Edited version of your private ruling

Authorisation Number: 1012503180889

Ruling

Subject: GST and supplies to non-residents

Question 1

Is the supply of web-based software application that is hosted on servers located in Australia to non-resident clients a GST-free supply under subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Is the supply of web-based software application to non-resident clients GST-free as a supply of goods under subsection 38-185(1) of the GST Act?

Answer

No.

Relevant facts and circumstances

You are an Australian resident company which is registered for GST.

Your product is a software application that is only available as a web-based application.

The software application is not available in 'shrink wrap' or downloadable form.

The software application is hosted on servers physically located in Australia.

Your client base consists of residents and non-residents of Australia for income tax purposes.

The non-residents will not be in Australia when they access the software application.

All users must pay a monthly fee in advance for log-on access rights.

Your website's Terms and Conditions provide the following:

A user must comply with the Terms and Conditions.

A user must open an account using the online registration facility on the website before they can use the software application. A user may only open an account as an individual.

Using the software application does not make the user the owner of any intellectual property rights in the software application or the content accessed using the software application. The user must not use content from the website unless the user obtains permission from the content owner or the user is otherwise permitted by law. The terms and conditions do not entitle the user to use any trademarks, branding or logos appearing on the website.

Once any initial free trial period has expired (if applicable), the user will need to pay an annual subscription fee to be able to use the software application.

The website may be accessed from within Australia and throughout the world. No representations or warranties are made that the website complies with the laws of any country other than Australia.

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 38-185.

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(2A).

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-190(3).

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

Reasons for decision

Summary

The supply of the software application to non-resident clients is not a GST-free supply of goods under subsection 38-185(1) of the GST Act. The supply is a GST-free supply under subsection 38-190(1) of the GST Act.

Detailed reasoning

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you must pay the GST payable on any taxable supply that you make.

You make a taxable supply if the supply meets all of the requirements of section 9-5 of the GST Act. Section 9-5 of the 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 under section 195-1 of the GST Act.)

The supply of the web-based software application, in the circumstances described, satisfies the requirements of paragraphs 9-5(a), 9-5(b), and 9-5(d) of the GST Act as:

· you supply the web-based software application for consideration

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

· you are registered for GST.

Your ruling request relates specifically to the supply of the web-based software application to non-resident clients who are not in Australia when they access the application. The terms and conditions provide that the account must be held by an individual.

As you are providing the web-based software application to an individual outside Australia, we need to determine if you are making supplies that are connected with Australia.

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, among others:

(a) the thing is done in Australia or

(b) the supplier makes the supply through an enterprise that the supplier carries on in Australia.

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

Goods and Services Tax Ruling GSTR 2000/31 explains when a supply is connected with Australia. GSTR 2000/31 provides that 'thing' is defined to mean anything that can be supplied or imported such as a service, advice, information or a right. The 'thing' is the subject of the supply.

Paragraph 64 of GSTR 200031 provides that the meaning of 'done' depends on the nature of the 'thing' being supplied. 'Done' can mean, for example, performed, executed, completed or finished depending on what is supplied.

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. In your case, the software application is hosted on servers located in Australia and clients access it from your website.

Based on the information provided, the supply of the web-based software application is connected with Australia because the supply is either done in Australia or made through the enterprise that you carry on in Australia. Hence, paragraph 9-5(c) of the GST Act is satisfied.

The supply of the web-based software application is not input taxed under any provision of the GST Act or any other Act. It remains to be determined if the supply is GST-free.

Paragraph 9-30(1)(a) of the GST Act provides that a supply is GST-free if it is GST-free under Division 38 of the GST Act or under a provision of another Act.

Section 38-185 of the GST Act

Section 38-185 of the GST Act sets out when supplies of goods are GST-free exports. A supply of goods, where those goods are exported from Australia, is GST-free if the requirements of one of the items in the table in subsection 38-185(1) are met.

Section 195-1 of the GST Act defines 'goods' as meaning any form of tangible personal property.

You advised that the software application is web-based and is not made available in 'shrink wrap' or downloadable form.

Based on the information provided, your supply of the web-based software application is not a supply of goods as there is no tangible property supplied. Therefore, subsection 38-185(1) of the GST Act is not applicable.

Section 38-190 of the GST Act

Section 38-190 of the GST Act provides that certain supplies of things other than goods or real property, for consumption outside of Australia are GST-free. Of particular relevance to your case 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.

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

Item 2

For the supply to be GST-free under item 2 there is a precondition that the recipient must not be in Australia in relation to the supply when it is done. In determining this factor, the entity type of the non-resident customer must be considered.

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

In relation to a supply to a non-resident individual, paragraph 35 of GSTR 2004/7 provides that a non-resident individual is in Australia if that individual is physically in Australia.

Furthermore, it is necessary to determine if the non-resident individual is in Australia in relation to the supply, when the supply is provided. A non-resident individual is in Australia in relation to the supply if the individual is in contact with the supplier while in Australia and that contact is not minor. Where a non-resident individual is in Australia for a purpose that is not related to the supply and has no contact with the supplier or only has minor contact, the individual is not considered to be in Australia in relation to the supply.

On the information provided, the supply of the web-based software application is to clients who are non-resident individuals and who are not in Australia when they access the software application. Hence, the requirement that the recipient is not in Australia when the thing supplied is done, is satisfied.

The supply must also satisfy the other requirements in either paragraph (a) or (b) of item 2 are satisfied.

Paragraph (a) of item 2

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

The supply of the software application from your website is neither a supply of work physically performed on goods situated in Australia nor a supply directly connected with real property situated in Australia. Therefore, the supply satisfies paragraph (a) of item 2.

As paragraph (a) of item 2 is satisfied, there is no need to consider paragraph (b) of item 2. However, for completeness, below is a discussion of the requirement of paragraph (b) of item 2.

Paragraph (b) of item 2

Under paragraph (b) of item 2, a supply is GST-free if the non-resident acquires your supply in carrying its 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 registered or required to be registered for GST before they can treat their supply as GST-free under paragraph (b) of item 2. Where the supplier is not in a position to be aware of these circumstances, enquiries should be made of the non-resident. The Commissioner of Taxation 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 can only be accepted where the supplier is not aware of any reasons to believe the statement is not accurate.

Hence, where the non-resident individual acquires your supply in carrying on his/her enterprise, and is neither registered nor required to be registered for GST in Australia, the supply satisfies paragraph (b) of item 2.

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 information provided provided, the supply of the software application 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 non-resident individuals 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 non-resident individuals outside Australia from being GST-free under Item 2.

In summary, the supply of the web-based software application to your non-resident individual clients outside Australia is a GST-free supply under item 2.

Although it is no longer necessary to consider the application of item 3, for completeness, we will consider the requirements of this provision.

Item 3

Similar to the precondition of item 2 discussed above, paragraph (a) of item 3 requires that the recipient must not be in Australia in relation to the supply when it is done. As stated above, on the information provided, the non-resident individuals are not in Australia when the thing supplied is done. Hence, paragraph (a) of the item 3 is satisfied.

Paragraph (b) of Item 3 requires that the place of effective use or enjoyment of a supply to be determined (that is, whether the place is outside Australia).

Goods and Services Tax Ruling GSTR 2007/2 examines the circumstances in which the effective use or enjoyment of a supply takes place outside Australia for the purposes of paragraph (b) of Item 3. 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. 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.

On the information provided, your non-resident clients are not in Australia when they access the software application through your website. When the supply of the software application is made and provided to the client outside Australia, this client is also the providee entity. The client outside Australia has actual use or enjoyment of your supply.

When the supply of the software application is made and provided to the non-resident client outside Australia, the use and enjoyment of the supply is outside Australia and the requirement of paragraph (b) of item 3 is satisfied.

Accordingly, the supply of the software application is also GST-free under Item 3.

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