Edited version of private advice

Authorisation Number: 1051595549073

Date of advice: 16 October 2019

Ruling

Subject: GST and supply of rights and services to a non-resident

Question 1

Is the supply of rights made by the Australian company to the non-resident company a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No. The supply of rights made by the Australian company to the non-resident company is not a taxable supply as it is GST-free under paragraph (b) in item 4 in the table in subsection 38-190(1) of the GST Act.

Question 2

Is the supply of services under the Agreement made by the Australian company to the non-resident company a taxable supply under section 9-5 of the GST Act?

Answer

No. The supply of services under the Agreement made by the Australian company to the non-resident company is not a taxable supply as it is GST-free under paragraph (a) of item 2 in the table in subsection 38-190(1) of the GST Act. Subsection 38-190(3) of the GST Act does not apply to negate the GST-free status of the supply of services as the Australian company has stated that it provides the services to the non-resident company and not to the non-resident company's customers.

Relevant facts

You are an Australian company (Licensor) and registered for GST.

The licensor has created and wrote a computer software system (System) and own the rights attached to this System

The Licensor has entered into an Agreement with a non-resident company and under the Agreement the Licensor has supplied to the non-resident company (Licensee) rights to exploit the System worldwide. The Licensee was not in Australia when the rights were supplied

The Licensor also agreed to supply its services to the Licensee which includes Second Level Support services The Licensee provides First Level Support for the System to its customers.

The Licensor has advised it does not have any direct relationship with the Licensee's customer when supplying the Second Level Support. The Licensee's customer logs requests for support with the Licensee's First Level Support. If this support requires assistance from the Licensor the support request is moved to Second Level Support. The Licensor provides the needed support or perform any necessary additional work as part of its engagement. The Licensee's First level Support then provides a support response to the customer.

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 38-190

Reasons for decision

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.

Detailed reasoning

Question 1

GST is payable on a taxable supply. Under section 9-5 of the GST Act 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.

From the information given, the Licensor's supply of rights to the Licensee satisfies paragraphs (a) to (d) in section 9-5 of the GST Act as:

a)    the Licensor receives consideration for the rights given to the Licensee; and

b)    the supply is made in the course of a business that the Licensor carries on; and

c)    the supply is connected with Australia as the licensor makes the supply through a business that it carries on in Australia; and

d)    the licensor is registered for GST.

The supply of rights made by the Licensor is a taxable supply to the extent that it is not GST-free or input taxed.

There is no provision in the GST Act that makes the Licensor's supply of rights input taxed.

GST-free provision

Relevant to the Licensor's supply of rights to the Licensee is item 4 in the table in subsection 38-190(1) of the GST Act (item 4)

Under item 4 a supply that is made in relation to rights is GST-free if:

a)    the rights are for use outside Australia; or

b)    the supply is to an entity that is not an Australian resident and is outside Australia when the thing supplied is done.

The Licensor has advised that the Licensee was not in Australia when the supply of rights was done. In this instance paragraph (b) of item 4 is satisfied.

The supply of rights is GST-free under item paragraph (b) in item 4 to the extent that it is not negated by subsection 38-190(2) or (2A) of the GST Act.

From the facts given, subsections 38-190(2) and (2A) do not apply to the supply of rights made by the Licensor. In this instance the supply of rights made by the Licensor is GST-free under paragraph (b) in item 4,

Question 2

The supply of services the Licensor makes to the Licensee satisfies paragraphs (a) to (d) in section 9-5 of the GST Act as:

a)    the Licensor receives consideration for the supply of services made to the Licensee; and

b)    the supply is made in the course of a business that the Licensor carries on; and

c)    the supply is connected with Australia as the licensor makes the supply through a business that it carries on in Australia; and

d)    the licensor is registered for GST

The supply of services is a taxable supply to the extent that it is not GST-free or input taxed.

There is no provision in the GST Act that makes the Licensor's supply of services input taxed.

GST-free provision

Relevant to the Licensor's supply of services to the Licensee is item 2 in the table in subsection 38-190(1) of the GST Act (item 2).

Item 2 provides that a supply of a thing other than goods or real property(for example services) made to a non-resident is GST-free if it is a supply that is made to a non-resident that 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-resident's enterprise, but is not registered or required to be registered for GST.

From the facts given paragraph (a) of item 2 is satisfied as:

·         the supply of services is made to a non-resident who is not in Australia in relation the supply when the services are done; and

·         the supply of services 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.

The supply of services made by the Licensor is therefore GST-free under paragraph (a) to the extent it is not negated by subsection 38-190(3) of the GST Act.

Subsection 38-190(3) of the GST Act

Subsection 38-190(3) of the GST Act provides that without limiting subsection 38-190(2) or (2A), a supply covered by item 2 in that table 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; and

c)    for a supply other than an input taxed supply - none of the following applies:

                      i.        the other entity would be an Australian-based business recipient of the supply, if the supply had been made to it;

                     ii.        the other entity is an individual who is provided with the supply as an employee or officer of an entity that would be an Australian-based business recipient of the supply, if the supply had been made to it; or

                    iii.        the other entity is an individual who is provided with the supply as an employee or officer of the recipient, and the recipient's acquisition of the thing is solely for a creditable purpose and is not a non-deductible expense.

All of the requirements in this subsection have to be satisfied for the GST-free supply under item 2 to be negated from being GST-free and be a taxable supply under section 9-5 of the GST Act

The Licensor has advised its services are made and provided to the Licensee and not to the customers of the Licensee. In this instance subsection 38-190(3) of the GST Act does not apply to the supply of services. Accordingly the supply of services to the Licensee is GST-free under paragraph (a) of item 2.

However, if at any time the Licensor is required to provide the Second Level Support services to an Australian entity in Australia, for example the Licensor interacts with the Licensee's Australian representative or the Licensee's customer, subsection 38-190(3) of the GST Act will apply where the Australian entity is not registered for GST. The supply of services that is provided to the Australian entity is a taxable supply in this instance.

Where the Licensor is interacting with an Australian entity that is registered for GST in Australia , subsection 38-190(3) of the GST Act will not negate the GST-free supply under item 2 provided that the Licensor has obtained the ABN of the Australian entity and a declaration from the Australian entity that it is registered for GST.