Further, in relation to the later use of a supply, that is, a supply is provided to another entity outside Australia, and that supply is later used in Australia, that later use does not alter the fact that the supply is not provided to that entity in Australia for the purposes of applying subsection 38-190(3) of the GST Act (to negate the GST-free status of a supply). For further information, refer to paragraphs 130 to 133 of Goods and Services Tax Ruling GSTR 2005/6.

Therefore, subsection 38-190(3) of the GST Act does not exclude the supplies of your design (and associated) services to the overseas companies from being GST-free supply under Item 2.

In summary, the supplies of your design (and associated) services to the overseas companies are GST-free under Item 2.

All public rulings and/or publications referred to in this ruling are available at the Australian Tax Office website at www.ato.gov.au.