Private ruling: Are the supplies subject to goods and services tax (GST)
Published: March 2014

Ruling: Q1: Are the supplies by an Australian company (you) to a non-resident company (NRCo) under the Agreement subject to goods and services tax (GST)? | A1: No, the supplies by you to NRCo of the network and the related services under the Agreement are GST-free.

Relevant facts and circumstances: You are an Australian company registered for goods and services tax (GST). You entered into an Agreement with a non-resident company (NRCo). You advise that NRCo is not in Australia at any time, in relation to the supplies. The supplies (referred to as the 'Service' under the Agreement) which will be provided are: • You are responsible for the provisioning of a digital circuit between two locations: Location A: a data centre in Australia (Data Centre); and Location B: your facility in Australia. • You will inject content into this fibre which will be gathered from various access points in Australia (satellite or local fibre optic connectivity). Location A (the Data Centre) is the handover point. Your supplies/services are completed at Location A. The Agreement also provides (amongst other things): • You will provide content from the various locations to NRCo's handover point. The access points/content providers are listed. • You will provide an encoding platform (one service); • You will provide the conversion of content at your facility. • NRCo will be responsible for the decoding platform in the overseas country; this will be supplied at cost. • You will send an engineer to the overseas country to assist with the installation of the decoding platform. • There will be continuous master control room services in Australia. • You will allow the use of your own XXX capacity to NRCo free of charge for a set period. • In consideration for you providing the Service under this Agreement, NRCO you will pay you on receipt of a valid tax invoice. • You will waive the one off installation fee. • You acknowledge that all content provided by NRCo for transmission via the Service is owned by NRCo or its licensors and you are not licensed to use or distribute any of that content, except to provide the Service under this Agreement. You agree to keep all such content confidential and not to alter it or use or disclose it except as permitted under this Agreement. • You will provide NRCo with a 24 hour a day 7 day per week contact person for technical assistance, and will provide XX% availability of Service between Location A and Location B. A rebate is provided for the unavailability of the Service. Additional information provided: You will provide (transmit) content from a specific list of suppliers (that is, the content providers) and physical sources that are available at your facility in Australia, and will switch the appropriate content into the digital fibre circuit/connection. Bookings will be made with your booking group, and this will be entered into your system. Your master control room will at an appropriate time switch the feed (as requested in the booking) into the path. Additionally, on occasions, you will also record content onto servers in your facility and then play out that content to NRCo. Content is only provided on the basis that either the content provider informs you that there is a right to make that content available, or that NRCo advises you in writing that they have the rights. The capacity to the network is provided by a third party who has permitted carriage of content on that resource. The digital fibre is owned and operated by the owner of the capacity, and the agreement on use of the capacity is between you and the owner of that capacity. You will inject the content at Location B, which transmits the content through the network (digital fibre circuit) to the handover point at Location A (being the Data Centre). You complete your duties once the content reaches Location A. Offer of any uplink capacity on XXX is on the basis of ad hoc connectivity. You have offered NRCo a fixed price for this ad hoc service, but the availability is dependent on other bookings at that time. You advise that it is standard business and is usual service provided by you with the contract offering a fixed price. This service has not been utilised by NRCo. There are various content providers. The content may take many and various forms, and it may be delivered by various different mechanisms such as fibre, satellite and IP. In relation to entering into the Agreement with NRCo, your director would have met NRCo's representative to discuss various commercial terms in relation to the Agreement. The Agreement was then prepared, executed (signed) and emailed by you to NRCo for their execution. A soft copy of the fully executed (signed) Agreement was then emailed by NRCo to you. You advise that NRCo is neither registered nor required to be registered for GST in Australia. You did not have any interactions with any representatives of NRCo in Australia. NRCo acquires your supplies for business purposes. The supplies are specifically designed to meet NRCo's requirements (of its own services), and you did not provide and are not required to provide your supplies to another entity in Australia. The Data Centre at Location A is owned by an unrelated company (DCco), which provides rack space and utilities to support third parties' equipment location. NRCo uses another unrelated company (SerCo) to operate its platform for NRCo's own services. A sample copy of tax invoice issued by you to NRCo (addressed overseas) was provided. The description states 'monthly service fee for the provision of a digital fibre circuit between two locations…'. The monthly amount was billed. Further additional information provided: You confirm that you are not making a supply of the content or rights to the content to NRCo, and therefore you do not receive any consideration for the content. Your role is similar to picking up goods from one end and delivering it to a port for export. Your service is to make available the digital fibre circuit/connection and transmit the relevant content from Location B to Location A (being the Data Centre). NRCo then has arrangements for the content to be transmitted overseas (as part of NRCo's own services). Your services involve you feeding (injecting) the relevant content through the cable (digital fibre circuit/connection) and transmitting it to Location A. You clarified that your supplies are to and for the purposes of NRCo (NRCo's own services) and no other party is provided with these supplies. The Agreement entered into is with and for NRCo. These facts indicate that your supplies are not provided to DCco, SerCo or another party in Australia. You clarified that DCco is a data storage centre/facility and that DCco is not carrying on the business (services) of NRCo. You also advise that NRCo uses SerCo to only assist with operating its platform (to transmit the content). SerCo does not carry on NRCo's business in Australia, but SerCo's business is involved in providing the infrastructure and/or network capacity to NRCo and any other entities. You (in your own right) can/have acquired SerCo's services separately. You clarified that the words 'provide content' in the Agreement is not intended to mean that you are making a supply of content to NRCo. Your supplies/services are to transmit the content from Location B (and or the relevant content providers) to Location A. You confirmed that the Agreement was signed by you and forwarded electronically to NRCo for signing. A soft copy of the fully executed Agreement was then emailed by NRCo to you.

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: Summary: Your supplies of the network (digital fibre circuit/connection) and the related services to NRCo under the Agreement are GST-free under item 2 and/or item 4 in the table in subsection 38-190(1) of the A New Tax System (Goods and Service Tax) Act 1999 (GST Act) because the supplies are provided to a non-resident entity which is not in Australia in relation to the supplies when the things supplied are done, and the supplies are not provided to another entity in Australia. | Detailed Reasoning - Detailed reasoning: GST is payable on a taxable supply. 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 in section 195-1 of the GST Act) All the requirements of section 9-5 of the GST Act must be satisfied for there to be a taxable supply. From the facts provided, the supplies by you to NRCo satisfy paragraphs 9-5(a) to 9-5(d) of the GST Act as follows: (a) you make the supplies in return for consideration by way of payments; (b) you make the supplies in the course of your business; (c) the supplies are performed/provided in Australia or made through a business that you carry on in Australia (and therefore are connected with Australia); and (d) you are registered for GST in Australia. We note that for any supplies that are provided to NRCo for no consideration will not satisfy paragraph 9-5(a) of the GST Act and are not taxable supplies. Further, a supply is not a taxable supply to the extent that it is GST-free or input taxed. There are no provisions in the GST legislation in which your supplies are input taxed. We also take the GST-free provisions into consideration (for supplies that satisfy the requirements of paragraphs 9-5(a) to 9-5(d) of the GST Act). Characterisation of the supply We first characterise the supplies that you make to NRCo before applying the GST-free provisions. The facts indicate that your supplies involve the provisioning of a digital fibre circuit between two locations (in Australia) and you injecting/switching content into this digital fibre circuit/connection, which you gather from various access points in Australia (via satellite or local fibre optic connectivity). In addition, your supplies may involve a conversion/recording process/service, assistance in the installation of system platforms in the overseas country, and ensuring availability of a contact person and the supplies ('Service' under the Agreement) are provided. You advise that you do not supply any content or rights to any content to NRCo, and therefore you do not receive any consideration for the content. It is the content providers that make the content available to NRCo, or that NRCo advises you in writing that they have the rights to the content. Accordingly, we consider that you are making the following two supplies: 1. the digital fibre circuit/connection between the two locations (the 'network'); and 2. the services of gathering/converting/recording/injecting the content into the network and assistance in relation to the network (the 'related services'). We note that certain activities that you may perform will be integral, ancillary or incidental to the supplies of the network and/or the related supplies and will be treated as part of the supplies of the network or the related services (the dominant supplies). | Detailed Reasoning - GST-free supply: The supplies of the network and related services are supplies of things other than goods or real property. Subsection 38-190(1) of the GST Act specifies circumstances in which a supply of things other than goods or real property for consumption outside Australia is GST-free. Of most relevance to the supplies of the network and related services to NRCo (which is a non-resident) are items 2 and 4 in the table in subsection 38-190(1) of the GST Act. | Detailed Reasoning - Item 2: Under item 2 in the table in subsection 38-190(1) of the GST Act (Item 2), a supply is GST-free where: 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. | Detailed Reasoning - Precondition - Not in Australia when the thing supplied is done: For the supply to be GST-free under Item 2 NRCo must not be in Australia when the thing supplied is done. Paragraphs 31 and 37 of Goods and Services Tax Ruling GSTR 2004/7 state: 31. The requirement that the non-resident in item 2, or the recipient in item 3, is not in Australia when the thing supplied is done is a requirement, in our view, that the non-resident or recipient is not in Australia in relation to the supply when the thing supplied is done. 37. A non-resident company is in Australia if that company carries on business (or in the case of a company that does not carry on business, carries on its activities) in Australia: a) at or through a fixed and definite place of its own for a sufficiently substantial period of time; or b) through an agent at a fixed and definite place for a sufficiently substantial period of time. Paragraph 199 of GSTR 2004/7 states that if the thing done is a service, 'when the thing supplied is done' refers to the period of time when the service is performed. The facts indicate that NRCo is a non-resident company. NRCo is neither registered nor required to be registered for GST in Australia. You advise that NRCo is not in Australia at any time, in relation to your supplies. Your director may have met NRCo's representative to discuss various commercial terms in relation to the Agreement. However, the Agreement was prepared, executed (signed) and emailed by you to NRCo (addressed overseas) for their execution, and then a soft copy of the fully executed (signed) Agreement was emailed by NRCo to you. The Agreement entered into is with and for NRCo. You confirmed that your supplies are to and for the purposes of NRCo (NRCo's own services) and no other party is provided with these supplies. DCco and SerCo are not agents carrying on the business (services) of NRCo. You did not have any interactions with any representatives of NRCo in Australia in relation to your actual supplies of the network and related services. Accordingly, the precondition that NRCo is not in Australia in relation to your supplies, when the things supplied are done (granted or performed) is satisfied. Other information We note that if NRCo is carrying on an enterprise (business) through an agent in Australia at a fixed and definite place for a substantial period of time (that is, the agent is carrying on NRCo's business, rather than its own business, in Australia), and that agent has involvement with you in relation to your supplies (other than minor involvement), the precondition that NRCo is not in Australia in relation to your supplies, when the things supplied are done (granted or performed) is not satisfied. In this circumstance, the supplies may not be GST-free. | Detailed Reasoning - Paragraphs (a) and (b) of Item 2: Paragraph (a) of Item 2 requires that 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 expression 'directly connected with' contemplates a very close link or association between the supply and goods or real property. The goods or real property must be particular goods or real property (rather than in general) for this very close connection to exist. However, paragraphs 57 to 59 of Goods and Services Tax Ruling GSTR 2003/7 state: 57. The range of supplies that are directly connected with goods includes supplies of work physically performed on goods. That is, a supply of work physically performed on goods is always directly connected with goods. However, not all supplies directly connected with goods are also supplies of work physically performed on goods. A supply of work physically performed on goods requires a much closer connection with the goods: it requires a physical intervention with the goods... 58. 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. The repair of goods is an example of work that is physically performed on goods. 59. In contrast, where activities do not change or affect goods in a physical way, there is no supply of work physically performed on goods. For example, a supply of transporting goods is not work physically performed on goods because the supply only changes the location of the goods, not the goods themselves. We consider that the supplies of the network and related services (involving the digital content which is an intangible property) by you to NRCo are not supplies of work physically performed on goods, nor directly connected with real property, situated in Australia, for the purposes of paragraph (a) of Item 2. Accordingly, your supplies to NRCo satisfy the requirements under paragraph (a) of Item 2 and are GST-free. For completeness, paragraph (b) of Item 2 also states that a supply is GST-free if the non-resident acquires the thing in carrying on the non-resident's enterprise but the non-resident is neither registered nor required to be registered for GST. The facts indicate that NRCo is a non-resident company. NRCo is neither registered nor required to be registered for GST in Australia. You advise that NRCo is not in Australia at any time, in relation to your supplies. You did not have any interactions with any representatives of NRCo in Australia in relation to your actual supplies. NRCo acquires the supplies for business purposes. The supplies are specifically designed to meet NRCo's requirements (for NRCo's own services), and you did not provide and are not required to provide the supplies to another entity in Australia (that is, your supplies are not for the purposes of DCco, SerCo or another entity in Australia). Accordingly, your supplies to NRCo also satisfy the requirements under paragraph (b) of Item 2 and are GST-free. Subsections 38-190(2), (2A) and (3) 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. Subsection 38-190(2) of the GST Act states that a supply covered by items 1 to 5 in the table in subsection 38-190(1) of the GST Act is not GST-free if it is the supply of a right or option to acquire something the supply of which would be connected with Australia and would not be GST-free. Goods and Services Tax Ruling GSTR 2003/8 explains subsection 38-190(2) of the GST Act as follows (paragraphs 143 and 144): 143. Subsection 38-190(2) is designed to ensure that the supply of a right or option is not GST-free if the right or option can be redeemed for the supply of something else, the supply of which would be a taxable supply. A supply to which subsection 38-190(2) applies is not GST-free even if item 4 or another item in the table in subsection 38-190(1) would otherwise apply. 144. Without subsection 38-190(2), the supply of a thing that is connected with Australia, and not otherwise GST-free, could occur without GST being payable, if all of the consideration were to be provided for the granting of a right or option to acquire the thing, notwithstanding that when the thing itself is supplied it may be consumed in Australia. You are supplying the network and the related services to NRCo. Your supplies of the network and related services to NRCo does not involve a supply of a right or option to acquire something else (that is, your supplies are not rights or options to redeem for another supply of something else), and therefore subsection 38-190(2) of the GST Act will not preclude your supplies from being GST-free. Subsection 38-190(2A) of the GST Act states that a supply covered by Items 2 to 4 is not GST-free if the acquisition of the supply relates to the making of a supply of real property in Australia that would be wholly or partly input taxed. In our view subsection 38-190(2A) of the GST Act does not apply to your supplies of the network and related services to NRCo. Subsection 38-190(3) of the GST Act states that a supply covered by Item 2 is not GST-free if it is a supply under an agreement entered into, 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. The facts indicate that NRCo is a non-resident company. NRCo is neither registered nor required to be registered for GST in Australia. You advise that NRCo is not in Australia at any time, in relation to your supplies. The Agreement entered into is with and for NRCo. NRCo acquires the supplies for its business purposes. The supplies are specifically designed to meet NRCo's requirements (for NRCo's own services), and you did not provide and are not required to provide the supplies to another entity in Australia. You advise that you did not have any interactions with any representatives of NRCo in Australia in relation to your actual supplies, and your role is completed when the content reaches the handover point (Location A being the Data Centre). On the basis of the facts provided, your supplies are not for DCco, SerCo, or another entity in Australia, and NRCo has arrangements for the content to then be transmitted outside of Australia. Accordingly, subsection 38-190(3) of the GST Act will not preclude your supplies from being GST-free. In summary, the supplies of the network and the related services by you to NRCo satisfy all the requirements of Item 2 and are GST-free. | Detailed Reasoning - Item 4: As the supplies are GST-free under Item 2, there is no need to consider the other GST-free provisions. However for completeness, item 4 in the table in subsection 38-190(1) of the GST Act (Item 4) is addressed to cover the supply of the network (being the digital fibre circuit/connection between Location A and Location B). Under Item 4 a supply is GST-free where: a supply that is made in relation to rights 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. (* denotes a defined terms in section 195-1 of the GST Act) Paragraphs 98 and 100 of GSTR 2003/8 state: Supply of capacity in an international telecommunication network 98. Telecommunication carriers (telcos) arrange telecommunication networks for clients' exclusive use. These networks have various names such as leased lines, international private circuits, indefeasible rights to use (IRUs), and global networks. To establish these networks, telcos acquire the right to access capacity in various telecommunication cables throughout the world and supply capacity to their clients. … 100. … supports our view that the supply of this type of capacity in an international telecommunication network is a supply of a right. Goods and Services Tax Determination GSTD 2012/9 covers the supply of a right to capacity in an international telecommunication network. Paragraphs 3 to 5 and 7 to 9 of GSTD 2012/9 state: 3. The telecommunication supply covered by this Determination is the supply of capacity in an international telecommunication network . The network can include international leased lines, international private circuits, indefeasible rights of use and global networks. These may comprise of a fixed line between two or more points, a global circuit or capacity that may be made available through a satellite network. 4. In this Determination, a telecommunication supplier means a carrier or a carriage service provider as defined in the Telecommunications Act 1997 or an Internet service provider as defined in Schedule 5 to the Broadcasting Services Act 1992 . 5. A supply of capacity in an international telecommunication network made by an Australian resident telecommunication supplier is a supply in relation to rights which is GST-free under item 4 in the table in subsection 38-190(1) (item 4) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provided that: (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. | Detailed Reasoning - …: 7. A supply of capacity in an international telecommunication network is discussed at paragraphs 98 to 100 of GSTR 2003/8. Consistent with the views expressed there, the Commissioner considers that the supply of capacity in an international telecommunication network is a supply of a right. 8. The supply by an Australian operator of a right to capacity in a network is GST-free under paragraph (b) of item 4 when it is supplied to a non-resident provided that they are not in Australia when the right is granted. 9. As the supply is covered by paragraph (b) of item 4 it is not necessary to consider whether the supply is a right which is for use outside Australia under paragraph (a) of item 4. The supply (use) of the digital fibre circuit/connection between Location A and Location B is a supply of capacity in a telecommunication network, which is considered to be a supply of a right. Hence, Item 4 may be applicable to this supply. The requirements of paragraph (b) of Item 4 are similar to the precondition of Item 2 discussed above. The facts indicate that the capacity to the network is provided by a third party who has permitted carriage of content on that resource. The digital fibre is owned and operated by the owner of that capacity, and the agreement on use of the capacity is between you and the owner of the capacity. You have then agreed to make the supplies (referred to as 'Service') under the Agreement with NRCo, and are responsible for the provisioning of a digital fibre circuit between the two locations: Location A (the Data Centre) and Location B (your facility). You also offer uplink capacity on XXX on the basis of an ad hoc connectivity (although this has not been utilised by NRCo). You will inject/feed the content through the network and transmit it to Location A (the Data Centre) which is then transmitted outside Australia through the platform (and other infrastructure) which NRCo operates with the assistance from SerCo. NRCo is a non-resident company. NRCo is neither registered nor required to be registered for GST in Australia. You advise that NRCo is not in Australia at any time, in relation to your supplies. The Agreement entered into is with and for NRCo. You confirmed that your supplies are to and for the purposes of NRCo (NRCo's own services) and no other party is provided with these supplies (that is, supplies are not for DCco, SerCo or another entity in Australia). You did not have any interactions with any representatives of NRCo in Australia in relation to your actual supplies. Your director may have met NRCo's representative to discuss various commercial terms in relation to the Agreement. However, the Agreement was prepared, executed (signed) and emailed by you to NRCo (addressed overseas) for their execution, and then a soft copy of the fully executed (signed) Agreement was emailed by NRCo to you. Hence, it is considered that NRCo was not in Australia in relation to your supplies when the thing supplied (rights) was granted. Accordingly, the requirement under paragraph (b) of Item 4 that NRCo is not an Australian resident that is outside Australia in relation to your supplies, when the thing supplied (rights) is done (granted) is satisfied, and your supply of the network (digital fibre circuit/connection) to NRCo is also GST-free under Item 4.