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Ruling

Subject: GST and purchase of software licence over the internet

Questions

1. Is the acquisition of the software licences and services through the internet from the Contractor, an overseas supplier, subject to GST?

2. If yes, how is the GST remitted to the ATO, considering nothing passes through customs?

3. Does the GST gross up clause mean that you are required to pay the GST to the Contractor?

Answers

1. No, the acquisition of the software licences and services through the internet from the Contractor, an overseas supplier, is not subject to GST.

2. Not applicable.

3. Yes.

Relevant facts and circumstances

You are registered for Goods and Services Tax (GST).

You are currently negotiating a contract with an overseas company (Contractor), to purchase certain software and related services through the internet.

The software is acquired for a creditable purpose.

The software is sent on line over the internet and does not pass through customs.

You have provided a copy of the draft proposed contract.

A clause in the contract provides for GST gross up as below.

Despite any other provision in this Contract, if a party (Supplier) makes a supply under or in connection with this Contract in respect of which GST is payable (not being a supply the consideration for which is specifically described in this Contract as GST inclusive), the consideration payable or to be provided for that supply under this Contract but for the application of this clause is increased by, and the recipient of the supply (Recipient) must pay to the Supplier, an amount equal to the GST payable by the Supplier on the supply (GST Amount).

The schedule of the contract on Contract Details provides:

· Contractor will supply remote and on-site installation support as described in the Statement of Work.

· Contractor will provide remote support during the Warranty Period and at other times to assist with any installation-related support issues.

· The Contractor is required to provide update and new releases during the contract period.

The schedule of the contract on Statement of Work provides:

· There will be no Installation of software. However, Contractor will provide onsite guidance and support for initial installations. Contractor will provide remote support as required during the installation and warranty period.

· There will be no implementation of software. However, Contractor will provide onsite guidance and support for initial installations. Contractor will provide remote support as required during the installation and warranty period.

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 9-25.

A New Tax System (Goods and Services Tax) Act 1999 Division 13.

A New Tax System (Goods and Services Tax) Act 1999 Section 84-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 85-5.

A New Tax System (Goods and Services Tax) Act 1999 Division 133.

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

Question 1

Division 13 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) details the circumstances in which goods that are imported into Australian are regarded as taxable importations. The download of software from an overseas company's website is not a taxable importation because it is not "goods".

The terms "goods" is defined in the Dictionary at section 195-1 as:

goods means any form of tangible personal property.

For the purchase of software downloaded from an overseas company's website to be subject to GST it would need to be defined as a taxable supply.

To be a taxable supply the supply must meet the conditions under section 9-5 of the GST Act. This section 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.

The asterisk denotes a defined term in the GST Act.

In your case, the supply of the software licence and services by the Contractor will be for consideration and is made in the course or furtherance of an enterprise that the Contractor carries on. Hence the supply of the software licence and services by the Contractor meets the requirements of paragraphs 9-5(a) and (b) of the GST Act.

We then need to consider whether the supply of the software licence and services are connected with Australia.

Connected to Australia is defined in the Dictionary at section 195-1 as:

Connected with Australia, in relation to a supply, has the meaning given by sections 9 - 25 and 85-5.

The Contractor is not providing telecommunication supplies therefore section 85-5 is not relevant.

You are receiving the software electronically therefore you are not receiving a tangible item.

Subsection 9-25(5) states:

A supply of anything other than goods or *real property is connected with Australia if:

(a) the thing is done in Australia; or

(b) the supplier makes the supply through an *enterprise that the supplier *carries on in Australia; or

(c) all the following apply:

(i) neither paragraph (a) nor (b) applies in respect of the thing;

(ii) the thing is a right or option to acquire another thing;

(iii) the supply of the other thing would be connected with Australia.

Example: A holiday package for Australia that is supplied overseas might be connected wit Australia under paragraph (5)(c).

Section 9-25(6) states that:

An *enterprise is carried on in Australia if the enterprise is carried on through:

(a) a permanent establishment (as defined in subsection 6(1) of the Income Tax Assessment Act 1936); or

(b) a place that would be such a permanent establishment if paragraph (e), (f) or (g) of that definition did not apply

From the information you have provided the supply is not made in Australia nor is the supply made through a permanent establishment of the Contractor in Australia. The supply is made directly to you through internet. Therefore the supply of software licence and services by the Contractor to you is not connected to Australia.

However, a supply may be a taxable supply even though it is not connected to Australia under subsection 84-5(1) of the GST Act. In this regard the GST is payable by the recipient of the supply. This provision is referred to as the "reverse charge" provision.

Subsection 84-5(1) states:

A supply of anything other than goods or *real property that is:

(a) a supply not *connected with Australia; or

(b) a supply connected with Australia because of paragraph 9-25(5)(c);

Is a taxable supply if:

(c) the *recipient of the supply acquires the thing supplied solely or partly for the purpose of an *enterprise that the recipient *carries on in Australia, but not solely for a *creditable purpose; and

(d) the supply is for *consideration; and

(e) the recipient is *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.

In your case, you have indicated that the software licence and services are being used for a creditable purpose. As the software is being used for a solely creditable purpose then paragraph 84-5(1)(a) of the GST Act does not apply.

Accordingly, the supply of the software licence and services by the Contractor to you is not a taxable supply under subsection 84-5(1) of the GST Act.

Question 2

As the software licence and services are being used for a solely creditable purpose and the supply is not subject to GST, you do not need to remit any GST to the ATO.

You include the amount paid for the software licence and services at G14 of the Business Activity Statement (BAS). There is no entitlement to input tax credits for the acquisitions and importations of the software licence and services from the Contractor.

Question 3

It is common for GST 'gross-up' clauses to be included in commercial agreements entitling the supplier to an additional amount, should a supply made under the contract prove to be subject to GST. In its simplest form, a 'gross up' clause provides that the consideration under the contract includes the stated amount plus any applicable GST.

Division 133 of the GST Act addresses the inequitable situation where a recipient is contractually required to make an extra payment after the expiry of the four year period, due to the supplier being liable for GST. Such a recipient may have had no opportunity to claim the input tax credit within the four year period.

Hence, should you be required to pay the Contractor the GST under the gross-up clause, you will be able to claim the related input tax credit under Division 133 of the GST Act after the expiry of the four year period.