Edited version of your private ruling

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Ruling

Subject: GST and the supply of website advertising space

Question 1

Is the supply made by an Australian company (AusCo) of space on its websites the supply of rights or the supply of something other than rights?

Answer 1

The supply of website space by AusCo is not the supply of rights, but is the supply of services.

Question 2

If the supply of website space by AusCo is the supply of rights, is the supply made by AusCo GST-free pursuant to item 4(b) in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer 2

The supply of website space by AusCo is not a supply that is made in relation to rights, but is the supply of services. Accordingly, item 4(b) in the table in subsection 38-190(1) of the GST Act is not applicable.

Question 3

If the supply of website space made by AusCo is the supply of something other than rights, is the supply GST-free pursuant to item 2(a) in the table in subsection 38-190(1) of the GST Act (Item 2(a))?

Answer 3

The supply of website space (services) made to a non-resident company (NRCo) but provided to another entity that is not in Australia in relation to the supply, when the services are provided/performed, will satisfy the requirements of Item 2(a). However, the supply is not GST-free if the acquisition of the supply relates (whether directly or indirectly, or wholly or partly) to the making of a supply of real property situated in Australia that would be input taxed.

The supply of website space (services) by AusCo that is made to NRCo but provided to another entity in Australia will not satisfy the requirements of Item 2(a).

Question 4

If the answer is 'yes' to question 3, does subsection 38-190(3) of the GST Act apply to the supply of website space (services) made by AusCo such that the supply is not GST-free under Item 2(a), where Australian resident businesses are the end-users of the advertising?

Answer 4

Yes, subsection 38-190(3) of the GST Act applies and the supply of website space (services) by AusCo is not GST-free, where the supply is made to a non-resident entity (such as NRCo) but provided to another entity in Australia. The supply of website space (services) that is provided to Australian businesses (purchasers/buyers) is a taxable supply.

Question 5

If the answer is 'yes' to question 4, confirm that subsection 38-190(3) of the GST Act does not apply to the supply of website space made by AusCo where non-resident (that is, offshore) businesses are the end-users of the advertising.

Answer 5

Yes, subsection 38-190(3) of the GST Act does not apply and the supply of the website space (services) is not excluded from being GST-free under Item 2(a), where the supply is provided to another entity outside Australia (such as an offshore business purchaser/buyer/end-user).

Question 6

If the supply of website space made by AusCo is not GST-free under section 38-190 or any other section of the GST Act, is it a taxable supply pursuant to section 9-5 of the GST Act?

Answer 6

Yes, if the supply of the website space (services) made by AusCo is not GST-free (or input taxed) under any provisions under the GST legislation, the supply is a taxable supply under section 9-5 of the GST Act.

Relevant facts

An Australian company (AusCo) is registered for goods and services tax (GST).

AusCo owns and operates a number of websites and digital media platforms hosted in Australia which contain advertising space. AusCo sells this advertising space on these websites directly to Australian resident businesses, including resident corporations and advertising agencies. However, purchasers/buyers may potentially be entities located outside of Australia.

AusCo has been looking to sell its advertising space on an auction style website, through an overseas company (OSCo) to businesses. The businesses will make bids with the successful bidder acquiring the use of the advertising space. AusCo understands that the relevant servers and other technology are located overseas.

AusCo will not contract with OSCo. Rather, an intermediary entity is required to interface with the OSCo platform.

AusCo entered into a service agreement ('Service Agreement') for another non-resident company (NRCo) to act as this intermediary. An executed copy of the Service Agreement is provided. The Service Agreement does not establish what supplies if any are being made by AusCo to NRCo. This agreement lists the terms and conditions which NRCo agrees to when they supply their services to AusCo.

The arrangements between AusCo and NRCo under this Service Agreement are addressed in another private ruling and not in this private ruling.

AusCo indicated that it proposes to make changes to the Service Agreement with NRCo, and provided a proposed amended agreement (Proposed Agreement). This private ruling addresses the GST consequences of the proposed arrangements between AusCo and NRCo under the Proposed Agreement.

The Proposed Agreement provides (amongst other things):-

Under the Terms and Conditions:

NRCo, as a reseller, shall seek to optimize the publisher's (being AusCo's) inventory located on various publisher platforms. NRCo shall purchase publisher's ad inventory for the publisher sites for the purpose of resale to its buyers ('Buyers'). The Buyers shall purchase such ad inventory from NRCo to deliver text, in-text, display, graphical, audio, video or other promotional activity ('advertisements' or 'ads') to the publisher sites.

Reseller obligations - NRCo agrees to do the following:

NRCo will purchase certain of publisher's ad inventory for the publisher sites for the purpose of resale to its Buyers.

NRCo will identify, select, and manage the Buyers and manage account(s) with respect to each Buyer.

NRCo will sell certain of publisher's ad inventory to certain Buyers with which NRCo has an agreement (each, an 'NRCo Buyer') and publisher has approved. NRCo must first submit to publisher for its approval a list of potential buyers prior to any sale of publisher's ad inventory. Publisher may by written notice to NRCo instruct NRCo to refrain from transacting with any NRCo Buyer in respect of publisher's ad inventory.

NRCo will use commercially reasonable efforts to set, monitor, and enforce publisher's business rules, guidelines and policies.

NRCo shall invoice and use commercially reasonable efforts to collect earnings owed from each NRCo Buyer from the sale of publisher's ad inventory to such NRCo Buyer and bear the risk of non payment by NRCo Buyers. For the avoidance of doubt, NRCo's obligation to pay the earnings applies regardless of whether NRCo has received earnings owed from its Buyers.

Upon publisher's request and NRCo's approval, NRCo will manage publisher's accounts, Buyers with which publisher has an agreement directly and that publisher elects to optimize along with other demand sources under this agreement (each, a 'AusCo Buyer'). Publisher is under no obligation to enter into any advertising services agreements and does so at its sole risk. In such case, Publisher shall be responsible for invoicing any AusCo Buyer and shall receive payment directly from the AusCo Buyer.

As between the parties, AusCo shall own the data NRCo collects from end users (the 'Data'), except that NRCo may capture and maintain the Data (and use) under certain (stated) circumstances.

The earnings are calculated as $X per impressions sold to AusCo Buyers; and

XX% of earnings from all impressions sold to NRCo Buyers.

Payments to publisher - Within certain number of days, NRCo shall pay the publisher the earnings. For the avoidance of doubt, NRCo is responsible for setting the prices at which NRCo supplies the advertisements to the Buyers and NRCo agrees to pay the publisher the earnings notwithstanding whether NRCo has received payment for such advertisements from the Buyers.

Earnings is the relevant amount payable by Buyers to NRCo for each advertisement net of any agency or other commissions, fees, taxes, or third party data or transaction fees that may be charged to or withheld by such Buyers.

Records - NRCo must ensure that reports relating to the sale of publisher's ad inventory are accessible by the publisher through the relevant software.

AusCo's advertising terms and conditions:

AusCo will display each advertisement on a participating site in accordance with these terms and conditions.

Placement of advertisement - AusCo has the sole right and discretion to:

· determine whether any advertisement is suitable for display;

· determine the appropriate placement, order, rotation and manner of presentation of any advertisement;

· display the advertisement at locations selected by AusCo (although AusCo will attempt to display it at advertiser's preferred locations); and

· place the word 'advertisement' above and / or below any advertisement that in AusCo's opinion resembles editorial matter.

AusCo may at any time suspend the publication of an advertisement without notice to advertiser.

The 'advertisement' means the ad inventory to deliver text, in-text, display, graphical, audio, video or other promotional activity purchased by the advertiser. The advertiser is the party engaged in purchasing, creating, placing or utilizing any advertisements on the AusCo sites. The end client is the person being promoted, marketed or advertised in the advertisement.

The definition of 'Services' - mean the services to be provided by AusCo to advertiser under these terms and conditions.

A copy of an agreement between NRCo and a buyer ('Buyer Agreement') for the sale of inventory in sites to which NRCo acquires from a publisher such as AusCo was provided in relation to the original Service Agreement. As the Buyer Agreement has not yet been updated or taken into account the Proposed Agreement, the Buyer Agreement will not be covered in this private ruling.

AusCo has been advised by NRCo of the following regarding NRCo and its circumstances:

NRCo does not have any presence in Australia nor does it carry on an enterprise in Australia through a resident agent acting on its behalf.

NRCo is supported in Australia by XCo which itself is an overseas based company which provides certain services to publishers. XCo is a separate legal entity with an Australian presence.

XCo is not related to NRCo. It is wholly independent (in terms of ownership/control) to NRCo and acts for various clients in Australia and the region. XCo has no authority to contract on behalf of NRCo.

XCo acts as a referrer of business to NRCo. The contract between AusCo was negotiated and concluded with members of NRCo's leadership team who are located overseas.

The third-party purchasers/buyers of AusCo's advertising space will, in the main, be Australian resident businesses, resident corporations, advertising agencies, etc. The buyers could also potentially be entities located outside of Australia.

AusCo contends that the arrangements between AusCo and NRCo under the Proposed Agreement will be effected under a reseller model. That is, AusCo will sell its advertising space directly to NRCo. NRCo will resell the space to third party purchasers/buyers (being those entities that find and purchase the space through the OSCo platform). NRCo will acquire the space from AusCo by paying an amount of XX% of the end resale price (that is, the successful bid price), which is payable by NRCo to AusCo regardless of non-payment by the third party purchasers/buyers. NRCo will therefore be placing the AusCo's space on the OSCo auction platform in its own right and will collect the successful bidder's bid and payment for the advertising space. AusCo will have no right of recovery on unpaid amounts from, or have a direct contractual relationship with, the third party purchasers/buyers.

AusCo also contends that there is only one supply, being the supply of the inventory in the websites from AusCo to NRCo. There is not another supply of an underlying thing.

Other information

AusCo outlined the method by which the advertising purchased by the highest bidder is placed on AusCo's website. Illustrated examples and diagrams were provided to explain the sale and fulfillment processes.

AusCo will set a 'floor price' for certain space whereby, in the instance that the bid price does not reach the 'floor', NRCo is unable to sell the space and is under no obligations to acquire or pay anything to AusCo.

A predetermined floor price set by AusCo is known to NRCo but is unknown to all other external parties, including OSCo. If a bid for the space was unsuccessful (eg. if the bid was below floor price condition), then NRCo would notify AusCo that it has not been able to meet AusCo's offer to serve advertising in the available ad (media) inventory.

Once sold, a third-party purchaser/buyer will submit their advertisement to OSCo who will, in turn, deliver these to AusCo. AusCo will place the third-party purchaser's advertisement in the space they have purchased for the period of time agreed with its contract with NRCo.

Relevant business names, trademarks and logos are displayed on the websites where the advertisements will be placed.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999, Section 9-5

A New Tax System (Goods and Services Tax) Act 1999, Section 38-190

A New Tax System (Goods and Services Tax) Act 1999, Subsection 38-190(1)

A New Tax System (Goods and Services Tax) Act 1999, Subsection 38-190(2)

A New Tax System (Goods and Services Tax) Act 1999, Subsection 38-190(3)

Reasons for decisions

Question 1

Supply of rights or services

AusCo has asked us to consider if the supply of the website advertising space under the arrangements with NRCo is a supply of a right or something else.

Goods and Services Tax Ruling GSTR 2003/8 addresses the supply of rights.

Where a transaction comprises a bundle of features and acts, you must consider all of the circumstances of a transaction to ascertain its essential character.

Paragraphs 66, 68, 70 and 71 of GSTR 2003/8 state:

66. Where rights are merely integral, ancillary or incidental to another dominant part of the supply, the supply is characterised by the dominant part.

68. If you make a supply that contains a dominant part and the supply includes something that is integral, ancillary or incidental to that part, the supply is a composite supply. A composite supply is a supply of a single thing. Where the supply of rights is integral, ancillary or incidental to another dominant part of the supply, the supply is a composite supply.

70. Rights are created under executory contracts and although the creation of such rights is supported by valuable consideration, the supply may not be characterised as a supply that is made in relation to rights if, for example, those rights contribute to the supply as a whole but cannot be identified as the dominant part of the supply.

71. For example, under an agreement for the sale of goods, a right to the title to the goods may be created in return for consideration. In determining whether this is treated as a single supply or as separate supplies of goods and rights, it is useful to apply the indicators set out in GSTR 2001/8. Applying paragraph 59 of GSTR 2001/8, the rights are regarded as integral, ancillary or incidental to the dominant part of the supply. The supply is a supply of goods.

Paragraph 59 of Goods and Services Tax Ruling GSTR 2001/8 states:

No single factor (by itself) will provide the sole test you use to determine whether a part of a supply is integral, ancillary or incidental to the dominant part of the supply. Having regard to all the circumstance, indicators that a part may be integral, ancillary or incidental include where:

· you would reasonably conclude that it is a means of better enjoying the dominant thing supplied, rather than constituting for customers an aim in itself; or

· it represents a marginal proportion of the total value of the package compared to the dominant part; or

· it is necessary or contributes to the supply as a whole, but cannot be identified as the dominant part of the supply; or

· it contributes to the proper performance of the contract to supply the dominant part.

That is, we consider that a part of a supply will be integral, ancillary or incidental where it is insignificant in value or function, or merely contributes to or complements the use or enjoyment of the dominant part of the supply. It is a question of fact and degree whether a supply is mixed or composite.

In addition, 'internet advertising' is considered in chapter 10 of the Electronic Commerce Industry Partnership - Issues Register and referred to as an 'advertising service'. That is, the 'connected with Australia' rule for when the thing is done applicable to the internet advertising is that of the supply of 'services' used in paragraph 65 in Goods and Services Tax Ruling GSTR 2000/31 (ie. the thing is a service, being 'done' where the service is performed). In other words, the internet advertising is not treated as rights.

From the facts provided, AusCo owns and operates a number of websites and media platforms hosted in Australia which contain advertising space. AusCo sells this space (referred to as the 'advertisement' or 'ad inventory'). Under the Proposed Agreement, the term 'advertisement' means the ad inventory to deliver text, in-text, display, graphical, audio, video or other promotional activity purchased by the advertiser. The 'services' (as defined) is the 'services to be provided by AusCo to the advertiser under these terms and conditions'. Further, the Proposed Agreement indicates that AusCo enters into advertising service agreements. This suggests that there is a supply of services by AusCo to the advertiser.

AusCo is not merely supplying a right to particular space because it is AusCo which: displays each 'advertisement' on a participating site; determine the placement of advertisements - AusCo has the sole right and discretion to: determine whether any advertisement is suitable for display; determine the appropriate placement, order, rotation and manner of presentation of any advertisement; display the advertisement at locations selected by AusCo (although AusCo will attempt to display it at advertiser's preferred locations); and place the word 'advertisement' above and / or below any advertisement that in AusCo's opinion resembles editorial matter; and can at any time suspend the publication of an advertisement without notice to the advertiser. These facts indicate that AusCo is performing a service(s).

AusCo is supplying space on its various websites for promotional activities, which is the essential character of this supply. The supply of advertising space, whether in physical or electronic form, to publicise goods, services or other thing, is about conveying the advertising message, and is a supply of advertising services. Whilst it could be argued that part of this supply contains a right to the website space for a certain period of time, we consider that this right is integral, ancillary or incidental to the dominant part of the supply of the advertising services. The right can not be separated (that is, aim in itself) and contributes to the dominant supply of the advertising services as a whole, but cannot be identified as the dominant part of the supply. Accordingly, the single composite supply of the website space on AusCo's websites is a supply of advertising services.

Question 2

GST is payable on a taxable supply under section 9-5 of the GST Act, which states:

You make a taxable supply if:

· you make the supply for *consideration

· the supply is made in the course or furtherance of an *enterprise that you *carry on

· the supply is *connected with Australia, and

· 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.

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

The facts indicate that the supply of website space (services) by AusCo satisfies the requirements under paragraphs 9-5(a), 9-5(b), 9-5(c) and 9-5(d) of the GST Act because the supply is made for consideration; the supply is made in the course or furtherance of AusCo's enterprise (business); the supply is connected with Australia because it is made through AusCo's enterprise (business) in Australia and the websites and digital media platforms that contains the advertising space are located in Australia; and AusCo is registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

On the basis of the facts provided, the supply of services on the websites made by AusCo is not input taxed. We need to determine whether the supply satisfies the GST-free provisions.

Section 38-190 of the GST Act specifies the circumstances where the supply of things other than goods or real property for consumption outside Australia is GST-free.

As requested by AusCo, Question 2 of this private ruling specifically addresses item 4(b) in the table in subsection 38-190(1) of the GST Act.

Item 4 in the table in subsection 38-190(1) of the GST Act states:

· a supply that is made in relation to rights 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.

Under GSTR 2003/8, a supply of a thing is a 'supply that is made in relation to rights' if it fits within one of the following three categories:

· supplies identified in paragraph 9-10(2)(e) of the GST Act;

· supplies of things that derive their value exclusively, or almost exclusively, from rights; and

· supplies of services directly connected with rights.

Category 1

In relation to supplies identified in paragraph 9-10(2) (e) of the GST Act, paragraphs 65 and 66 of GSTR 2003/8 state:

65. Where a transaction comprises a bundle of features and acts, you must consider all of the circumstances of the transaction to ascertain its essential character. While many transactions involve rights being supplied, Category 1 only covers a supply if:

· the essential character or substance of the supply, or the dominant part of a composite supply, is one of rights; or

· the essential character of a separately identifiable part of the supply is one of rights.

66. Where rights are merely integral, ancillary or incidental to another dominant part of the supply, the supply is characterised by the dominant part.

As discussed in Question 1 above, the essential character or substance of the supply of the website space by AusCo is the supply of advertising services, and not of rights. There is a single composite supply of the website advertising services, and the right to the space is integral, ancillary or incidental to the dominant part of the supply of the advertising services. Accordingly, category 1 in GSTR 2003/8 does not apply to AusCo's website advertising services.

Category 2

In relation to supplies of things comprising a bundle of rights that derive their value exclusively, or almost exclusively, from those rights, paragraph 27F of GSTR 2003/8 states:

27F. In order to fit within category 2, a supply of a thing need not be properly characterised as a supply of rights for GST purposes, nor must it be a supply under paragraph 9-10(2)(e). The supply must, however, encompass rights and the value of the supply must be in the rights. For this to occur, any tangible thing that passes between supplier and recipient which evidences the rights (such as a bank note) must, without those rights, be worthless or of incidental worth.

As discussed in Question 1 above, the essential character and substance of the supply of the website space by AusCo is the supply of advertising services, and not of rights. The right to the space is integral, ancillary or incidental to the dominant part of the supply of the advertising services. AusCo performs the advertising services, but does not pass on a thing that derives its value exclusively or almost exclusively, from the rights. Accordingly, category 2 in GSTR 2003/8 does not apply to AusCo's website advertising services.

Category 3

A supply of services (including provision of advice or information) that is directly connected with rights is a supply that is made in relation to rights for the purposes of Item 4. Paragraph 28A of GSTR 2003/8 states:

28A. Item 4 only applies to a service that facilitates a dealing in rights if the essential character or substance of the dealing is one of rights. Similarly, item 4 only applies to services that affect or protect the nature or value of a thing if the essential character or substance of that thing is rights.

As discussed in Question 1 above, the essential character or substance of the supply of the website space by AusCo is the supply of advertising services, and not of rights. The right to the space is integral, ancillary or incidental to the dominant part of the supply of the advertising services. The advertising services do not facilitate a dealing in rights, and therefore are not made in relation to any rights. Accordingly, category 3 in GSTR 2003/8 does not apply to AusCo's website advertising services.

In summary, the supply of the website space (services) by AusCo does not fall into one of the three categories for the purposes of Item 4. Therefore, the supply is not GST-free pursuant to Item 4(b).

Questions 3, 4, 5 and 6

Section 38-190 of the GST Act specifies the circumstances where the supply of things other than goods or real property for consumption outside Australia is GST-free. Item 2 in the table in subsection 38-190(1) of the GST Act (Item 2) is also of relevance.

As requested by AusCo, Question 3 of this private ruling specifically addresses item 2(a) in the table in subsection 38-190(1) of the GST Act (Item 2(a)).

Under 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:

· 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

· the ^*non-resident acquires the thing in ^*carrying on the non-residents ^*enterprise, but is not ^*registered or ^*required to be registered.

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

The scope of Item 2 may be limited by subsection 38-190(2A) and subsection 38-190(3) of the GST Act (which is discussed later). It is noted that the limitation by subsection 38-190(2) of the GST Act is not applicable as AusCo is not supplying a right or option.

Who is AusCo making a supply of the space (services) to?

We first need to determine who AusCo is supplying the website space (services) to (that is, NRCo or the third party purchasers/buyers), before determining the GST status under Item 2(a).

Goods and Services Tax Ruling GSTR 2000/37 covers agency relationships. Paragraphs 28 and 29 of GSTR 2000/37 list factors that indicate the existence of an agency relationship, as follows:

Factors that indicate an agency relationship

28. In most cases, any relevant documentation about the business relationship, the description used by the parties and the conduct of the parties establish the existence of an agency relationship. Therefore, the following factors may show that you are an agent under an agency relationship, although no single factor (by itself) is determinative:

· any description of you as an agent, having authority to act for another party, in an agreement (expressed or implied) between you and the other party;

· any exercise of the authority that you are given to enter into legal relations with a third party;

· whether you bear any significant commercial risk;

· whether you act in your own name;

· whether you are remunerated for your services by way of commissions and whether you are entitled to keep any part of your remuneration secret from another party; and

· whether you decide the price of things that you might sell to third parties.

29. In some situations, these factors may be difficult to establish. For example, situations may arise where:

· the existence of a principal is disclosed but not named; or

· the existence of a principal is not disclosed to third parties.

However, documents used by the parties and the conduct of the parties may still indicate the existence of an agency relationship.

Further paragraph 32 of GSTR 2000/37 states:

32. Consequently, the relationship between the parties is determined by an examination of the particular facts surrounding relevant transactions. However, should there be any doubt about the position of the parties in a transaction, an agreement may contain descriptions that clarify the relationship.

The Proposed Agreement indicates that the website space (services) can be made to 'AusCo Buyers' or 'NRCo Buyers'.

In relation to the AusCo Buyers, it is clear that AusCo is making the supply of the website space (services) in its own right directly to the purchaser(s)/buyer(s).

In relation to the NRCo Buyers, AusCo proposes to make changes to its existing Service Agreement with NRCo. The Proposed Agreement provides (amongst other things) that:

· AusCo and NRCo will enter into a reseller agreement.

· NRCo, as a reseller, shall purchase AusCo's ad inventory for AusCo's sites for the purpose of resale to its buyers. The buyers shall purchase such ad inventory from NRCo.

· NRCo shall invoice and collect earnings owed from each NRCo Buyer and bear the risk of non payment by NRCo Buyers. For the avoidance of doubt, NRCo's obligation to pay the 'earnings' applies regardless of whether NRCo has received earnings owed from its buyers.

· NRCo is responsible for setting the prices at which NRCo supplies the advertisements to the buyers and NRCo agrees to pay AusCo the earnings notwithstanding whether NRCo has received payment for such advertisements from the buyers.

· AusCo advises that under the arrangements with NRCo and in accordance with the Proposed Agreement, it will sell its advertising space directly to NRCo. NRCo will resell the space to third party purchasers/buyers (being those entities that find and purchase the space through the OSCo platform). NRCo will acquire the space from AusCo by paying an amount of XX% of the end resale price (that is, the successful bid price), which is payable by NRCo to AusCo regardless of non-payment by the third party purchasers (buyers). NRCo will be placing the AusCo's space on the OSCo auction platform in its own right and will collect the successful bidder's bid and payment for the space. AusCo will have no direct contractual relationship with the third party purchasers/buyers.

We acknowledge that AusCo will have some influence in setting the 'floor price' at which a supply of the website space (services) can be made to the third party purchasers/buyers, and that it retains control over the suitability, placement and presentation of advertisements on its websites.

We take into consideration all the facts surrounding the relevant transactions as no single factor, by itself, is determinative of the existence of an agency relationship.

On the basis of the amendments to the agreement(s) and the alteration to the arrangements between AusCo and NRCo to ensure that their relationship is one of seller and reseller in relation to the supply of the website space (services) to third party purchasers (buyers), we will accept that AusCo is making the supply of website space (services) to NRCo.

We now consider whether the supply of the website space (services) made by AusCo to NRCo satisfies the requirements of Item 2, where Item 2 is applicable to a supply made to a non-resident entity.

Non-resident not in Australia in relation to the supply

For the supply of the website 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/performed.

Goods and Services Tax Ruling GSTR 2004/7 discusses when an entity is not in Australia when the thing supplied is done.

Under the Proposed Agreement, AusCo will supply the website space (services) to NRCo, which is a non-resident company.

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.

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 supply is done (that is, provided/performed).

Paragraphs 41 and 65 of GSTR 2004/7 provide that a non-resident company is in Australia in relation to the supply if the supply is solely or partly for the purposes of the Australian presence, for example, its Australian branch, representative office or agent if it is a non-resident company, or the Australian head office if it is an Australian incorporated company. If the supply is not for the purposes of the Australian presence but that Australian presence is involved in the supply, the company is in Australia in relation to the supply, except where the only involvement is minor.

AusCo advises that NRCo does not have any presence in Australia nor does it carry on an enterprise in Australia through a resident agent acting on its behalf. Although NRCo is supported in Australia by XCo (an overseas based company, with an Australian presence), XCo is not related to NRCo and is wholly independent (in terms of ownership/control) to NRCo. XCo acts for various clients in Australia and certain region, and has no authority to contract on behalf of NRCo, but is a referrer of business to NRCo. The contract between AusCo was/will be negotiated and concluded with members of NRCo's leadership team who are located overseas.

On the basis of these facts, NRCo appears to be merely one of XCo's clients and is not carrying on a substantial or material part of NRCo's businesses in Australia. The contract for the supply of the website space (services) was/is between AusCo and NRCo, and not made through XCo. Accordingly, the presence of XCo in Australia will not make NRCo in Australia in relation to AusCo's advertising services. The precondition of Item 2 that the recipient must not be in Australia in relation to the supply when it is done is satisfied.

Paragraphs (a) and (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.

Paragraphs (a) of Item 2

Under Item 2(a), 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 when the work is done nor a supply directly connected with real property situated in Australia.

AusCo advises that the supply of website space (services) is neither a supply of work physically performed on goods situated in Australia nor a supply directly connected with real property situated in Australia.

Furthermore, paragraph 44 of Goods and Services Tax Ruling GSTR 2003/7 confirms that the supplies of marketing and advertising services are not directly connected with goods or real property.

Accordingly, the supply of the website space (services) by AusCo to NRCo satisfies Item 2(a).

Paragraph (b) of Item 2

For completeness, under Item 2(b), a supply is also GST-free if the non-resident (being NRCo) acquires the services in carrying on its enterprise (business), and is neither registered nor required to be registered for GST.

The supplier must be satisfied, on reasonable grounds that the non-resident is not required to be registered for GST before they can treat their supply as GST-free under Item 2(b). Where the supplier is not in a position to be aware of these circumstances, enquiries should be made of the non-resident. The Commissioner accepts that the supplier has reasonable grounds to be satisfied, if the non-resident has provide a signed written statement, declaring that they are not required to be registered. This is only accepted where the supplier has no reasons to believe the statement is not accurate.

Please note that the GST registration status of an entity can be ascertained by checking the Australian Business Register at www.abr.gov.au.

Limitations

Where the requirements of Item 2 are satisfied, it is necessary to consider subsection 38-190(2A) and subsection 38-190(3) of the GST Act.

Subsection 38-190 (2A) of the GST Act

Subsection 38-190(2A) of the GST Act provides that a supply covered by Item 2 is not GST-free if the acquisition of the supply relates (whether directly or indirectly, or wholly or partly) to the making of a supply of real property situated in Australia that would be input taxed under subdivisions 40-B or 40-C of the GST Act.

Subdivision 40-B of the GST Act deals with the supply of premises by way of lease, hire or licence; and Subdivision 40-C of the GST Act deals with the sale of residential premises and the supply of residential premises by way of long-term lease.

As stated above, GSTR 2003/7 confirms that the supply of marketing and advertising services is not directly connected with goods or real property, although its subject matter may be goods or real property. However, the supply of marketing/advertising services may be indirectly related to the making of the underlying supply of goods or real property in Australia.

As covered in the Explanatory Memorandum (EM) of Tax Laws Amendment (2004 Measures No. 6) Act 2005 in relation to subsection 38-190(2A) of the GST Act, supplies that would be indirectly related to the making of supplies of real property in Australia include advertising services. Example 9.1 in paragraph 9.6 of the EM states:

Example 9.1

Jane is a non-resident of Australia who lives in Singapore. She owns a rental property in Brisbane. She hires a local gardener to maintain the garden. She also hires a local real estate agent to advertise the property for rent. The supply of the gardening service is directly related to the property while the advertising is indirectly related to the property. New subsection 38-190(2A) operates to ensure that these services are not GST-free.

Where the acquisition of the website advertising services is not related (directly or indirectly) to the making of input taxed supplies of real property situated in Australia that would be wholly or partly input taxed, subsection 38-190(2A) of the GST Act does not apply to exclude the supply of the website advertising services from being GST-free under Item 2. However, subsection 38-190(3) of the GST Act must also be taken into consideration.

Where the acquisition of the website advertising services is related (directly or indirectly) to the making of input taxed supplies of real property situated in Australia that would be wholly or partly input taxed, subsection 38-190(2A) of the GST Act applies to exclude the supply of the website advertising services from being GST-free under Item 2.

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.

Under section 195-1 of the GST Act, the recipient in relation to a supply is defined as the entity to which the supply is made.

Goods and Services Tax Ruling GSTR 2006/9 considers multi-party transactions, commonly known as tripartite arrangements. As stated at paragraphs 131 and 132 of GSTR 2006/9:

131. 'Made' in the context of 'a supply made' takes its meaning from the definition of 'recipient' in section 195-1:

recipient, in relation to a supply, means the entity to which the supply was made.

132. 'Provide' is used to contrast with 'made' - it distinguishes between the contractual flow of the supply to the recipient (the entity to which the supply is made) and the actual flow of the supply to another entity (the entity to which the supply is provided).

Under a tripartite arrangement (involving three or more parties) it is possible that a supply is made to one entity under the terms of an agreement, but the supply is provided to another entity. It may be that the agreement, together with the surrounding circumstances, show that there is a binding obligation between the two parties making the arrangement for goods, services or anything else to be provided to a third party.

As stated above, on the basis of the amendments to the agreement(s) and the alteration to the arrangements between AusCo and NRCo to ensure that their relationship is one of seller and reseller in relation to the supply of the website space (services) to third party purchasers (buyers), we will accept that AusCo has made the supply to NRCo.

Goods and Services Tax Ruling GSTR 2005/6 also discusses subsection 38-190(3) of the GST Act. In relation to when the supply is provided to another entity, paragraphs 61, 65, and 285 of GSTR 2005/6 state:

61. Thus the expression 'provided to another entity' means, in our view, that in the performance of a service (or in the doing of some thing), the actual flow of that supply is, in whole or part, to an entity that is not the non-resident entity with which the supplier made the agreement for the supply. The contractual flow is to one entity (the non-resident recipient) and the actual flow of the supply is to another entity.

65. We consider that an agreement requires that a supply be provided to another entity in Australia if it is an express or implied term of the agreement that the supply is to be provided to another entity in Australia.

………

285. In situations where the contractual flow of the supply is to an entity (other than an individual), and it is necessary to determine whether the actual flow of the supply is to another entity (other than an individual), we consider that a strong indicator that the supply is provided to another entity is that the contracting entity has no further interaction with, or participation in, the provision of the supply beyond contracting and paying for the supply. However, the application of subsection 38-190(3) is still dependent upon on all the facts and circumstances of the supply.

A clear understanding of the exact nature of the supply is essential to determining whether the supply is provided to another entity. By determining what is in substance and reality being supplied, it is possible to identify to which entity the supply is provided. Paragraphs 73, 74, 76, and 713 to 715 of GSTR 2005/6 further state:

73. Thus, the focal point in working out whether a supply is provided to another entity is the facts and circumstances of the doing of the thing supplied. By the supplier examining what it is required to do and in what circumstances, the supplier is able to objectively determine to whom the supply is provided.

74. In some instances, it is inherent in the nature of the supply that the supply is provided to a particular entity…

76. In the case of other supplies, for example, supplies that involve the supply of legal, accounting, auditing or advertising services, the question of whether the supply is provided to another entity depends on the facts and circumstances in any given case.

………….

Subcontract arrangements

713. Sometimes, a supplier (with no presence in Australia) makes a supply to a customer in Australia and subcontracts the provision of that supply to an Australian based supplier.

714. For example, a non-resident supplier enters into a contract with an entity in Australia (the customer) under which it is obliged to provide certain services to that customer. The non-resident has no presence in Australia. The non-resident, therefore, enters into another contract with an Australian entity for the provision of those services to the Australian customer.

7.15. This is shown in diagrammatic form (please see GSTR 2005/6 for diagram).

As concluded in paragraphs 726 to 731 of GSTR 2005/6 for the above example, in relation to the supply made by the second supplier, the subcontract arrangements including the provision of the supply by the Australian supplier to the Australian customer do not in our view alter the character and nature of the supply by the second supplier (the Australian supplier) to the first supplier (that is, the non-resident). The supply made by the Australian supplier to the non-resident is, and remains, the supply of a service. The arrangement is one under which a subcontractor contracts to supply a particular service, the supply is properly described as the supply of that particular service. While there may be a right to have a particular service supplied, that right is not the dominant part of the supply. The essential character of the supply is the supply of a service, not the supply of a right. The supply of services by the Australian supplier to the non-resident is a supply under an agreement entered into with a non-resident. Paragraph 38-190(3)(a) is therefore satisfied. The services are required to be provided to another entity in Australia. Therefore, subsection 38-190(3) of the GST Act negates the GST-free status of the supply covered by item 2.

Accordingly, the focus is on the nature of the supply and the actual flow of that supply.

As discussed in Issues 1 and 2 above, the essential character or substance of the supply of the website space is the supply of services. While there may be a right to have a particular service supplied, that right is not the dominant part of the supply. The essential character of the supply is the supply of advertising services, and not a supply of rights. Under the arrangements with NRCo, it is considered that the nature of the supply of the website space (services) on AusCo's website is such that the supply of the services is provided to the purchasers/buyers, and not NRCo. The website space (services) is for the purposes of, and used by, the purchasers/buyers.

The Proposed Agreement allows for the supply of the website space (services) to be provided to the purchasers/buyers. This agreement provides that NRCo shall purchase AusCo's ad inventory for resale to buyers; AusCo (as the Publisher) is made aware that NRCo will provide the inventory (advertising services) to the purchasers/buyers for which requires AusCo's approval, and the list of potential purchasers/buyers is first approved by AusCo. AusCo is also made aware that NRCo will only pay AusCo a percentage for its sale which is provided to the purchasers/buyers.

AusCo only makes a supply to NRCo when the website space (services) is provided to the purchasers/buyers for a successful bid. As AusCo advises, a predetermined floor price set by AusCo is known to NRCo but is unknown to all other external parties, including OSCo. If a bid for the space was unsuccessful (eg. if the bid was below floor price condition), then NRCo would notify AusCo that it has not been able to meet AusCo's offer to serve advertising in the available ad inventory. NRCo will not sell the space and is under no obligations to acquire or pay anything to AusCo. In other words, if AusCo's 'floor price' is not achieved NRCo is not permitted to provide the website space (services) to the purchasers/buyers.

Although NRCo is involved in contracting (with the purchasers/buyers, and also with AusCo for the supply of the websites space (services) to be provided to the purchasers/buyers), and for collecting and paying for the supply to AusCo, NRCo appears to have limited participation in the actual services to the purchasers/buyers. As AusCo advises, once sold, a third-party purchaser/buyer will submit their advertisement to OSCo who will, in turn, deliver these to AusCo. AusCo will place the third-party purchaser's advertisement in the space they have purchased for the period of time agreed with its contract with NRCo. It is AusCo which displays each advertisement, and determines the suitability, placement, and presentation of the advertisements for the purchasers/buyers.

The facts indicate that AusCo has an agreement with NRCo where the supply of the website space (services) is made to NRCo, but is provided to another third party (being the 'NRCo Buyers'). AusCo would be able to determine who the website space (services) are provided to because AusCo's approval is required, and AusCo approves the list of potential buyers; AusCo also owns the data that NRCo collects from end users; NRCo must ensure that reports relating to the sale of the inventory are accessible by AusCo through certain software; and AusCo is responsible for the suitability, placement, and presentation of the advertisements.

Where the supply of the website services is made to NRCo but provided to another entity in Australia, subsection 38-190(3) of the GST Act applies to exclude the supply from being GST-free under Item 2. Accordingly, the supply is taxable.

Where the supply of the website services is made to NRCo but provided to another entity outside Australia, subsection 38-190(3) of the GST Act does not apply. Accordingly, the supply is GST-free under Item 2 (provided subsection 38-190(2A) of the GST Act does not apply).

Summary

In relation to the 'AusCo Buyers', AusCo is making the supply of the website space (services) in its own right directly (or indirectly through NRCo) to these purchaser(s)/buyer(s). The GST treatment of this supply in such circumstance is addressed in another private ruling.

In relation to the 'NRCo Buyers', AusCo is making the supply of website space (services) to NRCo, which is provided to the third party purchasers/buyers.

The supply of website space (services) by AusCo that is made to NRCo but provided to another entity that is not in Australia in relation to the supply, when the services are provided/performed, will satisfy the requirements of Item 2(a). However, a supply of website space (services) covered by Item 2 is not GST-free if the acquisition of the supply relates (whether directly or indirectly, or wholly or partly) to the making of a supply of real property situated in Australia that would be input taxed.

The supply of website space (services) by AusCo that is made to NRCo but provided to another entity in Australia will not satisfy the requirements of Item 2(a).

A supply of website space (services) made by AusCo which is not GST-free (or input taxed) under any provisions under the GST legislation, will be a taxable supply under section 9-5 of the GST Act.

All publications mentioned in this ruling are available on our website at www.ato.gov.au