Edited version of private ruling

Authorisation Number: 1011697268053

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Ruling

Subject: GST and supply of low value digital products over the internet

Question 1

Will the Commissioner of Taxation (the Commissioner) approve the proposed percentage based apportionment approach to work out the GST payable on your sales of digital products over the internet?

Answer

No.

Question 2

Alternatively, will the commissioner provide another suggested approach?

Answer

No.

Relevant facts and circumstances

You are registered for GST.

You are a resident of Australia for income tax purposes. Your head office is located in Australia. You also have an office in an overseas country.

Your primary activities are creation and retail sale of digital products (products). You sell the products over the internet via your website to consumers all around the world.

The products are electronic codes that exist in the virtual world. You retain the ownership of the codes that you create. This code is licensed to consumers upon purchase. The purchaser receives a licence key in order to operate the product when the purchase is made.

The products are sold for relatively low prices.

You make millions of sales annually. It is expected that the sales will grow rapidly over the coming years.

You receive limited data and information from each sale transaction to determine if the sale is export or Australian related for GST purposes.

Based on the available data, the majority of sales are made to overseas purchasers.

You do not make sales to intermediaries for their on sale. This means that the first purchasing consumer will also be the final user of the products.

There are a number of avenues or streams through which you generate sales. These include:

Direct sales

The consumer accesses your website and selects the product they wish to purchase. The consumer is then directed to a webpage and required to complete various purchase details.

The consumer is required to choose a payment method either via entity X (X) or entity Y (Y). These are independent organisations and are not related to you.

X is a third party that provides electronic payment processing and other services. X is based overseas.

Y is a third party that provides an online payment mechanism. Y is based overseas.

You do not have any direct dealings with Y. You only deal with X in settling your sales, money transfers and data collection.

If a payment is made through Y, Y transfers the money to X. X after deducting its fees (a specified percentage of the sale price) transfers the balance remaining to you. X deducts the same fee from sales made directly through X or indirectly through Y.

X houses the information provided by the purchaser in an online account that is accessible to you. This data can be searched via various parameters. Sales data is uploaded to this database within a few hours of a sale being made. This data can be exported to an excel format or graph for ease of use.

The headings contained in the excel format include;

Date, Reference, Type, Item Type, Currency, Total, Subtotal, Tax, Product, Title, Base, Quantity, Referrer, Entry, Campaigns, Licenses, Source, Salutation, First Name, Middle Name, Last Name, Company, Email, Phone, Address 1, Address 2, City, Country, Region, Postal

You have no input into the compilation of the data provided by X. The data is independently collected and is not manipulated or influenced by you.

When the consumer is purchasing a product, the default country setting will be to the server of the country in which the consumer is located. If the purchaser is physically located in Australia then an Australian server will be identified. This means that the payment will be processed through Australia, or vice versa. However, the consumer can choose to alter this setting by selecting a different country server. The consumer may choose this in order to purchase in another currency. For instance, this may be due to exchange rate fluctuations. This creates part of the difficulty with accurately determining whether the sale is an export or not.

Promotional sales

This process is not periodic or on going but rather the frequency of this is dependent on the promotion company running a promotion that includes your products.

This process is operated by a promotion company, which maybe located any where around the world, bundling together various products from various suppliers for sale. The consumer then purchases the bundle of products rather than each product individually. The bundle is sold cheaper on a per unit basis than it would be for the consumer to purchase the products from each supplier separately.

The relevant promotion company hosts a website and engages various marketing initiatives to generate website traffic to its website. The bundle is sold via the promotion company's website. The promotion company receives payment for the bundle and forwards the payment regarding your products to X. X then undertakes its normal process to finalise payment and transfer the sale proceeds to you.

As an example, the promotion company will approach you requesting that you sell two products in a total bundle of eight products. The other six products will be provided by other suppliers. The purchaser can then acquire the eight products in one purchase rather than acquiring each of the eight products separately.

Sales generated through affiliated websites

This is currently a minor revenue stream. It involves generating web traffic to your website via web links with affiliated websites.

This strategy operates by the consumer navigating to the relevant affiliate's website and then being directed by that website to your website. If the consumer then purchases your product then the affiliate will receive a percentage of the sales.

The consumer's purchase from you will then follow the process discussed above under the direct sales.

You are aware that it is the supplier's responsibility to obtain the necessary supporting evidence from the recipient to determine if the supply is an export sale and thus GST-free. You are also aware of the ATO's approach to sales made over the internet for low value supplies.

Your contentions:

In order for you to comply with your obligations under the GST regime, you are required to assess each individual sale made to each consumer. This would require you to specifically determine where each product sold is 'effectively used or enjoyed'. There would be difficulties in determining this issue.

You consider that the purchase of your products is not location specific. Rather the products can be used or enjoyed throughout the world independent of the location. The products are easily portable with a portable device and can be easily carried to different locations around the world. This is different to the supply of services that is not portable and exhausts its use at the time of supply or is limited to use in the location of purchase.

Assessing each transaction on an individual basis to meet your obligations under the GST law is too high a burden, from compliance, time and commercial perspective. This is due to a few key reasons:

§ the number of transactions that you undertake annually

§ the limited data available from each consumer at the completion of the purchase

§ the burdensome requirements of reviewing each individual sale transaction

§ the impact that data collection has on buyer behaviour (having the consumer complete more forms before completion of the purchase will negatively impact on sales revenue)

You consider that the ATO approach for low value supplies made over the internet does not contemplate circumstances where hundreds of thousand of supplies are made but rather considers supplies made on a much reduced and manageable scale. Reviewing each address detail for each consumer in light of the volume of sales being generated creates a commercial obstruction to this process, that is, it is too costly to review.

You stated that the GST law has not considered and has difficulty accommodating this situation. Also, the ATO has not provided any guidance on the law on circumstances similar to yours.

To address this compliance issue you request the ATO to endorse an approach as a 'reasonable method', based on Goods and Services Tax Ruling GSTR 2001/8 and Goods and Services Tax Ruling GSTR 2006/4, as follows:

§ use the data provided by X to identify the relevant percentage of sales made to consumers overseas and the relevant percentage of sales made to consumers in Australia.

§ the percentage will be based on three months of sales data provided by X.

§ this data will be generated prior to lodging each activity statement.

§ this percentage based approach will be applied to sales made across all three revenue streams during each quarterly tax period until the point at which material circumstances change.

For example:

Total revenue $1,000,000

Apportionment percentage

Australian sales 6% $60,000

Export sales 94% $940,000

GST payable ($60,000 x 1/11) $5,454.54

You seek approval for this approach both prospectively and retrospectively

Reasons for decision

Question 1 and 2

Summary

The GST Act requires for subsection 38-190(1) of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to be considered in respect of each individual supply that you make. Accordingly, the Commissioner cannot approve the method that you have proposed or suggest another method for you to calculate your GST liability on the supplies that you make.

Detailed reasoning

Section 9-40 GST Act provides that you must pay the GST payable on any taxable supply that you make.

A supply is a taxable supply if it meets all the requirements of section 9-5 of the GST Act. Section 9-5 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

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.

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

In your case, the supplies of the products satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:

§ you make the supplies for consideration

§ the supplies are made in the course or furtherance of an enterprise that you carry on

§ the supplies are connected with Australia under paragraph 9-25(5)(b) of the GST Act, and

§ you are registered for GST.

The supplies of the products are not input taxed supplies under the GST Act or a provision of another Act. Therefore, what remains to be determined is whether the supplies are GST-free.

Supplies of things other than goods or real property for consumption outside Australia

Under section 38-190 of the GST Act, certain supplies of things, other than goods or real property, for consumption outside Australia are GST-free. Of particular relevance to your case are items 2 and 3 in the table in subsection 38-190(1) of the GST Act.

Item 2 in the table in subsection 38-190(1) of the GST Act (Item 2) provides that a supply of a thing, other than goods or real property, made to a non-resident is GST-free if the non-resident 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 the non-resident is not registered or required to be registered for GST.

However, the scope of Item 2 is limited by subsection 38-190(3) of the GST Act which provides that a supply covered by Item 2 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.

Item 3 in the table in subsection 38-190(1) of the GST Act (Item 3) states that a supply of a thing, other than goods or real property, is GST-free if it is a supply:

a) that is made to a recipient who is not in Australia when the thing supplied is done, and

b) the effective use or enjoyment of which takes place outside Australia; other than a supply of work physically performed on goods situated in Australia when the thing supplied is done, or a supply directly connected with real property situated in Australia.

Subsection 38-190(4) of the GST Act extends the scope of Item 3 by treating a supply that is made to a recipient who is in Australia in relation to the supply as being made to a recipient who is not in Australia if:

a) the supply is made under an agreement entered into, whether directly or indirectly, with an Australian resident, and

b) the supply is provided, or the agreement requires it to be provided, to another entity outside Australia.

As stated above, one of the requirements of both Items 2 and 3 is that the supply is neither a supply of work physically performed on goods situated in Australia when the thing supplied is done nor a supply directly connected with real property situated in Australia. We consider that the supplies of the products meet this requirement.

The supplies of the products must also meet the other requirements of either Item 2 or Item 3 for them to be GST-free. Goods and Services Tax Ruling GSTR 2004/7 examines these requirements. It explains, amongst other things, for an entity (the recipient) that is either an individual, company, partnership, corporate limited partnership or trust:

§ when a supply is made to an entity that is a non-resident for the purposes of Item 2

§ when a supply is made to an entity for the purposes of Item 3

§ when an entity is not in Australia or is outside Australia when the thing supplied is done for the purposes of Item 2 and Item 3.

Generally, if a supply is provided or required to be provided to an individual who is physically in Australia (that is the presence of the individual in Australia is integral to the provision of the supply), consumption of the supply does not take place outside Australia. In this instance the supply will not be GST-free.

If a company, partnership or trust does not have a presence in Australia (that is, it only has a presence outside Australia) and the supply is provided or required to be provided to that entity outside Australia, consumption of the supply takes place outside Australia. In this instance the supply will be GST-free.

To work out whether the supplies provided are for consumption outside of Australia and therefore GST-free, the supplier needs to ascertain certain information at the time the thing supplied is done.

In Chapter 1 of the Electronic Commerce Industry Partnership - Issues Register, the ATO provides guidance on how to determine if a low value supply of things other than goods or real property made over the internet is for consumption outside Australia. It provides the details that you must obtain from each recipient of your supply in order to determine the GST status of each supply that you make. These are:

Individual recipient

The supplier must obtain the following information if the recipient of the supply is an individual:

§ the residential status of the individual and their physical location at the time of the supply

§ confirmation that the individual is not a member of the Australian Public Service or Australian Defence Forces

§ the use of the supply

§ if they are a non-resident and are in Australia, whether their presence is in relation to the supply, and

§ if they are a resident of Australia and are outside Australia, whether their presence is integral to (as distinct from being merely coincidental with) the provision of the supply.

Company, partnership or trust recipient

The supplier must obtain the following information if the recipient of the supply is a company, partnership or trust:

§ the residential status of the company, partnership or trust and their physical location at the time of the supply

§ the use of the supply

§ if the company, partnership or trust has no presence either through an agent or permanent establishment in Australia

§ that the company, partnership is not controlled or run by Australian residents

§ if the non-resident company, partnership or trust has a presence in Australia, whether it is in relation to the supply.

Where the purchaser does not provide the required information, you will not have sufficient records to demonstrate that the supply was a GST-free supply under section 38-190 of the GST Act. In these circumstances the supply of the products will be a taxable supply. Hence, you will be liable to pay GST on the supply.

The GST Act requires for subsection 38-190(1) of the GST Act to be considered in respect of each individual transaction/supply that you make. There are no provisions in the GST Act which allow you to calculate your GST liability in any other way. Accordingly, the Commissioner cannot approve the method that you have proposed or suggest another method to calculate your GST liability on the supplies that you make.