Private ruling: GST and supply of non-fungible token
Date of advice: 16 August 2022
Published: November 2022
Ruling period: Not applicable
Date scheme commenced: Not applicable

Ruling: Q1: Are the supplies of non-fungible tokens (NFTs) by a creator connected with the indirect tax zone under subsection 9-25(5) of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act)? | A1: Yes, the supplies of NFTs by the creator are connected with the indirect tax zone under subsection 9-25(5) of the GST Act. The NFTs are supplied through a process where a smart contract will be executed by the purchaser and the NFTs are extracted and supplied to the purchaser only when the creator approves the smart contract. The subject of the supply or the thing supplied will be an NFT and the thing is done in Australia. Therefore, the supplies of NFTs are connected with the indirect tax zone. | Q2: If the answer to Question 1 is Yes, are the supplies of NFTs by the creator via a decentralised blockchain platform GST-free supplies for the purposes of either (or both) table items 2(a) or 4(b) of subsection 38-190(1) of the GST Act? | A2: As it has been determined in question one that the supplies of NFTs by the creator are connected with the indirect tax zone, these supplies will be taxable supplies as all other elements for a taxable supply are met. Whether either table items 2(a) or 4(b) of subsection 38-190(1) of the GST Act will apply to the supplies of NFTs by the creator requires the creator to determine if their supplies are made to non-residents. Non-resident is a defined term for the purposes of the GST Act and means 'an entity that is not an Australian resident'. Australian resident is also a defined term for the purposes of the GST Act and means 'a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936' . In order to determine whether the supplies of NFTs are made to non-residents and therefore GST-free, the creator is required to form a reasonable belief based on sufficient evidence to be satisfied that the recipients are not Australian residents. Based on the facts provided and the apportionment method suggested by the creator, it is our view that there is insufficient non-contradictory evidence existing to treat any of the supplies as GST-free. Therefore, the supplies of NFTs will not be GST-free under either (or both) table items 2(a) or 4(b) of subsection 38-190(1) of the GST Act. Please refer to the reasons for decision for more explanation.

Relevant facts and circumstances: • The creator is an Australian registered company and in the business of creating/issuing NFTs through a decentralised blockchain platform and receives cryptocurrency as consideration. • The NFT XXX project created by the creator focuses on allowing the purchasing of the digital XXX it created using computer driven artificial intelligence. • The creator is registered for goods and services tax (GST) • The creator has contracted with an entity from outside Australia to create, develop and launch NFTs on to the decentralised blockchain platform on their behalf. This entity is an individual shareholder of the creator and not an employee of the creator. • The arrangement between the entity and the creator is a verbal arrangement with no formality or documentation in terms of the split roles and responsibilities. Creation and listing of NFT for sale • An NFT is created using an open-source contract. This means a predefined code that allows the creation of NFTs and dictates the rules surrounding the transfer and exchange of the NFTs. NFTs are commonly customised by the individuals who launch the contract, for their respective needs. • Each NFT can have a variety of data assigned to it. The most common NFTs are represented via a digital XXXX. NFTs are the underlying token ID which the XXXX is attached to, much like a certificate of authenticity. Each NFT contract has a set of rules which define the interactions people can make with the NFT and any associated use. • When an entity is ready to sell the NFT, it "launches" it to the relevant blockchain. This launching equates to releasing the contract publicly to make it available on the distributed decentralised blockchain. Once it is released, it can then be engaged with via various methods. • The first step for an individual to interact with the contract, is called "minting". Minting is essentially generating and purchasing an NFT from the contract and the transfer to the receiver's wallet. Minting happens progressively, however, ownership in the NFT is acquired the instant minting takes place. • The creator has created an NFT XXX project which focuses on allowing the purchasing of the digital XXX it created using computer driven artificial intelligence. • The creator uses the decentralised blockchain platform to launch available NFTs for sale and receives cryptocurrency (in its wallet) in return for its NFT sales. The creator's smart contracts are developed, implemented and controlled by the entity from outside Australia which includes the launching of the NFTs for sale on the decentralised blockchain platform. • The entity set up a wallet to launch the contract with both the entity and the creator having access to the wallet. • Activities in Australia are limited to marketing the digital XXXX and management carried out by the creator. Buying and selling NFTs • Once the contract is posted to the decentralised blockchain, it can be accessed via various means, which are not controlled by the creator. For example, there are many third-party websites which can engage with these contracts and the creator has no control over or visibility on these platforms or services. • The creator advertises the release of an XXX project and the NFTs for sale on social media, such as XXXX. It has also created a website which outlines the nature of the XXX project. • Once the contract was launched and the administrator of the wallet granted permission, the contract was minted and engaged with by buyers. As explained above, this engagement occurs without the knowledge of the creator or the control of the administrator of the wallet. • The engagement with the contract occurs: o via a website as an interface, which allows the relevant buyers to acquire the NFTs. With the NFT's in question, the interfaces used were a combination of a website controlled by the creator and websites controlled by third parties and owned by non-Australian entities; or o via direct engagement with a contract through a host of other third-party website. • When it comes to release day, the creator uses a webpage which allows the potential buyer to open a third-party wallet (such as XXXX) to engage with the contract they have deployed to the decentralised blockchain platform. As noted above, all these activities (other than the marketing and management functions) are undertaken by the entity from outside Australia. • NFTs are transferred the moment the buyer "mints" the NFT either via actioning the process to open the third-party wallet from the creator's website, third party marketplace, or third-party website. • Ownership of the NFT is publicly available via third party applications recording the owners of a particular NFT. However, as noted above, this does not mean that the true identity and location of the buyer is known or could ever be known. In other words, the true identity of the buyer (and their relevant characteristics such as residency and location) can never be known to the creator or any future seller of an NFT due to the anonymity provided by the minting process. • Secondary sales take place on third party platforms. "Royalty" payments to the creator, which are payable in perpetuity are distributed monthly by these platforms and directly to the creator. This happens automatically via multiple contracting methods on the third

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 - subsection 9-25(5) | A New Tax System (Goods and Services Tax) Act 1999 - subsection 38-190(1) | Income Tax Assessment Act 1936 - subsection 6(1) | Corporations Act 2001

Reasons for decision: Detailed Reasoning - Question 1.: You are liable to pay GST on any taxable supplies that you make. You make a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) if: a) you make a supply for consideration; b) the supply is made in the course or furtherance of an enterprise that you carry on; c) the supply is connected with the indirect tax zone; 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. The creator makes supplies of non-fungible tokens (NFTs) for consideration. The creator trades the NFTs through the decentralised blockchain platform and receives consideration for the sales of NFTs in cryptocurrency. The creator makes the supplies of NFTs in the course of carrying on their enterprise of creating/issuing NFTs and is also registered for GST. The issue in relation to question one of this private ruling is whether the supplies of NFTs by the creator is connected with the indirect tax zone (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: 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; iii. the supply of the other thing would be connected with Australia; or d) the recipient of the supply is an Australian consumer. NFTs are not considered as goods or real property as they are intangibles. In applying subsection 9-25(5) of the GST Act to the supplies of NFTs by the creator, paragraphs 9-25(5)(a) and 9-25(5)(b) of the GST Act are most relevant to determining whether the supplies of NFTs are connected with Australia considering the nature of the supply. Based on the nature of the supply (as detailed below) the thing is done in Australia and further that the creator carries on their enterprise in Australia. Paragraph 9-25(5)(c) of the GST Act will not apply as all the three items in this paragraph should be satisfied. Paragraph 9-25(5)(d) of the GST Act may apply provided the creator can confirm the recipients' location and other details to determine whether the recipients are Australian consumers. However, the creator claims that the location and other details of the purchasers are not known to them and therefore paragraph 9-25(5)(d) of the GST Act may not be considered. | Detailed Reasoning - Thing done in Australia - paragraph 9-25(5)(a): Goods and Services Tax Ruling (GSTR 2019/1) Goods and services tax: supply of anything other than goods or real property connected with the indirect tax zone (Australia), discuses when a supply of an intangible is connected with Australia under paragraphs 9-25(5)(a),(b) and (c). Paragraphs 32 and 33 of GSTR 2019/1 state the following: 32. 'Thing' is defined to mean anything that can be supplied or imported. 'Thing' includes but is not limited to a service, advice, information, a right or a digital product. It does not matter if the supply is provided electronically. 33. It is the 'thing' supplied which is the subject of the supply and which must be characterised for GST purposes. When determining what is supplied, it is the subject of the supply or its component parts which must be characterised, rather than the activities, actions, means, processes or systems involved. The creator has made arrangements with an entity from outside Australia to create, develop and launch the smart contracts on to the decentralised blockchain platform in relation to the creation of NFT on behalf of the creator. If a purchaser wishes to acquire an NFT they have to enter into the smart contract and agree to the terms and conditions including the price. The NFT is only created when the smart contract is executed, and this is the only way an NFT can be extracted from the smart contract and recorded in purchaser's wallet. This process is known as "Minting" and the purchaser pays for the minting. The creator, including the entity from outside Australia who is an associate of the creator, have access and control to the smart contract and the relevant wallet of the creator once the smart contract is launched on to the decentralised blockchain platform. This means the smart contract will be executed and the NFT is created only when the creator or the entity from outside of Australia approves the smart contract. As explained in paragraph 33 of GSTR 2019/1, the subject of the supply is an NFT and it is supplied through a process where a smart contract is executed by the purchaser and should be approved by the supplier (creator). The entity from outside of Australia is just engaged in the process of creating the smart contract and launching the smart contract on to the decentralised blockchain platform. A supply of an NFT is not made at the point in time when the smart contract is launched on to the decentralised blockchain platform. Instead, the supply of NFT is made only when the smart contract is executed by the purchaser and approved by the creator. This clearly indicates that the actual supply of NFT is made by the creator and we are satisfied that the subject of the supply which is the NFT is done in Australia. The entity from outside Australia does not make the supply and is merely involved in the process of creating the item rather than making the supply, as the supply is made by the creator. | Detailed Reasoning - Supplier makes the supply through an enterprise that the supplier carries on in Australia - paragraph 9-25(5)(b): A supply of an intangible is connected with Australia under paragraph 9-25(5)(b) of the GST Act if the supplier: • carries on an enterprise in Australia within the meaning given by section 9-27 of the GST Act, and • makes the supply through that enterprise. The term 'enterprise' is defined in section 9-20 of the GST Act. Broadly speaking, an enterprise is an activity, or series of activities, done in a particular manner. An enterprise includes an activity, or series of activities, done in the form of a business. Law Companion Ruling LCR 2016/1 GST and carrying on an enterprise in the indirect tax zone (Australia) explains when a supplier carries on an enterprise in Australia, within the meaning of section 9-27 of the GST Act. In this Ruling, the concept of 'an enterprise of an entity that is carried on in Australia' is referred to as the entity's 'Australian GST presence'. Under section 9-27 of the GST Act, an enterprise of an entity has an Australian GST presence if that enterprise is carried on by one or more specified individuals who are in Australia, and: • the enterprise is carried on through a fixed place in Australia • the enterprise has been carried on through one or more places in Australia for more than 183 days in a 12-month period, or • the entity intends to carry on the enterprise through one or more places in Australia for more than 183 days in a 12-month period. To satisfy section 9-27 of the GST Act, the enterprise of an entity must be carried on by one or more individuals identified in subsection 9-27(3) of the GST Act (relevant individuals). These are: • if the entity is an individual - that individual • an employee or officer of the entity, or • a dependent agent, or an employee of the dependent agent, of the entity. The term 'officer' is defined to have the meaning contained in the Corporations Act 2001 and includes the directors, secretaries and other decision makers of the company. For example, a director acting in accordance with their directors' duties under the Corporations Act 2001 , will satisfy the requirement of an individual carrying on an enterprise in Australia under section 9-27 of the GST Act. Similarly, a person who is exercising the central management and control of an entity in Australia will be carrying on an enterprise in Australia. For a supply to satisfy paragraph 9-25(5)(b) of the GST Act, the supply must also be made 'through' an Australian GST presence. There needs to be a connection between the Australian GST presence and the supply. A supply may be connected with an entity's enterprise carried on in more than one jurisdiction. This means that a supply that is connected with an entity's Australian GST presence can still satisfy paragraph 9-25(5)(b) of the GST Act, even if the supply can also be said to be connected with the entity's place of business in another country. Where an entity has an Australian GST presence and no place of business in another country, all intangible supplies are made through the Australian GST presence because that is the only presence the supply can be connected to. As the creator has no place of business in another country, its supplies of NFTs are made through its Australian GST presence because that is the only presence the supply can be connected to. Therefore, the supplies of NFTs made by the creator are connected with Australia under either paragraph 9-25(5)(a) paragraph 9-25(5)(b) of the GST Act. | Detailed Reasoning - Question 2: The purchasers of NFTs issued by the creator are located outside Australia and in Australia. Although, the supplies of NFTs by the creator satisfies the requirements of section 9-5 of the GST Act as taxable supplies, the issue of whether the supplies of NFTs would satisfy the requirements of a GST-free provision should be determined based on the facts and the details provided in relation to the residency of the recipients. Subsection 38-190(1) of the GST Act provides a table containing a list of supplies of things other than goods or real property for consumption outside of Australia that are GST-free. Table item 2 of subsection 38-190(1) of the GST Act provides that a supply that is made to a non-resident who is not in Australia when the thing supplied is done is GST- free where: 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. Table item 2(a) of subsection 38-190(1) of the GST Act may apply as the supply of an NFT is neither a supply of work physically performed on goods in Australia when the work is done nor a supply directly connected with real property situated in Australia. Table item 2(b) of subsection 38-190(1) of the GST Act may also be relevant in determining whether the supplies of NFTs would be GST-free. However, due to the limited information available to the creator in relation to the recipients of NFTs, the creator is not in a position to confirm whether the purchasers are non-residents (table item 2(a)) and/or the non-resident purchasers will be acquiring the NFTs in carrying on their enterprise but not registered or required to be registered for GST (table item 2(b)). Table item 4 of subsection 38-190(1) of the GST Act provides that a supply that is made in relation to rights will be GST-free if: (a) the rights are for use outside the indirect tax zone; or (b) the supply is to an entity that is not an Australian resident and is outside the indirect tax zone when thing supplied is done. The NFTs supplied by the creator are attached to digital XXXX and connected with specified token IDs. This means if a purchaser wishes to purchase a particular digital XXXX, they are required to purchase the relevant NFT that is attached to that particular digital XXXX. The creator advertises the digital XXXX and the sales of NFTs on social media such as XXXX and has created a website which outlines the details of the XXX project. The NFTs supplied by the creator would provide the rights to purchasers to acquire the particular XXXX attached to the relevant NFT. The XXXX created by the creator are considered to be available in Australia. The rights acquired under the NFTs supplied by the creator will be used in Australia and therefore, table item 4(a) of subsection 38-190(1) of the GST Act will not be considered. In order to consider table item 4(b) of subsection 38-190(1) of the Act, the details and the location of the recipients should be obtained. As explained above, the creator is not in a position to obtain the details and the locations of the recipients considering the nature of the transactions in relation to the supplies of NFTs. | Detailed Reasoning - Identifying the details and location of the recipients of the NFT supply: According to the creator, once the smart contract is launched on to the decentralised blockchain platform, the purchasers engaged with the contract to mint via various websites and marketplaces as an interface. These websites are controlled by the creator and controlled by third parties owned by non-Australian entities. The purchasers also engaged directly through a host of other third-party websites. The moment a purchaser mints the NFT, the NFT is transferred to a third-party wallet created from the creator's website, third-party marketplace or third-party websites. Although the ownership of the NFT is publicly available (i.e. the username/alias used by the purchaser for their cryptocurrency wallet and NFT trading) the natural identity of the purchaser such as legal name, address, country of residency and geolocation can never be known to the creator or any future seller of the NFT due to the anonymity provided by the minting process. Therefore, based on these facts the creator is unable to determine the residency status of the purchaser to ascertain whether they are located in Australia or outside Australia at the time of acquiring the NFT. Goods and Services Tax Ruing GSTR 2005/6 Goods and services tax: the scope of subsection 38-190(3) and its application to supplies of things (other than goods or real property) made to non-residents that are GST-free under item 2 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 states that the term 'non-resident' is defined in section 195-1 of the GST Act to mean 'an entity that is not an Australian resident'. 'Australian resident' is defined in section 195-1 of the GST Act to mean 'a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936). A non-resident therefore includes an individual who is not a resident of Australia as defined in subsection 6(1) of the ITAA 1936. The definition included at paragraph 208 of GSTR 2005/6 provides that an individual is a 'resident of Australia' as defined in subsection 6(1) of the ITAA 1936 if that individual is: (a) a person, other than a company, who resides in Australia and includes a person: (i) whose domicile is in Australia, unless the Commissioner is satisfied that his [or her] permanent place of abode is outside Australia; (ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that his [or her] usual place of abode is outside Australia and that he [or she] does not intend to take up residence in Australia; or (iii) who is: (a) a member of the superannuation scheme established by deed under the Superannuation Act 1990 ; or (b) an eligible employee for the purposes of the Superannuation Act 1976 ; or (c) the spouse, or a child under 16, of a person covered by sub-subparagraph (a) or (b). Although not explicitly drafted for application to table items 2 and 4 of subsection 38-190(1) of the GST Act, Goods and Services Tax Ruling GSTR 2017/1 Goods and services tax: making cross-border supplies to Australian consumers, provides insight on the evidentiary requirements the Commissioner will accept from a supplier when determining the residency of a recipient of a supply. In relation to determining whether a recipient is an Australian consumer, paragraphs 15 and 16 of GSTR 2017/1 state: 15. For you to satisfy the evidentiary requirements in section 84-100, you must have either: • ............................................or • have taken reasonable steps to obtain information about whether your recipient is an Australian consumer (the reasonable steps approach). 16. In determining if a recipient is not an Australian consumer because of the residency element, we accept that the requirements of section 84-100 are met when you: • ..........................................or • collect sufficient evidence to show the recipient does not satisfy the residency element using automated systems. It is a requirement for a supplier to have a business systems and processes to form a reasonable belief that they are supplying to an Australian consumer or the supplier has taken reasonable steps to obtain the relevant information to confirm whether their recipients are Australian consumers. Paragraphs 91 and 92 of GSTR 2017/1 state: 91. We will accept that your supplies are made to recipients that are not Australian consumers under section 84-100 if: • the supplies do not ordinarily involve any human interaction by you (or on your behalf) with the recipient in real time in entering the transaction for the supply, and • your usual business systems provide at least two pieces of non-contradictory evidence that support the conclusion that the recipient has their residency, usual residence, permanent address or similar term at a particular place or jurisdiction outside Australia. 92. The two pieces of non-contradictory evidence may include: • the recipient's billing address is an address outside of Australia • the recipient's mailing address is an address outside of Australia • the recipient's banking or credit card details, including the location of the bank or credit card issuer being outside of Australia • the recipient's web-based country selection is for a country other than Australia • the recipient's location detected through tracking/geolocation software that shows the recipient is outside of Australia • the IP address of the device used to make the purchase indicates that the recipient is outside of Australia • the recipient provides a mobile phone or landline country code that is for a country other than Australia, and • other commercially relevant information which is relevant to establishing a person's residency. The creator has submitted an apportionment method to treat the sales of NFTs to Australian purchasers and to non-residents based on the possible time spent by the purchasers to mint NFTs. Based on this method, the creator predicts that the sales to Australian purchasers would be 15% and therefore taxable. However, it is our view that the time-based method proposed by the creator does not provide at least two non-contradictory evidence as required in GSTR 2017/1 to enable the ATO to accept as sufficient evidence to form a reasonable belief. | Detailed Reasoning - Conclusion:: The supplies of NFTs by the creator are taxable as the supplies satisfy all of the requirements of section 9-5 of the GST Act. The supplies are connected with Australia as explained in the reasons for decision for question 1. In relation to question 2, whether the supplies made to non-resident will be GST-free, the creator is required to collect sufficient evidence, as explained in GSTR 2017/1, to form a reasonable belief that the recipients of their NFTs are not Australian residents. The ATO provides clear guidance in GSTR 2017/1 to allow a supplier to form a reasonable belief as to the residency of a recipient of its supplies. It is only when supplies are made to non-residents that table items 2 or 4(b) of subsection 38-190(1) of the GST Act can operate to enable the supplier to treat said supplies as GST-free. The creator will not be able to treat any of their sales of NFTs as GST-free if they are unable to obtain satisfactory evidence to determine the residency of the recipients and therefore, their supplies will be taxable.