Private ruling: GST and supply of rights
Date of advice: 14 February 2022
Published: May 2022
Ruling period: Year ending 30 June 20XX
Date scheme commenced: Background information:

Ruling: Q1: Is a supply made to a 'subscription client' under the facts described in this ruling a GST-free supply? | A1: Yes. A supply made to a 'subscription client' under the facts described in this ruling is a GST-free supply? | Q2: Is a supply made to a 'licensee client' under the facts described in this ruling a GST-free supply? | A2: Yes. A supply made to a 'licensee client' under the facts described in this ruling is a GST-free supply?

Relevant facts and circumstances: Background information: The entity is currently registered for GST. The entity provides a software solution to clients, both locally and abroad, to assist them with the reviewing of their performance on various marketplace selling platforms all on a single dashboard. Currently, The entity sells a subscription model of their software to the clients on either a monthly or annual basis, of which 10% is remitted to the ATO for GST purposes. Their pricing is consistent across both local and international clients. The entity has also begun licensing their infrastructure/software for use by a firm overseas paraded under a different skin, so it does not look identical to The entity original product. The software is currently operating on xx Cloud Front content delivery network. This technology allows the software provider (The entity) to automatically deploy the front end of the platform in various locations around the world from its overseas source. The entity has inbuilt logic to deploy said software in a location closest to the end user to mitigate impact on performance. Practically speaking, this means the software built by The entity is done on Australian soil, however the source code is kept overseas and when a licence is obtained by a customer, they use the front end at a location closest to them based on the source code which lives overseas. As can be deduced from the above, the software does not 'reside' in Australia and technically has many 'homes' across the world. Tax treatment so far: So far, The entity has been remitting 10% of their sales to all clients to the ATO to account for the GST portion of their sales. Below are the two types of clients The entity currently services internationally. Subscription Clients As per Item 3 of s38-190(1) of the Act 1999, a supply that is used/enjoyed outside the indirect tax zone is GST-free if that supply is: a) Made to a recipient who is not in the indirect tax zone when the thing supplied is done; and b) The effective use of or enjoyment of that supply takes outside the indirect tax zone. To follow the above, Flowchart 4 of GSTR 2007/2, "if the entity only has a presence outside Australia, the supply is provided to that entity outside Australia", indicating that a client who is located outside Australia and does not have an Australian presence, is a recipient not connected to the indirect tax zone and enjoys the supply outside said zone. This is true for The entity's international clients. They have no base in Australia. This is further backed by paragraphs 403 and 404 of GSTR 2007/2 which state that if a supply is provided to an entity that does not have a presence in Australia, the supply cannot be provided to that entity in Australia and therefore the effective use or enjoyment of that supply takes place outside of Australia. This satisfies paragraph (b) of Item 3 of s38-190(1). The entity is of the opinion, that as referenced in the background information section of this letter, its overseas clients that meet this criterion should not have 10% of their fees remitted to the ATO for GST purposes. Licensee Clients As per Item 4 of s38-190(1) of the Act 1999, a supply that is made in relation to rights is GST-free if: a) The rights are for use outside the indirect tax zone; and b) The supply is to an entity that is not an Australian resident and is outside the indirect tax zone when the thing supplied is done. While what is a 'right' is not defined in the Act 1999, as referenced by paragraph 25 of GSTR 2003/8, The entity is of the opinion that the licensing agreement between The entity and these clients meets the general definition of affording a right to another entity to use one's product. Regarding the notion of 'rights are for use outside the indirect tax zone', The entity references paragraphs 108A, 109 and 110 of GSTR 2003/8. The entity licensee clients' intention must be to use The entity's software solution in their country of origin for their clients and to not expand into Australia for the agreement to continue. This intention is supported by the view in Stewart's Case, as referenced in this ruling, that it's the intended use of rights outside the indirect tax zone which is the telling factor of meeting that criteria, not the actual use of the right. Regarding part (b) of the criteria, there appears to be no concrete guidance as to what 'when the thing supplied is done' means in this context as The entity's product is in the cloud. However, it is our opinion, that due to the mechanics of xx Cloud Front network, the point of access the client gets the software from is in their country of origin (or the closest point to it), not in Australia. This train of logic would satisfy the criteria for this supply of rights to be GST-free for international clients that meet this criterion and therefore The entity needs not continue to remit 10% of their fees to the ATO for GST purposes.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 section 38-190 Question 1 | Is a supply made to a 'subscription client' under the facts described in this ruling a GST-free supply? | Answer | Yes. A supply made to a 'subscription client' under the facts described in this ruling is a GST-free supply? | Detailed reasoning | Relevant to the supply described as 'subscription clients' is item 3 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) (item 3). Item 3 provides that a supply that is used/enjoyed outside the indirect tax zone is GST-free if that supply is: | (a) made to a recipient who is not in the indirect tax zone (Australia) when the thing supplied is done; and | (b) the effective use or enjoyment of which takes place outside the indirect tax zone; | other than a supply of work physically performed on goods situated in the indirect tax zone when the thing supplied is done, or a supply directly connected with real property situated in the indirect tax zone. | According to the information provided a 'subscription client' will satisfy the requirements of paragraphs (a) or (b) of item 3. Therefore, such a supply will be GST-free. | Question 2 | Is a supply made to a 'licensee client' under the facts described in this ruling a GST-free supply? | Answer | Yes. A supply made to a 'licensee client' under the facts described in this ruling is a GST-free supply? | Detailed reasoning | Item 4 (a) of the table in subsection 38-190(1) provides that a supply is GST-free if it is made in relation to rights if the rights are for use outside the indirect tax zone. | Item 4 (b) of the table in subsection 38-190(1) provides that a supply is GST-free if it is made to an entity that is not an Australian resident and is outside the indirect tax zone when the thing supplied is done. | It is considered that a supply to a 'licensee client' as described herein is a supply of a right for use outside the indirect tax zone. Further, the facts available indicate that the supply is made to an entity that is not an Australian resident and is outside the indirect tax zone when the thing supplied is done. Therefore, the supply made to a 'licensee client' is GST-free under either Item 4 of the table in subsection 38-190(1). | Additional information | GST is to be remitted on taxable supplies as per section 9-5. If an entity has by error remitted GST on GST-free supplies the entity can amend its activity statements to correct the mistake. Therefore, The entity is allowed to amend its activity statements within the amendment period. | Subsection 38-190(2) provides that a supply covered by any of items 1 to 5 in the table in subsection (1) is not GST-free if it is the supply of a right or option to acquire something the supply of which would be connected to the indirect tax zone and would not be GST-free. | Therefore, where an international client has a presence in Australia, The entity will have to interpret the legislation separately to them because it is a point of difference which may justify the need to remit GST from their fees.