Edited version of private ruling

Authorisation Number: 1011902229502

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Ruling

Subject: internet service to non-resident entity

Issues

1. When you supply the access to your computer game to the recipient, and the recipient allows its registered users access to your computer game via its platform and canvas pages, is the supply a taxable supply?

2. If the answer to question 1 is your supply is a mixed supply, how do you identify the taxable component of your supply when you receive payment from the recipient?

Answers

1. Your supply of the access to your computer game to the recipient is a mixed supply. The supply is GST-free when the game players are overseas at the time the supply is provided, and taxable when the game players are in Australia at the time the supply is provided.

2. Please see reason for the decision.

Relevant facts

Your ruling is based on the following facts.

You are an Australian based software development company and you are registered for goods and services tax (GST) in Australia.

You are a game developer. You develop a computer game which is hosted on the recipient's networks.

According to your Terms of Service, your service is only available to persons who are registered members of the recipient.

Previously, all your game players paid through Pay Pal, a system which made it compulsory to disclose the player's address. From the Pay Pal system, you can identify which customers are Australian residents.

The recipient is a non-resident with no branches in Australia. It is not registered for GST in Australia. As far as you know, it is not registered with ASIC, and it does not have a permanent establishment in Australia for income tax purposes. It does not carry on its business at a fixed and definite place of its own for a substantial period of time. Nor does it do so through an agent at a fixed and definite place for a substantial period of time.

Previously the recipient charged you nothing for hosting your game on its networks. You charged the game players yourself and were in control of your payment system. You remit to the ATO 1/11^th of the fee received from the game players who are in Australia, because you believe it is a taxable supply. You do not remit any GST on the amount paid by the game players who are overseas because you believe the supply of access to your computer game to the game players who are overseas is a GST-free supply.

The recipient's Credit Terms

At the present, the recipient introduces a credit payment system for all game developers who host their games on its networks.

In summary, the recipient sets up their own universal currency for all games hosted on it network. Players have to buy these credits from the recipient if they wish to play games hosted on its network. The recipient keeps some of the credits used to play your game and sends you the balance in money.

You contend that the money you receive from the recipient is consideration for your supply of the access to your computer game to the recipient. You also state that the recipient issues invoices to game players who buy its credits and game players can view ccredit purchases and associated receipts for specific items they have purchased on their homepage. Since the recipient is a non-resident entity, you believe your supply to the recipient is GST-free.

You contend that game players are the recipient's registered members and only deal with the recipient and pay the recipient directly to gain access to your computer game. The recipient has complete control over the players' financial information and their payments. You also contend that since you no longer have any control over payments, you do not issue any invoice/receipt to the game players. In addition, you have no information about the game players, and cannot tell whether they are in Australia or are overseas. You have requested the recipient to provide you with information about which buyers of the credits used for your game are in Australia, but the recipient advises that they protect users' financial information with security features and never shares the information with anyone.

You are solely responsible for the resolution of disputes between yourself and the game players.

The recipient is responsible for the payment system. You, as a game developer, must implement this change to the credits as a method of payment.

Reasons for decisions

1. A supply will be a taxable supply where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) are satisfied. Section 9-5 of the 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

(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

From the information received, your supply of access to your computer game to the recipient satisfies paragraphs 9-5(a) to (d) of the GST Act as follows:

(a) You make a supply of access to your computer game for consideration;

(b) You make the supply in the course or furtherance of your enterprise of game development.

(c) You make the supply through an enterprise that you carry on in Australia and therefore the supply is connected with Australia.

(d) You are registered for GST in Australia.

Hence, your supply of access to your computer game to the recipient is taxable to the extent that it is not GST-free or input taxed.

You supply of computer game to The recipient does not satisfy the input taxed provisions under the GST Act. The GST-free provisions should also be taken into consideration.

GST-free

Of most relevance to this situation are items 2 and 3 in the table in subsection 38-190(1) of the GST Act (Items 2 and 3) which allow certain supplies to be made GST-free.

Under Item 2 in the table in subsection 38-190(1) of the GST Act (Item 2), a supply is GST-free where it is:

a supply that is 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-resident's *enterprise, but is not *registered or *required to be registered.

Under Item 3 in the table in subsection 38-190(1) of the GST Act (Item 3), a supply is GST-free where 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.

Item 2 is applicable to supplies made to non-resident recipients. Item 3 is applicable irrespective of the residency of the recipient.

Based on the facts provided, the recipient is a non resident and your supply of the access to your computer game to the recipient is neither a supply of work physically performed on goods situated in Australia nor are they directly connected with real property situated in Australia.

However, in order for a supply to be GST-free under items 2 and 3 of subsection 38-190(1) of the GST Act, The recipient must not be in Australia when the services are performed. 

In accordance with the Goods and Services Tax Ruling GSTR 2004/7, the pre-condition that the non-resident is not in Australia when the thing supplied is done requires that neither the non-resident, nor a representative acting on behalf of the non-resident if the non-resident is a company, is in Australia in relation to the supply.

Is the recipient "in Australia" and if yes, is it "in Australia in relation to your supply"?

Paragraphs 37 and 38 of GSTR 2004/7 state as follows:

37. A non-resident company is in Australia if that company carries on business (or in the case of a company that does not carry on business, carries on its activities) in Australia:

(a)   at or through a fixed and definite place of its own for a sufficiently substantial period of time; or

(b)   through an agent at a fixed and definite place for a sufficiently substantial period of time.

38. We consider that it would be reasonable for a supplier to conclude that a non-resident company is in Australia if:

· the company is registered with ASIC; or

· the company has a permanent establishment in Australia for income tax purposes

Pursuant to the information you have provided, the recipient is not registered with ASIC, and it does not have a permanent establishment in Australia for income tax purposes. It does not carry on its business at a fixed and definite place of its own for a substantial period of time. Nor does it do so through an agent at a fixed and definite place for a substantial period of time.

Therefore, according to paragraphs 37 to 38 of GSTR 2004/7, the recipient is not in Australia for the purposes of Item 2 and Item 3(a). We do not need to discuss whether the recipient is in Australia in relation to your supply or not.

Limitation of Item 2

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:

· it is a supply under an agreement entered into, whether directly or indirectly with a non-resident and

· the supply is provided or the agreement requires it to be provided, to another entity in Australia.

Pursuant to the information you have provided, you and the recipient have an agreement for the recipient to host your computer game on its networks. In addition, the recipient is responsible for the payment system. Game players, who are registered members of the recipient, will access your computer game through the recipient's network.

Paragraph 38-190(3) (a) of the GST Act is satisfied because your supply of the access to your computer game to the recipient is a supply under an agreement entered into with a non-resident entity, the recipient.

The next step is to consider paragraph 38-190(3) (b) of the GST Act.

Is your supply provided to another entity, and if yes, is your supply provided to that other entity in Australia?

Paragraphs 59 and 61 of Goods and Services Tax Ruling GSTR 2005/6 provide guidance in relation to the expression "provided to another entity". Generally a supply is made to whoever you are contractually liable to perform the services for, in this instance your supply is made to the recipient. However, a supply is provided to whoever obtains the actual effective use or enjoyment of the supply, that is, the actual beneficiary.

Paragraph 509 of GSTR 2005/6 provides that for the purposes of applying subsection 38-190(3), the focus is on the nature of the supply and the actual flow of that supply.

You are supplying the recipient with the access to your computer game. The key issue here is what the recipient does with the access to your computer game. Since the recipient merely passes on your supply of access to your computer game to their registered members (the game players), your supply is provided to another entity, the game players.

Furthermore, you have a lot of interaction/dealing with the game players in that they will have to accept your terms and conditions which are supplied with your computer game. You accept responsibility for fulfilling each transaction pursuant to the terms you offer. In addition, you are solely responsible for the resolution of disputes between yourself and the game players. You are responsible for your application and its content, and you will provide customer support for your application.

We take into account the fact that in providing your supply to the recipient, you have a lot of interaction/dealing with its registered members, the game players. You are responsible for your computer game and its content, and you provide customer support as well as dispute resolution to the game players.

Paragraph 521 of GSTR 2005/6 provides many examples about whether a supply is provided to another entity in Australia. Examples 26 to 31 highlight when interactions between the supplier of the services/advice and the Australian resident entity are considered minor. In your case, we consider that your interactions with the game players are not minor. Therefore your supply is provided to another entity, the game players, and in the case of the game players who are in Australia when the supply is provided, paragraph 38-190(3) (b) of the GST Act is satisfied.

Accordingly, when the game users are in Australia at the time the supply is provided, subsection 38-190(3) applies and your supply is not GST-free under Item 2. Conversely, your supply is GST-free under Item 2 where it is provided to game players who are outside Australia at the time the supply is provided.

Item 3

Paragraph (a) of Item 3 has already been addressed above.

Paragraph (b) of Item 3 requires the place of effective use or enjoyment of a supply to be determined (that is, whether the place is outside Australia). We take a two step approach to work out whether effective use or enjoyment of a supply takes place outside Australia. Firstly, we determine the entity to which the supply is provided (the providee entity). We then determine whether provision of the supply to the providee entity is outside Australia. 

As paragraph (b) of Item 3 refers to the effective use or enjoyment of the supply, it is necessary to inquire as to the entity that has the actual use or enjoyment of the supply. According to paragraph 41 in Goods and Services Tax Ruling GSTR 2007/2, a supply is made to a recipient and provided to another entity if in the performance of the service (or in the doing of some thing) the actual flow of that supply is to an entity that is not the recipient entity with which the supplier made the agreement for the supply. That is while the contractual flow of the supply is to the recipient entity, the actual flow of the supply is to another entity.

In this case, where you have made the supply of the access to your computer game to the recipient, but the recipient allows the game players access to your computer game on its network, then the game players are the providee entities. We consider that in all circumstances the game players have the actual use or enjoyment of your supply. Please see above-mentioned arguments in relation to whether your supply is provided to the recipient or to the game users, that is who the actual beneficiary is. Our conclusion is that the actual flow of your supply is to the game users, not the recipient.

The next step is to determine whether the effective use or enjoyment of the supply takes place outside Australia. Effective use or enjoyment of a supply only takes place outside Australia if there is provision of the supply to the providee entity outside Australia.

When the game players are in Australia when you provide your supply of access to your computer game, the use and enjoyment of your supply is in Australia. When the game players are overseas at the time the supply is provided, the use and enjoyment of your supply is outside Australia.

It is noted, as discussed above, that your supply of computer game is neither a supply of work physically performed on goods situated in Australia nor a supply directly connected with real property situated in Australia.

Therefore, your supply to the recipient is GST-free under Item 3, where it is provided to the game players who are overseas (that is, in such circumstances, the game players are the providee entities). Conversely, your supply is not GST-free where it is provided to game players who are in Australia.

In summary, your supply of the access to your computer game online is a mixed supply. The supply is GST-free under both Items 2 and 3 in the table in subsection 38-190(1) of the GST Act when the game players are overseas at the time the supply is provided, and taxable when the game players are in Australia at the time the supply is provided.

2. In working out whether the supply is taxable how do you determine the status of the game users when you supply lower value transactions over the Internet?  

This issue has been considered by the Electronic Commerce Industry Partnership Issues Register which is posted on our website at

http://www.ato.gov.au/businesses/content.aspx?doc=/content/18428.htm

Chapter 1: Consumption outside Australia

Nature of the arrangement:

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.

Issue:

How to determine if a low value supply of things other than goods or real property is for consumption outside Australia when the supply is made via the internet

Decision

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.

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