Edited version of private ruling

Authorisation Number: 1011862619884

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Ruling

Subject: GST and the supply of a digital product

Question 1

Will you be making a taxable supply when supplying a digital product to a recipient in Australia?

Question 2

Will you be making a taxable supply when supplying a digital product to a recipient that is not in Australia?

Decision 1

Yes, you will be making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Decision 2

No, the supply will be GST-free under subsection 38-190(1) table items 2 or 3 of the GST Act.

Relevant facts

You have been registered for GST since X July 20XX for other business activities.

Your GST turnover is presently under the threshold of $75,000.

You are about to start a new business venture selling eBooks on your website.

You are based in Australia and your supplies will be made to both recipients in Australia and to recipients not in Australia.

Your customers will pay for the eBook online and the product will be automatically despatched on Payment.

Marketing of your product will be through social media, internet advertising and certain magazines.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Nature of the supply

Before considering the GST status of the supply of the eBooks downloaded from the Internet, it is necessary to determine the characteristic of this supply.

The Tax Office view is that software supplied in an intangible form, for example by downloading it from the Internet, is not a supply of goods as there is no tangible property supplied. Accordingly, the supply of the eBooks downloaded from the Internet is not a supply of goods.

Question 1

GST status of the supply of the eBooks downloaded from the Internet by Australian residents

A supply is a taxable supply if it meets all the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Section 9-5 of the GST Act provides that you make a taxable supply if all the following requirements are met:

(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 Australia, 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.

In your case, the supply of the eBooks downloaded from the Internet will satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:

· you will make the supply for consideration

· the supply will be made in the course or furtherance of an enterprise that you carry on

· the supply will be connected with Australia as the supply of the eBooks downloaded from the Internet is not a supply of goods and you will make the supply through an enterprise that you carry on in Australia, and

· you are registered for GST.

The supply of the eBooks downloaded from the Internet will not be an input taxed supply under the GST Act or a provision of another Act. Furthermore, while supplied to residents in Australia, the supply of your eBooks are not caught by the GST-free provisions in the GST Act. Therefore, when supplied to Australian residents, the supply of the eBooks will be a taxable supply that will be subject to GST as it satisfies section 9-5 of the GST Act.

Question 2

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 supply of the eBooks downloaded from the Internet meets this requirement.

The supply of the eBooks downloaded from the Internet must also meet the other requirements of either Item 2 or Item 3 for it 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 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.

At a practical level, the Tax Office has published guidelines for the e-commerce industry on how to ascertain whether the other requirements of Items 2 or Item 3 are met. These guidelines are outlined in Chapter 1 of the Electronic Commerce Industry Partnership - Issues Register which state:

Australian businesses retailing on the internet must pay GST on taxable supplies they make. In relation to supplies of things other than goods or real property, where such supplies are consumed outside of Australia, they may be GST-free.

The supplier has an obligation to determine whether the supply is for consumption outside of Australia. Where a supply of things other than goods or real property is made via the internet it may be difficult to determine if the consumption is outside of Australia.

At the present time there is no failsafe method of determining where consumption takes place when a supply is made via the internet. Where a supplier has long established arrangements with a recipient, the supplier may have evidence of the residence of a recipient and this evidence should be used to determine whether supplies made are for consumption outside of Australia. Similarly, when entering into higher value transactions, prudent commercial practice may require the supplier to obtain details about the recipient that will establish the residence of the recipient.

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.

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.

Obtaining this information would be sufficient record-keeping for GST purposes to demonstrate that the supply is GST-free under section 38-190 of the GST Act. Therefore, the supply of the eBooks downloaded from the Internet in these circumstances is GST-free.

Where the purchaser does not provide the above information, you will not have sufficient records to demonstrate that the supply was GST-free under section 38-190 of the GST Act. In these circumstances the supply of the eBooks downloaded from the Internet will be a taxable supply. Hence, you will be liable to pay GST on the total amount paid by the purchaser on such supplies.

Please note that all records relating to GST matters should be kept for at least five years.

For your information the GST Ruling and the Issues Register referred to can be found in full on our website at www.ato.gov.au