Edited version of your private ruling

Authorisation Number: 1012465207401

Ruling

Subject: GST and the supply of electronic books

Question 1

Is the supply of electronic books (eBooks) through distributors, to Australian resident and non-resident end users, a taxable supply according to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

The supply eBooks to Australian resident end-users will be a taxable supply under section 9-5 of the GST Act. GST will be payable on the supply of eBooks to resident end-users.

Conversely, the supply of eBooks to a non-resident end-user, who is not in Australia in relation to the supply, will be GST-free if paragraph (a) of item 2 is satisfied and the supplier is not required to provide the supply to another entity in Australia.

Question 2

Are royalties that are paid to Australian authors subject to GST where sales are made to Australian resident end users and non-resident end users?

Answer

Where the Australian author is registered for GST, GST will have to be included in the royalty you pay. You will be able to claim an input tax credit for the amount of GST paid to the author.

Where the Australian author is not registered for GST, the Australian author cannot charge GST for his royalties.

Relevant facts and circumstances

· In your private ruling application, you provided the following information:

· You are registered for goods and services tax (GST)

· You are a publisher of electronic books (eBooks)

· The eBooks are sold through a non-resident distributor (Distributor A (NRE)).

· The intellectual property remains with the Australian author who receives a royalty for each book sold.

· Distributor A (NRE) traditionally retains 30% of the sale price and remits the balance to you, who share the balance with the author.

· Distributor A (NRE) reports sales by country.

In a request for further information, you provided the following information:

· The eBooks are sold through Distributor A (NRE) as well as another distributor, being Distributor B group of entities.

· Some Australian authors are registered for GST but some are not.

· You provided a copy of the following agreements:

o Distributor A (NRE) Agreement

o Distributor B Agreement and

o Publishing agreement, between you and the author of the books.

Distributor B agreement

Exhibit A of the Distributor B Agreement states the following:

· Publisher appoints Distributor B Pty Limited (Distributor B Aus) as Publisher's agent for the sale and delivery of eBooks to end-users located in Australia

· Publisher appoints non-resident Distributor B (Distributor B NRE) entities as Publisher's agent for the sale and delivery of eBooks to end-users located in countries outside Australia.

Exhibit D, clause 2(c)(iii) of the Distributor B Agreement states the following:

(iii) Publisher and Distributor B agree to enter into an arrangement for the purposes of s. 153-50 of the GST Act. Publisher and Distributor B further agree that that for taxable supplies made by Publisher, through Distributor B as agent, to any end-user:

a. Distributor B will be deemed as making supplies to any end-user;

b. Publisher will be deemed as making separate, corresponding supplies to Distributor B;

c. Distributor B will issue to any end-user, in Distributor B's own name, all tax invoices and adjustment notes made under paragraph (iii)(a);

d. Publisher will not issue to any end-user any tax invoices or adjustment notes relating to taxable supplies made under paragraph 9(iii)(a);

e. Distributor B will issue a recipient created tax invoice to Publisher in respect of any table supplies made by Publisher to Distributor B under this Agreement, including taxable supplies made under paragraph (iii)(b); and

f. Publisher will not issue a tax invoice to Distributor B in respect of any taxable supplies made by Publisher to Distributor B under this Agreement, including taxable supplies made under paragraph (iii)(b)

Publishing agreement

According to clause 3.1 of the Publishing agreement:

The Author grants to the Publisher the sole and exclusive licence to produce, publish and sell the Work in its entirety throughout the territories for the duration of the initial term.

According to clause 6.1 of the Publishing agreement:

The Publisher will pay the Author a royalty of xx per cent of the net proceeds of all sales of the Work.

Distributor A (NRE) Terms of use

The following is an extract from Distributor A (NRE)'s terms of use as found on Distributor A (NRE)'s website:

… the Publisher grants you [end user] a non-exclusive right to view, use, and display such Content an unlimited number of times… solely for your personal, non-commercial use. Content is licensed, not sold, to you by the Publisher. The Publisher may include additional terms for use within its Content. Those terms will also apply, but this Agreement will govern in the event of a conflict.

Distributor B Terms and Conditions

The following is an extract from Distributor B's terms and conditions as found on Distributor B's website

…Distributor B is acting as agent for the Publisher in providing each such Product to you [the end-user]; Distributor B is not a party to the transaction between you and the Publisher with respect to that Product; and the Publisher of each Product reserves the right to enforce the terms of use relating to that Product. The Publisher of each Product is solely responsible for that Product, the content therein, any warranties to the extent that such warranties have not been disclaimed, and any claims that you or any other party may have relating to that Product on your use of that Product.

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 9-10

A New Tax System (Goods and Services Tax) Act 1999, section 9-15

A New Tax System (Goods and Services Tax) Act 1999, section 9-20

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(3)

Reasons for decision

Question 1

Summary

The supply of eBooks to Australian resident end-users will be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). GST will be payable on the supply of eBooks to resident end-users.

Conversely, the supply of eBooks to a non-resident end-user, who is not in Australia in relation to the supply, will be GST-free if paragraph (a) of item 2 is satisfied and the supplier is not required to provide the supply to another entity in Australia.

Detailed reasoning

GST is payable on a taxable supply. Section 9-5 of the GST Act states to the supplier that:

You make a taxable supply if:

a) you make the supply for consideration

b) the supply is made in the course or furtherance of an enterprise that you carry on

c) the supply is connected with Australia, and

d) 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.

From the facts provided, we consider you to be making the following supplies:

· The supply of eBooks through Distributor A (NRE) to Australian resident and non-resident end-users

· The supply of eBooks through Distributor B (Aus) to Australian resident end-users

· The supply of eBooks through Distributor B (NRE) to non-resident end-users.

Each supply will be examined independently.

The supply of eBooks through Distributor A (NRE) to Australian resident and non-resident end-users

Before we determine the GST status of the supply, it is necessary to determine who is making the supply. From the facts provided, although you make the supply of the eBooks to the end user through Distributor A (NRE), a contract exists between you and the end user.

According to the Distributor A (NRE) terms of use that is provided to the end-user:

… the Publisher grants you [end user] a non-exclusive right to view, use, and display such Content an unlimited number of times… solely for your personal, non-commercial use. Content is licensed, not sold, to you by the Publisher. The Publisher may include additional terms for use within its Content. Those terms will also apply, but this Agreement will govern in the event of a conflict.

From Distributor A's (NRE) terms of use, it is evident that you, being the content provider, and not Distributor A (NRE), will be deemed to be the supplier of eBooks to the end-user when an order is placed through Distributor A (NRE).

Having established that you are the supplier of the eBooks to the end user, the next step is to determine the GST status of the supply.

Taxable supply

In order for a taxable supply to be made, all the requirements listed in section 9-5 of the GST Act must be satisfied. However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

From the facts received, you make a supply of eBooks to both resident and non-resident end-users for consideration, in the course of the enterprise that you carry on in Australia, and you are registered for GST. Therefore, paragraphs (a), (b), (c) and (d) of section 9-5 of the GST Act will be satisfied.

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

Input taxed supply

Division 40 of the GST Act makes certain supplies input taxed. If a supply is an input taxed supply then no GST is payable on the supply and there is no entitlement to an input tax credit (GST paid) for anything acquired or imported to make the supply.

There is no provision under the GST Act that makes the supply of eBooks, input taxed.

GST-free

Subsection 38-190(1) 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.

Section 38-190 of the GST Act defines certain supplies other than goods or real property for consumption outside of Australia as GST-free.

Item 2 in the table in subsection 38-190(1) of the GST Act (Item 2) states:

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

Supplies to non-resident end-users

A non-resident is defined in section 195-1 of the GST Act to mean an entity that is not an Australian resident for income tax purposes.

For a supply to be within the scope of item 2, the supply must be made to a non-resident who is not in Australia when the thing is done. The expression 'not in Australia' requires that the non-resident not be in Australia in relation to the supply.

In relation to the supply of eBooks you make to non-resident end-users, the non-resident end-users will not be considered to be in Australia in relation to the supply. However, where a non-resident is not in Australia when the supply is done, the supply must still meet the requirements of paragraph (a) or paragraph (b) in item 2 to be GST-free.

Paragraph (a)

Paragraph (a) in item 2 requires that the supply must not be a supply of work physically performed on goods situated in Australia or directly connected with real property in Australia.

Where the requirements of paragraph (a) are met, the supply will be GST-free under item 2.

The supply of an eBook to a non-resident end-user is neither a supply of work physically performed on goods situated in Australia nor a supply directly connected with real property in Australia. Therefore, your supply of eBooks to non-resident end-users will meet the requirements of paragraph (a) in item 2.

For more information on the meaning 'directly connected with goods or real property' and ' a supply of work physically performed on goods' please refer to Goods and Services Tax Ruling GSTR 2003/7 (available on www.ato.gov.au).

As paragraph (a) in item 2 is satisfied, it is unnecessary to apply paragraph (b) to your circumstances.

Subsection 38-190(3) of the GST Act

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.

From the facts, you have an agreement with the non-resident end-users to supply them with eBooks. There are no facts to indicate that these end-users are required to provide that same supply to another entity in Australia. Therefore, subsection 38-190(3) of the GST Act will not apply in your circumstances.

For more information on subsection 38-190(3) of the GST Act please refer to Goods and Services Tax Ruling GSTR 2005/6 (available on www.ato.gov.au)

In summary, a supply of eBooks through Distributor A (NRE) to a non-resident end-user, who is not in Australia in relation to the supply, will be GST-free if paragraph (a) of item 2 is satisfied and the supplier is not required to provide the supply to another entity in Australia.

Supplies to resident end-users

Conversely, the supply of a book electronically to an Australian resident end-user will be a taxable supply under section 9-5 of the GST Act as there are no provisions under the GST Act that would make your supply of a book electronically to an Australian end-user GST-free.

The supply of eBooks through Distributor B (Aus) to Australian resident end-users

According to the Distributor B iBookstore terms and conditions:

…Distributor B is acting as agent for the Publisher in providing each such Product to you [the end-user]; Distributor B is not a party to the transaction between you and the Publisher with respect to that Product; and the Publisher of each Product reserves the right to enforce the terms of use relating to that Product. The Publisher of each Product is solely responsible for that Product, the content therein, any warranties to the extent that such warranties have not been disclaimed, and any claims that you or any other party may have relating to that Product on your use of that Product.

From the Distributor B iBookstore terms and conditions, it is evident that you, and not Distributor B who will be deemed to be the supplier of eBooks to the end-user when an order is placed through Distributor B.

However, according to exhibit D of Distributor B's Agreement, a clause has been inserted to deem Distributor B as making supplies to any end-users for the purposes of the GST Act:

(iii) Publisher and Distributor B agree to enter into an arrangement for the purposes of s. 153-50 of the GST Act. Publisher and Distributor B further agree that that for taxable supplies made by Publisher, through Distributor B as agent, to any end-user:

a. Distributor B will be deemed as making supplies to any end-user;

b. Publisher will be deemed as making separate, corresponding supplies to Distributor B;

c. Distributor B will issue to any end-user, in Distributor B's own name, all tax invoices and adjustment notes made under paragraph (iii)(a);

d. Publisher will not issue to any end-user any tax invoices or adjustment notes relating to taxable supplies made under paragraph 9(iii)(a);

e. Distributor B will issue a recipient created tax invoice to Publisher in respect of any table supplies made by Publisher to Distributor B under this Agreement, including taxable supplies made under paragraph (iii)(b); and

f. Publisher will not issue a tax invoice to Distributor B in respect of any taxable supplies made by Publisher to Distributor B under this Agreement, including taxable supplies made under paragraph (iii)(b)

Therefore, Distributor B will be deemed to be the supplier of eBooks to the end user and you will be deemed as making separate, corresponding supplies to Distributor B for the purposes of the GST Act.

In relation to the supplies you make to Distributor B for the delivery of eBooks to Australian resident end-users, Exhibit A, clause 1 of the Distributor B Agreement states the following:

· Publisher appoints Distributor B Pty Limited (Distributor B Aus) as Publisher's agent for the sale and delivery of eBooks to end-users located in Australia

Therefore, we will need to consider whether the supplies you make to Distributor B (Aus) is considered a taxable supply in accordance with section 9-5 of the GST Act.

In order for a taxable supply to be made, all the requirements listed in section 9-5 of the GST Act must be satisfied. However, a supply is not a taxable supply to the extent that it is GST-free or input taxed.

From the facts received, you make a separate, corresponding supply of eBooks to Distributor B (Aus) for consideration, in the course of the enterprise you carry on in Australia, and you are registered for GST. Therefore, paragraphs (a), (b), (c) and (d) of section 9-5 of the GST Act will be satisfied.

As Distributor B (Aus) is an Australian resident, the supply of eBooks to Distributor B (Aus), who then distribute the eBooks to Australian resident end-users, will be a taxable supply under section 9-5 of the GST Act as there are no provisions under the GST Act that would make your supply of eBooks to Distributor B (Aus) GST free.

The supply of eBooks through Distributor B (NRE) to non-resident end-users

As mentioned above, Distributor B will be deemed to be the supplier of eBooks to the end user and you will be deemed as making separate, corresponding supplies to Distributor B for the purposes of the GST Act.

In relation to the supplies you make to Distributor B for the delivery of eBooks to non-resident end-users, Exhibit A, of the Distributor B Agreement states the following:

· Publisher appoints non-resident Distributor B (Distributor B NRE) entities as Publisher's agent for the sale and delivery of eBooks to end-users located in countries outside Australia.

Therefore, we will need to consider whether the supplies you make to Distributor B (NRE) is considered a taxable supply in accordance with section 9-5 of the GST Act.

From the facts given, you satisfy all the conditions of paragraphs 9-5(a) to (d) of the GST Act, as:

a) you make a supply of eBooks and in return you will receive consideration for the supply by way of payments

b) you supply the eBooks is in the course or furtherance of your business

c) you supply the eBooks through an enterprise that you will carry on in Australia (and therefore the supply will be connected with Australia); and

d) you are registered for GST.

Hence, the eBooks will be taxable to the extent that it is not GST-free or input taxed.

The supply of eBooks to the Distributor B (NRE) will not satisfy any of the input taxed provisions under the GST Act.

GST-free

A supply is GST-free under Item 2 in the table in subsection 38-190(1) of the GST Act if it meets the requirement that the non-resident is not in Australia, and satisfies either paragraph (a) or (b) of Item 2.

Non-resident is not in Australia

For a supply to be within the scope of Item 2, the supply must be made to a non-resident not in Australia when the thing is done.

From the information you have provided, you supply the eBooks to Distributor B (NRE). Therefore, the non-resident is not in Australia when the thing supplied is done.

Paragraph (a)

Paragraph (a) in item 2 requires that the supply must not be a supply of work physically performed on goods situated in Australia or directly connected with real property in Australia.

Where the requirements of paragraph (a) are met, the supply will be GST-free under item 2.

The supply of an eBook to Distributor B (NRE) is neither a supply of work physically performed on goods situated in Australia nor a supply directly connected with real property in Australia. Therefore, your supply of eBooks to the non-resident Distributor B entities will meet the requirements of paragraph (a) in item 2.

As paragraph (a) in item 2 is satisfied, it is unnecessary to apply paragraph (b) to your circumstances.

Subsection 38-190(3) of the GST Act

Subsection 38-190(3) of the GST Act provides that a supply covered by Item 2 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.

The term 'provided' in the context of subsection 38-190(3) of the GST Act is used to distinguish between the recipient of the supply in a contractual sense and the entity that is provided with the supply in an actual sense.

Paragraph 38-190(3)(a) of the GST Act requires the Item 2 supply to be under an agreement entered into with a non-resident. Paragraph 38-190(3)(b) of the GST Act looks at the actual flow of the supply, which is the provision of the supply and whether it is provided to an entity in Australia.

The supply of eBooks to Distributor B (NRE) by you is a supply under a written agreement entered into with Distributor B entities entitled 'the Distributor B agreement'.

The supply of eBooks is provided to non-resident end-users. That is, the flow of the actual eBooks is to the non-resident end-users and not Distributor B (NRE). Although the supply is provided to another entity, the other entity is not in Australia. Accordingly paragraph 38-190(3)(b) of the GST Act is not satisfied.

Therefore, the supply of eBooks to Distributor B (NRE), who then distribute the eBooks to non-resident end-users, will be a GST-free supply.

In summary

Supplies to Australian resident end-users

The supply of eBooks to Australian resident end-users through either Distributor A (NRE) or Distributor B (Aus) will be a taxable supply under section 9-5 of the GST Act. GST will be payable on the supply of eBooks to Australian resident end-users

Supplies to non-resident end-users

The supply of eBooks to a non-resident end-user through either Distributor A (NRE) or Distributor B (NRE), will be GST-free if paragraph (a) of item 2 is satisfied and the supplier is not required to provide the supply to another entity in Australia.

Question 2

Summary

Where the Australian author is registered for GST, GST will have to be included in the royalty you pay. You will be able to claim an input tax credit for the amount of GST paid to the author.

Where the Australian author is not registered for GST, the Australian author cannot charge GST for his royalties.

Detailed reasoning

GST is payable on a taxable supply. Section 9-5 of the GST Act states that:

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.

Supply

The definition of a supply, is broadly defined in sub-section 9-10(1) of the GST Act. According to that sub-section a supply is any form of supply whatsoever.

Paragraph 9-10(2)(e) of the GST Act states that a creation, grant, transfer, assignment or surrender of any right to be a supply.

To determine if the Australian author is making a supply, it is necessary to first consider what the author is supplying. To determine this, we need to look to the purpose and features of a royalty.

According to paragraph 10 of Taxation Ruling No. IT 2660 (IT 2660), a royalty, as accorded by common law, will normally have the following features:

a) it is a payment made in return for the right to exercise a "beneficial privilege" or right (eg to produce a play, publish a book) as referred to in McCauley v FC of T and FC of T v Sherritt Gordon Mines Ltd;

b) the payment is made to the person holding the ownership or other rights which enable him to confer that beneficial privilege : Barrett v FC of T;

c) the consideration payable is linked to the amount of use made of the right acquired (eg a payment of x cents per performance, per item sold) : McCauley v FC of T; and

d) the consideration will usually be paid as and when the privilege acquired is exercised.

Given the above, the granting of the right to publish would be a supply according to section 9-10 of the GST Act.

Consideration

Paragraph 9-15(1)(a) of the GST Act states that; consideration includes any payment, or any act or forbearance, in connection with a supply of anything. In return for granting the right, you receive consideration, in the form of royalties which is payable each time the right is being exercised. Accordingly, royalties paid by the publisher will be considered as consideration for the purposes of the GST Act

Enterprise

An enterprise is an activity, or series of activities done in the form of an adventure or concern in the nature of trade paragraph 9-20(1)(b) of the GST Act. Accordingly the Australian author is carrying on an enterprise as an author.

Registration

You have stated that some Australian authors are registered for GST, while some will not be due to their turnover threshold.

In Australia

The supply is connected with Australia, as you are in Australia.

GST-free or input taxed?

Supplying a right to publish books is neither considered as a GST free supply nor an input taxed supply in the GST Act.

On this basis, where the Australian author is registered for GST, the Australian author is making a taxable supply. GST will have to be included in the royalty you pay to the Australian author. You will be able to claim an input tax credit for the amount of GST paid to the author.

Where the Australian author is not registered for GST, the Australian author cannot charge GST for his royalties.