Edited version of your private ruling

Authorisation Number: 1012437574751

Ruling

Subject: GST and supply of software applications to non-resident entities

Question

Is the supply of the software applications by an Australian company (you) to customers outside Australia GST-free, where the software applications are accessed via your website and used by the customers to create apps for smart phones?

Answer

Yes, the supply of your software applications made and provided to customers outside Australia is GST-free.

Relevant facts and circumstances

An Australian company (you) is based in Australia. You are registered for goods and services tax (GST).

You supply apps (referred to as 'software applications') to customers in overseas countries.

Your software applications are accessed and used by your customers on your website. The customers would use your software applications in order for them to create apps for smart phones (which will be referred to as 'customers' apps'). Your customers can then sell the customers' apps to their customers.

Your customers are not required to download your software applications and can use them from your website. The software applications are intangible and there are no supplies of any goods. You do not supply the rights to the copyrights or intellectual property rights to your software applications.

Your software applications are used by your customers in their country of sale. That is, your software applications will be used by your customers in the country where your apps were purchased by those customers.

You confirmed that the software applications are sold by you (as the supplier) to your customers, through your website. All money from the sale of the software applications comes into Australia to you.

You mainly supply the software applications to companies, but the customers can be individuals.

You contend that the supplies of your software applications to overseas customers are GST-free.

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, Section 38-190

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

Reasons for decision

GST is payable on a taxable supply. Section 9-5 of the A New Tax System (Goods and Service Tax) Act 1999 (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.

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

The facts indicate that you satisfy all the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act as:

· You make the supply of the software applications to customers in return for consideration (by way of payments);

· The supply is made in the course of an enterprise (business) that you carry on;

· Your supply of the software applications is connected with Australia (because the supply of the apps (an intangible property) will either be done in Australia and/or supplied through a business that you carry on in Australia); and

· You are registered for GST.

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

There are no provisions under the GST legislation in which your supply of the software applications to customers outside Australia could have been input taxed. What remains to be determined is whether your supply is GST-free.

GST-free supply

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. Of relevance to the supply of your software applications to customers outside Australia are items 2 and 3 in the table in subsection 38-190(1) of the GST Act.

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-residents *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.

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

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

Precondition of Item 2 and paragraph (a) of Item 3 - Recipient who is not in Australia in relation to the supply

For the supply to be GST-free under Items 2 & 3 there is a condition that the recipient must not be in Australia in relation to the supply when it is done.

Goods and Services Tax Ruling GSTR 2004/7 discusses when an entity is not in Australia when the thing supplied is done. There are different tests to determine whether an entity is in Australia depending on the type of entity.

Supply to a non-resident individual

Under paragraph 35 of GSTR 2004/7, a non-resident individual is in Australia if that individual is physically in Australia. If a non-resident individual is physically in Australia and in contact (other than contact which is only of a minor nature) with the supplier, that presence is in relation to the supply. A non resident individual is in Australia in relation to the supply if the non resident individual is involved with the supply while in Australia.

Supply to 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) a fixed and definite place of its own for a sufficiently substantial period of time; or

(b) 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.

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.

The different tests for other entity types (such as partnerships and trusts) can be found in paragraphs 43 to 51 of GSTR 2004/7.

The facts indicate that you supply the software applications to customers in overseas countries. Your software applications are used by your customers in their country that is, in the country where the apps were purchased by them. The customers would access and use your software applications through your website.

Accordingly, when you supply your software applications to customers who are not in Australia in relation to your supply (when the supply is done), the condition that the recipient is not in Australia when the thing supplied is done, is satisfied.

The other requirements of Item 2 must also be taken into consideration.

Item 2 and subsection 38-190(3) of the GST Act

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 ('Item 2(a)')

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.

Goods and Services Tax Ruling GSTR 2003/7 covers the expression 'a supply of work physically performed on goods'. Paragraphs 57 to 59 of GSTR 2003/7 provide that a supply is a supply of work physically performed on goods where something is done deliberately to the goods to change them or to otherwise affect them in some physical way. In contrast, where activities do not change or affect goods in a physical way, there is no supply of work physically performed on goods.

The facts indicate that you supply the software applications to customers in overseas countries. The customers would use your software applications on your website, in order for them to create apps for smart phones (customers' apps). Your customers can then sell the customers' apps to their customers. Your customers are not required to download your software applications and can use it from your website. The software applications are intangible and there are no supplies of any goods. You do not supply the rights to the copyrights or intellectual property rights to your software applications.

On the basis of these facts, the supply of your software applications is neither a supply of work physically performed on goods situated in Australia, nor a supply directly connected with real property situated in Australia. Accordingly, the supply of your software applications through your website to a non-resident customer outside Australia satisfies Item 2(a).

Paragraph (b) of Item 2 ('Item 2(b)')

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

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 provided 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

Having met the requirements of Item 2, it is necessary to consider subsections 38-190(2),

38-190(2A) and 38-190(3) of the GST Act.

From the facts provided, the supply of your software applications does not involve a supply of a right or option to acquire another thing; does not relate to making input taxed supplies of real property; and there is no agreement with your overseas customers to provide the supply to another entity in Australia.

Accordingly, subsections 38-190(2), 38-190(2A) and 38-190(3) of the GST Act do not exclude your supply of the software applications to the customers outside Australia from being GST-free under Item 2.

To summarise, your supplies of the software applications to non-resident customers outside Australia is GST-free under Item 2.

Paragraph (b) of Item 3

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

For completeness in applying Item 3, even if it is considered that the overseas customer is not in Australia in relation to your supply of the software applications when it is done, paragraph (b) of Item 3 must also be satisfied for the supply to be GST-free under Item 3.

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 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.

The facts indicate that you supply the software applications to customers in overseas countries. Your software applications are used by your customers in their country that is, in the country where the apps were purchased by them. The customers would access and use your software applications through your website.

When the supply of your software applications is made and provided to a customer outside Australia, this customer is also the providee entity. The customer outside Australia has actual use or enjoyment of your supply.

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.

Your software applications are used by your customers in their country that is, in the country where the apps were purchased by them. When the supply of your software applications is made and provided to the customers outside Australia, the use and enjoyment of your supply is outside Australia.

Accordingly, the supply of your software applications made and provided to the customers outside Australia is also GST-free under Item 3.

To summarise, the supply of your software applications made and provided to customers outside Australia (that is, customers who are not in Australia in relation to your supply, when the supply is done), is GST-free.

All public rulings and publications stated in this ruling are available at the ATO website at www.ato.gov.au