Edited version of your written advice

Authorisation Number: 1013020556166

Date of advice: 18 May 2016

Ruling

Subject: GST and supply of licence to use software to Australian entities

Question 1

Does the non-resident company make a supply that is connected with Australia for the purposes of the goods and services tax (GST) when it supplies a licence to use software directly to Australian clients and is the non-resident company therefore making a taxable supply in this instance?

Advice

Where the software is hosted on an Australian server, the non-resident company's supply of a licence to use software directly to Australian clients is connected with Australia under paragraph 9-25(5)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The non-resident company will make a taxable supply under section 9-5 of the GST Act where its GST annual turnover for all supplies that are connected with Australia is $75,000 or above.

Where the software is hosted on an overseas server, the non-resident company's supply of a licence to use software directly to Australian clients is not connected with Australia as all the requirements in subsection 9-25(5) of the GST Act are not met. The supply is outside the scope of the GST system.

Question 2

Does the non-resident company make a supply that is connected with Australia for the purposes of GST when it supplies a licence to use software to an Australian reseller under the Reseller Agreement and is the non-resident company therefore making a taxable supply in this instance?

Advice

Under the Reseller Agreement between the non-resident company and the Australian reseller, the non-resident company has made a supply of right to the reseller.

Where the Reseller Agreement was executed in Australia, the supply of the right is connected with Australia under paragraph 9-25(5)(a) of the GST Act. The non-resident company will make a taxable supply of right under section 9-5 of the GST Act where its GST annual turnover for all supplies that are connected with Australia is $75,000 or above.

Where the Reseller Agreement was executed outside Australia, the supply of the right is not connected with Australia as all the requirements in subsection 9-25(5) of the GST Act are not met. The supply is therefore outside the scope of GST.

Relevant fact

You a company incorporated outside Australia and a non-resident of Australia. You are currently not registered for GST.

You are a software provider and supply software as an online tool to subscribers. To effect the provision of your software, you have entered into a Hosting Service Agreement with an overseas company for the provision of managed hosting services in each of the countries you trade in globally.

The overseas company supplies the physical hardware that your software runs on. The current Agreement includes the lease of a dedicated server and a firewall from the overseas company in Australia.

You maintain the hosted servers directly. The hardware is managed by the overseas company but the software is managed remotely by you. If an Australian server fails, disaster recovery is located in an overseas country and the Australian clients will be able to access their information via the overseas country back-up server.

Supply to Australian clients

You supply the software to Australian clients. Your supply comprises of an annual licence which enables a certain number of users of the clients to use the software. Your supply does not comprise physical products or goods.

You do not and have not engaged either employees or contractors to undertake duties in Australia; and do not have a formal presence (such as an office) in Australia.

You do not have an Australian website and clients cannot purchase the software licence directly through the Australian website owned by your Australian reseller.

Clients must contact or are contacted by the sales support located overseas, who discuss the client's requirements and recommend suitable resources which will best meet the client's operational needs.

When the client's requirements are determined, an order form is issued to the customer to sign. This form makes reference to your Master Agreement which can be accessed via your website. The order form together with the Master Agreement form the entire agreement between you and the client in respect of the product and services set forth in the Product and Pricing Summary in the order form.

The client subscribes to access the online software application by signing the order form sent to them. Having confirmed the engagement, your staff located, overseas activates the client's account and provide them with access to log into the online software which is hosted on a server in the countries you trade in globally including Australia. The client chooses the server from which it would like to have access and any work done through the software will be saved on that allocated server.

The supply of access to the online software application by you to your clients is subjected to various restrictions on its use. You only provide your customers the online access to your software that is hosted on a server in the countries you trade in globally including Australia. You do not supply any rights to the copyright or any other intellectual property rights under the Agreement with your clients.

After providing the clients with the log in details, you provide both start-up and on-going training to your users via webinars and videos. Further as a source of additional training, email updates are occasionally sent out to all of your clients making them aware that new information or help guides are available at no additional charge. These help documents are saved on the client's platform and hosted on their dedicated platform.

Under the Master Terms, technical support and services is performed the same for both overseas and Australian Clients. They are performed by your technical support staff members located outside Australia. Server outages or software bugs are reported to your staff who works to resolve these issues internally. The fee for technical support and services is included in the annual cost of the license and is not broken out separately.

Upgrades for the web-based platform go out regularly at no additional charge. You launch new features or updates which are loaded/installed on your servers. Clients are notified through your helpdesk (located on the overseas server) when upgrades become available.

Australian reseller of the software

In addition to supplying your software licences to Australian end users, you also have a Reseller Agreement with an Australian entity (reseller). The negotiation for the agreement was handled over the phone and by email.

In undertaking the requirements of the Reseller Agreement, the reseller acts as principal in making the supply to its client. The Australian website is operated and owned by the Australian reseller.

The reseller markets and sells the product on its own right. The client signs a contract with the reseller, is invoiced by the reseller and remits payment to the reseller. When a new client signs on with the reseller, the reseller provides you with an account set-up form that contains the client's information.

You provide the client with access to the software Platform, which is provided back to the reseller, who provides it to its client. The reseller is responsible for on-boarding the new client. The reseller's clients have the choice to choose whether to be hosted on the Australia Server or overseas based server.

Under the Reseller Agreement, a third-party client will go through the reseller for all support needed. They do not receive support from your staff located in your overseas offices. Should the reseller not be able to resolve the issue on its own, the reseller can contact you for guidance and resolution.

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 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 188-15

A New Tax System (Goods and Services Tax) Act 1999 section 188-20

Detailed reasoning

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in section 195-1 of the GST Act.

Question 1

Characterisation of the supply

Under the software order form and software Master Terms, the licensee subscribes to use the software Platform. Pursuant to the Agreement the licensee receives start up and on-going training to make them aware of new information or help guides, that are available and technical support. These services are supplied at no additional charge to the licensee.

Goods and Services Tax Ruling GSTR 2003/8 discusses the characterisation of software as a supply of right, a supply of software (as intangible property), a supply of a service, or a supply of goods.

GSTR 2003/8 provides that where the essential nature of the transaction is the supply of the computer program, subject to restrictions on its use, the fact that a licence relating to the supply of the software is couched in terms of a licence to use the software will not in itself mean that the substance of the supply is a supply of a right to use the software.

However, paragraph 90 of GSTR 2003/8 states that a supply of the rights to use the 'copyright' in the program itself for commercial purposes, which allows the licensee to modify, adapt or copy or otherwise do what would ordinarily be the exclusive right of the copyright owner, is a supply that is made in relation to rights.

From the facts given, the supply of access to an online software application by you to your clients is subjected to various restrictions on its use. You only provide your customers the online access to your software that is hosted on a server in the countries you trade in globally including Australia. You do not supply any rights to the copyright or any other intellectual property rights under the Agreement with your clients. Accordingly, your supply of access to the online software application is a supply of software, not a supply of a right. The upgrades and other services that you supply at no additional charge are incidental to the supply of software.

The next step is to determine the GST status of your supply of access to the online software.

GST Status of your supply

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

a) the supply is made for consideration;

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

c) it 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.

Based on the information provided, your supply of access to your online software application satisfies paragraphs 9-5(a) and 9-5(b) of the GST Act as:

• you receive consideration for your supply; and

• the supply is made in the course of your enterprise (business).

Therefore, we need to consider whether your supply of online access to your software is connected with Australia under paragraph 9-5(c) and whether you are required to be registered for GST under paragraph 9-5(d) of the GST Act.

Paragraph 9-5 (c) of the GST Act - connected with Australia

Under subsection 9-25(5) of the GST Act, 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 of 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; the supply of the other thing would be connected with Australia.

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

Paragraph 9-25(5)(a) of the GST Act

Goods and Services Tax Ruling provides guidance on when 'supplies are connected with 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.

'Thing' is defined in section 195-1 of the GST Act to mean anything that can be supplied or imported. Things other than goods or real property that can be supplied include services, advice, information, rights, obligations to do anything, or any combination of these things.

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

In your case, the thing that is being supplied is the access to an online software application to your customers.

You advised that the client subscribe to access the online software application by signing the order form sent to them. Having confirmed the engagement, your staff located overseas activates the client's account and provide them with access to log into the online software which is hosted on a server in the countries you trade in globally including Australia. The client chooses the server from which it would like to have access and any work done through the software will be saved on that allocated server.

Based on the information provided, the supply of the software is not connected with Australia under paragraph 9-25(5)(a) of the GST as the software is not prepared in Australia. Paragraph 9-5(c) of the GST Act is not satisfied.

Paragraph 9-25(b) of the GST Act

In relation to paragraph 9-25(5)(b) of the GST Act, subsection 9-25(6) of the GST Act provides 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

GSTR 2000/31 explains subsection 9-25(6) of the GST Act as follows:

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.

Computer equipment and software are discussed in paragraphs 42.1 and 2.2 of the OECD Commentary on Article 5. They state:

42.1 Whilst a location where automated equipment is operated by an enterprise may constitute a permanent establishment in the country where it is situated (see below), a distinction needs to be made between computer equipment, which may be set up at a location so as to constitute a permanent establishment under certain circumstances, and the data and software which is used by, or stored on, that equipment. For instance, an Internet web site, which is a combination of software and electronic data, does not in itself constitute tangible property. It therefore does not have a location that can constitute a "place of business" as there is no "facility such as premises or, in certain instances, machinery or equipment" (see paragraph 2 above) as far as the software and data constituting that web site is concerned.

42.2 On the other hand, the server on which the web site is stored and through which it is accessible is a piece of equipment having a physical location and such location may thus constitute a "fixed place of business" of the enterprise that operates that server.

Further clarification is provided in paragraph 42.3 of the OECD Commentary on Article 5 and this paragraph states:

42.3 The distinction between a web site and the server on which the web site is stored and used is important since the enterprise that operates the server may be different from the enterprise that carries on business through the web site. For example, it is common for the web site through which an enterprise carries on its business to be hosted on the server of an Internet Service Provider (ISP). Although the fees paid to the ISP under such arrangements may be based on the amount of disk space used to store the software and data required by the web site, these contracts typically do not result in the server and its location being at the disposal of the enterprise, even if the enterprise has been able to determine that its web site should be hosted on a particular server at a particular location. In such a case, the enterprise does not even have a physical presence at that location since the web site is not tangible. In these cases, the enterprise cannot be considered to have acquired a place of business by virtue of that hosting arrangement. However, if the enterprise carrying on business through a web site has the server at its own disposal, for example it owns (or leases) and operates the server on which the web site is stored and used, the place where that server is located could constitute a permanent establishment of the enterprise if the other requirements of the Article are met.

To effect the provision of your supply, you have entered into an agreement with an overseas company, which provides managed hosting services to you in each of the countries you trade in globally. The overseas company supplies the physical hardware that your software runs on.

Your current contract with the overseas company comprises the lease of a dedicated server and a Firewall in Australia. You maintain the hosted servers directly. The hardware is managed by the overseas company but the software is managed remotely by you.

You have a dedicated server in Australia which your Australian client can log in to access the software and this server performs the same function as the servers in the other countries. The server in Australia is therefore an integral part of your overall business operations as it is an essential and integral part of the business.

In this instance, it is considered as per paragraph 42.3 of the OECD Commentary on Article 5 of the Overseas Convention, when the clients use your dedicated server in Australia, the supply of access to use the software is being carried on through a fixed place of business in Australia.

Accordingly, that fixed place of business is a permanent establishment for GST purposes and you are partly carrying on your business in Australia through the server that you own and operate in Australia under subsection 9-25(6) of the GST Act.

Where the clients access the software that is located on the Australian server, your supply is connected with Australia under paragraph 9-25(5)(b) of the GST Act as you make your supply through the business you carry on in Australia under subsection 9-25(6) of the GST Act. Paragraph 9-5(c) of the GST Act is satisfied.

Where the clients access the software that is not located on an Australian server, your supply is not connected with Australia. Paragraph 9-5(c) of the GST Act is not satisfied in this instance. Your supply is therefore outside the scope of GST.

Subsection 9-25(5)(c) of the GST Act

Subsection 9-25(5)(c) of the GST Act is not applicable as there are no supplies of rights or options to acquire other things where the supply of the other things would be connected with Australia when you make your supply to the Australian clients. Paragraph 9-5(c) of the GST Act is not satisfied.

Paragraph 9-5(d) of the GST Act

Under section 23-5 of the GST Act you are required to be registered for GST if:

a) you are carrying on an enterprise; and

b) your GST turnover is at or above the registration turnover threshold (currently $75,000 and $150,000 for non-profit organisation).

You may choose to register for GST if your turnover is below $75,000.

When calculating the current and projected GST turnovers, the following supplies (amongst others) are disregarded:

• supplies that are input taxed;

• supplies that are not for consideration (and are not taxable supplies under section 72-5 of the GST Act);

• supplies not made in connection with an enterprise that you carry on;

• supplies that are not connected with Australia;

• supplies that are connected with Australia because of paragraph 9-25(5)(c) of the GST Act.

Consequently you would need to include in the calculation of your GST turnover the consideration for supplies that are connected with Australia.

Where your GST annual turnover for supplies connected with Australia is $75,000 or above, you are required to be registered for GST. Paragraph 9-5(d) of the GST Act is satisfied.

Where the GST annual turnover for supplies connected with Australia is below $75,000, you are not required to be registered for GST. Paragraph 9-5 (d) is not satisfied.

GST-free and input taxed supply

There is no provision that make your supply to the Australian customers in Australia GST-free or input taxed.

Summary

Where the software is located on your Australian server, your supply to the Australian clients is connected with Australia under paragraph 9-25(5)(b) of the GST Act. In the event where your turnover for your supplies that are connected with Australia is $75,000 or over, your supply is a taxable supply under section 9-5 of the GST Act.

Where the software is not located on your Australian server, your supply to the Australian clients is not connected with Australia. In this case GST is not applicable to your supply.

Question 2

Characterisation of supply

Under the Reseller Agreement and Amended Reseller Agreement you grant to the reseller a non-exclusive non-transferable licence to permit end users to access your software. The Reseller has the right to sub-licence the software to end users (customer of resellers who are authorised to use the software pursuant to an End User Agreement you have with the customer). In this instance it is a supply of right that you have made to the reseller.

GST status of the supply of right

The supply of right is a taxable supply under section 9-5 of the GST where all the requirements in that section are met.

From the information received your supply of right satisfies paragraphs 9-5(a) and 9-5(b) of the GST Act as you supply the right for consideration and the supply is made in the course of the business that you carry on.

Paragraph 9-5(c) of the GST Act.

Under subsection 9-25(5) of the GST Act, a supply of right is connected with Australia if:

a) the supply is done in Australia; or

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

c) all of the following apply:

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

ii. the right is a right or option to acquire another thing; the supply of the other thing would be connected with Australia.

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

Paragraph 9-25(5)(a) of the GST Act

In regard to when a supply of rights is done GSTR 2000/31 provides the following:

The creation, grant, transfer, assignment or surrender of a right

74. If the supply is the creation, grant, transfer, assignment or surrender of a right, the creation of that right in another, the granting, transfer or assignment of that right to another, or the surrender of that right, is done where the right is created in that other person, granted, transferred or assigned to that other person or surrendered respectively.

75. The act that creates that right in another or grants, transfers or assigns that right to another, or surrenders the right, will depend on the facts of each individual case.

76. If, for example, a right is granted under an agreement to another to use certain intellectual property, the granting of that right to another is done where the agreement is made. If the agreement is made in Australia, the supply of that right is connected with Australia. If the agreement is made outside Australia, the supply is not connected with Australia under paragraph 9-25(5)(a). However, even if the agreement is made outside Australia the supply is connected with Australia under paragraph 9-25(5)(b) if the supplier makes the supply through an enterprise that the supplier carries on in Australia.

Where the Reseller Agreement was executed in Australia, the supply of the right is connected with Australia under 9-25(5)(a) of the GST Act. Paragraph 9-5(c) of the GST Act is satisfied.

Where the Reseller Agreement was executed outside Australia, the supply of the right is not connected with Australia. Paragraph 9-5(c) of the GST Act is not satisfied.

Paragraph 9-25(5)(b) of the GST Act

As discussed in question 1 you have a permanent establishment in Australia under subsection 9-25(6) of the GST Act where the software is hosted in Australia.

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.

In this case you did not supply the right to the reseller through your Australian permanent establishment. Paragraph 9-5(c) of the GST Act is not satisfied.

Paragraph 9-25(5)(c) of the GST Act

This paragraph is not applicable as there are no supplies of rights or options to acquire other things where the supply of the other things would be connected with Australia when you make your supply of right to the Australian reseller. Paragraph 9-5(c) of the GST Act is not satisfied.

Paragraph 9-5(d) of the GST Act

Under section 23-5 of the GST Act you are required to be registered for GST if:

a) you are carrying on an enterprise; and

b) your GST turnover is at or above the registration turnover threshold (currently $75,000 and $150,000 for non-profit organisation).

You may choose to register for GST if your turnover is below $75,000.

Where the GST annual turnover of all supplies that are connected with Australia is $75,000 or above, you will be required to be registered for GST under section 23-5 of the GST Act. Paragraph 9-5(d) of the GST Act is satisfied.

Where your GST annual turnover of all supplies that are connected with Australia is less than $75,000, you will not be required to be registered for GST. Paragraph 9-5(d) of the GST Act is not satisfied.

GST-free and input taxed supply

Your supply of right to the reseller is neither GST-free nor input taxed.

Summary

Where the Reseller Agreement was executed in Australia, your supply of right to the reseller is a taxable supply when the supply is connected with Australia under paragraph 9-25(5)(a) of the GST Act and you are required to be registered for GST under section 23-5 of the GST Act.

Where the Reseller Agreement was executed outside Australia, your supply of right to the reseller is not a taxable supply as the supply is not connected with Australia and therefore outside the scope of GST.