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Ruling

Subject: GST and supply of software licence by a non-resident to an Australian resident

Question 1

Is the supply of software licences to Australian resident entities (ABC) by a non-resident entity (NR), connected with Australia under subsection 9-25(5) of the GST Act, where the agreements to grant the licences are made outside Australia?

Answer

No, the supply of software licences to ABC by NR is not connected with Australia. As the supply is not connected with Australia you are not making a taxable supply.

Relevant facts and circumstances

NR will enter into software licence agreements to supply software licences to ABC.

NR is a non-resident company and you advise they do not have a permanent establishment in Australia.

The activities of NR will include entering into licensing agreements with resellers that are based in Australia (ABC).

Presently you do not have a signed licensing agreement between NR and ABC. You have provided a sample of what will be signed (sample agreement). You advise that the finalised agreement is likely to be on terms similar to this sample agreement.

NR will be entering into licensing agreements on terms similar to the sample agreement with the ABC. NR will appoint ABC as non-exclusive distributors of their software programs or "Licensed Product". This Licensed Product is developed outside Australia. NR will supply to ABC a grant of a non-exclusive, non-transferable licence over its Licensed Product.

ABC can then distribute the software and sell the licensed products to end users as per the sample agreement.

The sample agreement permits ABC to install and use the software on one central processing unit, per switch, solely for their internal business purposes and for evaluation and demonstration purposes. The software is copyrighted and owned by NR and is not sold to ABC.

The licence agreements entered into between NR and ABC are concluded outside Australia.

In most cases the software provided is transmitted to ABC electronically. There are instances where the software is provided on computer disks. You advise that you do not require advice on these supplies of software on a computer disk.

NR may also supply maintenance and support services to ABC. These services may be performed both overseas and in Australia. Where the services are performed in Australia they may be subcontracted by NR to their related Australian entity (OZ). You acknowledge that where the services are performed in Australia, NR may be making a taxable supply to ABC, notwithstanding that some of the services are subcontracted to OZ. You do not require advice on this issue of supplies of services by your related Australian entity to ABC.

NR has registered for GST in Australia to recover the GST payable as you expect that you will be making creditable acquisitions where you contract to your related Australian entity to supply services, and they will be making taxable supplies to you.

Role of Australian Entity

OZ has an agreement with NR to provide professional maintenance and training services in respect of software products licensed by NR to ABC located in Australia. OZ also provides marketing and sales support services and administrative services to NR.

You have provided copies of the agreements between NR and OZ in your application. You advise these agreements have yet to be executed in final but any changes are unlikely to impact on the matter for determination in your private ruling request.

OZ is subcontracted by NR to provide professional, maintenance and training services in respect of software products licensed by NR, as well as marketing and sales support services and administrative services to NR. OZ does not have any authority to bind NR to any contracts with customers and does not act as agent for NR in any way.

OZ is not involved in the supply (by NR) of the software licenses to ABC. The Licensing Agreements are made exclusively between NR and ABC, and are executed outside Australia.

Relevant legislative provisions

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

Paragraph 9-5(c) of A New Tax System (Goods and Services Tax) Act 1999

Section 9-20 of A New Tax System (Goods and Services Tax) Act 1999

Section 9-25 of A New Tax System (Goods and Services Tax) Act 1999

Section 9-25(5) of A New Tax System (Goods and Services Tax) Act 1999

Section 9-25(6) of A New Tax System (Goods and Services Tax) Act 1999

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

Reasons for decision

Issue 1

Question 1

GST is payable on any taxable supplies that you make. Under section 9-5 of the GST Act you make a taxable supply if:

· the supply is made for consideration;

· it is made in the course or furtherance of an enterprise that you carry on;

· it 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.

NR supplies the software licences to ABC for consideration, NR carries on an enterprise (defined in section 9-20 of the GST Act to include an activity done in the form of a business) and NR is GST registered. The issue is whether the supply made by NR to ABC is connected with Australia.

Connected with Australia:

Section 9-25 of the GST Act provides different tests for whether a supply is connected with Australia according to whether the supply is a supply of goods, real property, or any other thing. Thus it is necessary to determine what NR supplies to ABC.

The terms of the sample agreement describe the supply made by NR as a supply to ABC of a non-exclusive, non-transferable licence over its licensed product. This licence allows ABC to install and use the software on a computer, for their internal business purposes use and for evaluation and demonstration purposes. The software is copyrighted and owned by NR and is not sold to ABC.

Supplies involving software are discussed in Goods and Services Tax Ruling GSTR 2003/8 which states that where a one-off solution is developed by a computer programmer for a client, the correct analysis of the supply will depend on all of the facts and circumstances, including the terms of the contract between the programmer and the client (paragraph 33). GSTR 2003/8 also states that computer software supplied in intangible form, e.g. by downloading it from the Internet, is not a supply of goods (as no tangible property is supplied) and is not necessarily a supply of rights even where the recipient also receives a 'click-wrap' licence, but a supply of the copyright in a program which allows the recipient to modify, adapt, or copy the program for commercial purposes is a supply that is made in relation to rights (paragraphs 89 -90).

In the present case NR develops software, and supplies a licence to ABC appointing them as a non-exclusive distributor of licensed products to end users. NR does not grant any copyright to the ABC and specifically retains all right, title and interest, including all intellectual property rights in the licensed product. Under the sample agreement all ABC can do is resell access to the licensed product (software) to end users. Based on the discussion in GSTR 2003/8, we consider that the supply made by NR is not the supply of a right as no right is transferred to ABC. NR is making a supply of a licence to distribute the substance or knowledge of the information in the software (that is, intellectual property). The supply of the information (licensed product) by NR is a supply of services.

Subsection 9-25(5) of the GST Act provides that

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

· the thing is done in Australia (paragraph 9-25(5)(a));

· the supplier makes the supply through an enterprise that the supplier carries on in Australia (paragraph 9-25(5)(b)); or

· all of the following apply:

(i) neither paragraph 9-25(5)(a) nor (b) applies in respect of the thing;

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

(iii) the supply of the other thing would be connected with Australia (paragraph 9-25(5)(c)).

In relation to the 'thing is done in Australia' test, Goods and Services Tax Ruling GSTR 2000/31 (GSTR 2000/31) discusses supplies that are connected with Australia and states the following:

62. Thing is defined to mean anything that can be supplied or imported such as a service, advice, information or a right. It is the subject of the supply.

63. Under paragraph 9-25(5)(a) the connection with Australia requires that the 'thing' being supplied is 'done' in Australia.

64. The meaning of 'done' depends on the nature of the 'thing' being supplied. 'Done' can mean, for example, performed, executed, completed, finished etc depending on what is supplied.

Supply of a service

65. If the 'thing' being supplied is a service, the supply of that service is typically done where the service is performed. If the service is performed in Australia, the service is done in Australia and the supply of that service is connected with Australia under paragraph 9-25(5)(a). This is the case even if the recipient of the supply is outside Australia.

Provision of advice or information

71. If a supply is the provision of advice or information and the supply involves work to create, develop or produce that information or advice for the recipient, the supply is one of the performance of services. The advice or information is done where it is prepared, produced, or created, as the case may be. The supply of that advice or information is connected with Australia if the advice or information is prepared, created or produced in Australia.

171. Paragraph 9-25(5)(a) looks at what is being supplied and then, if the 'thing' that is being supplied is done in Australia, the supply of that 'thing' is connected with Australia. Thus, if the supplier does the thing in Australia, the supply of that thing is connected with Australia. If the supplier does not do the thing in Australia, the supply of that thing is not connected with Australia under paragraph 9-25(5)(a) but it may be connected with Australia under paragraph 9-25(5)(b) or paragraph 9-25(5)(c).

In the present case NR supplies a licence to distribute the software to ABC. NR did the work to develop the software outside Australia. The supply of the licence is not done in Australia and therefore will not be connected with Australia under paragraph 9-25(5)(a) of the GST Act. We now need to consider if the supplier makes the supply through an enterprise that they carry on in Australia.

GSTR 2000/31 considers where a supply is made through an enterprise carried on in Australia in the following paragraphs:

The supply is made through an enterprise carried on in Australia

78. If a supply of a thing is not connected with Australia because the thing is not done in Australia, the supply is connected with Australia if, under paragraph 9-25(5)(b), the supplier makes the supply through an enterprise that the supplier carries on in Australia.

79. The concept of carrying on an enterprise in Australia is defined in terms of the definition of 'permanent establishment' in subsection 6(1) of the Income Tax Assessment Act 1936.

83. A supply of a thing other than goods or real property, is connected with Australia under paragraph 9-25(5)(b) if the supplier:

(i) carries on an enterprise through a permanent establishment (as defined) in Australia; and

(ii) the supply is made through that permanent establishment (as defined).

84. For a supply to be connected with Australia under paragraph 9-25(5)(b), a connection must be established between the Australian permanent establishment and the supply.

85. The business profits articles of various double tax agreements entered into by Australia provide for primary but not exclusive taxing rights in the country of source, of the business profits that 'are attributable to a permanent establishment'. Similar language is also used in the Income Tax Assessment Act 1936. Despite the differences in terminology the underlying concept of connection to a permanent establishment is similar. Thus in establishing whether a supply is made through a permanent establishment it may be possible to draw some guidance from existing case law and commentaries such as the commentaries on the 'OECD Model Tax Convention on Income and on Capital'.

86. There is no specific set of circumstances which must be satisfied before a supply is connected with a permanent establishment. Rather, each case will be determined on the basis of the individual facts and circumstances. However, some factors that will usually indicate that the supply is made through a permanent establishment include:

· the permanent establishment has the authority to sign contracts or accept purchase orders for the supply;

· the permanent establishment has the authority to make important decisions in respect of the supply;

· the permanent establishment physically makes for example, manufactures or produces, the supply;

· if the supply is a service, the service is provided by the permanent establishment;

· if the supply is the provision of advice or information such as a legal opinion, the permanent establishment provides that advice or information;

· if the supply is the grant, creation, assignment, transfer or surrender of a right, the permanent establishment grants, creates, assigns, transfers or surrenders that right.

87. The definition of permanent establishment for the purposes of subsection 9-25(6) is wider than the definition of permanent establishment found in subsection 6(1) of the Income Tax Assessment Act 1936. This is because the exclusions from a permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936 - paragraphs (e), (f) and (g) are not similarly excluded from the definition of permanent establishment for the purposes of subsection 9-25(6).

88. Thus, permanent establishment for the purposes of subsection 9-25(6) means a place at or through which a person carries on any business and, without limiting the generality of the foregoing, includes:

(a) a place where the person is carrying on business through an agent;

(b) a place where the person has, is using or is installing substantial equipment or substantial machinery;

(c) a place where the person is engaged in a construction project; and

(d) where the person is engaged in selling goods manufactured, assembled, processed, packed or distributed by another person for, or at or to the order of, the first-mentioned person and either of those persons participates in the management, control or capital of the other person or another person participates in the management, control of both of those persons - the place where the goods are manufactured, assembled, processed, packed or distributed.

OZ does not have authority to sign contracts or make important decisions on behalf of NR, does not act as an agent and does not supply to ABC, the licence to distribute the software. OZ is engaged by NR to provide maintenance, training and support services in respect of the software products, which will occur after the supply of the licensed software.

In our view, although OZ is a related Australian entity, the business affairs of NR are not being conducted through OZ and therefore NR is not considered to have a permanent establishment in Australia. As NR does not have a permanent establishment in Australia, the supply of the licensed product by NR to ABC is not connected with Australia under paragraph 9-25(5)(b) of the GST Act. As the supply of the licensed software is not a supply of a right which would be connected with Australia, it is also not connected with Australia under paragraph 9-25(5)(c) of the GST Act.

As the supply of the software licence by NR is not connected with Australia paragraph 9-5(c) of the GST Act is not satisfied.

Other Information

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