Is your supply of software and intellectual property rights of that software to a non-resident company a GST-free supply under section 38-190 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
Yes. Your supply of software and intellectual rights of that software to a non-resident company is a GST-free supply respectively under item 2 and item 4 in the table in subsection 38-190(1) of the GST Act.
You are registered for GST and carry on your business activities in Australia. You have entered into an agreement with a non-resident company located outside Australia for the supply of software and intellectual property rights of that software. The non-resident company does not have a presence or agent in Australia. The non-resident company is potentially purchasing the system for further development or resale overseas. The non-resident company is not registered or required to be registered in Australia and the use and enjoyment of the system occurs outside of Australia. There is no agreement between you and the non-resident company for the supply to be made to an entity in Australia. The installation of this system is to be conducted overseas. The sale is not performed on goods connected with real property in Australia or overseas.
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 A New Tax System (Goods and Services Tax) Act 1999 section 195-1
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 GST is payable on a taxable supply. A supply is a taxable supply under section 9-5 of the GST Act if: a) the supplier makes the supply for consideration; and b) the supply is made in the course of an enterprise that the supplier carries on; and c) the supply is connected with Australia; and d) the supplier is registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. You must satisfy all of the above for your supply to be a taxable supply and liable for GST. Supply of a 'good' or 'service' Supplies involving software are discussed in Goods and Services Tax Ruling¸ Goods and services tax: supply of rights for use outside Australia - subsection 38-190(1), item 4, paragraph (a) and subsection 38-190(2)
(GSTR 2003/8), GSTR 2003/8, which states that where a one-off solution is developed by a computer programmer for a client, the correct analysis of the supply will depend on all the facts and circumstances, including the terms of the contract between the programmer and the client (paragraph 33). GSTR 2003/8 also provides that computer software supplied in intangible form, for example, by downloading it from the internet, is not a supply of goods (as no tangible property is supplied) and is not necessarily a supply of rights even where the recipient also receives a 'click-wrap' licence, but a supply of the copyright in a program which allows the recipient to modify, adapt or copy the program for commercial purposes is a supply that is made in relation to rights (paragraph 89-90). Paragraphs 91-93 of GSTR 2003/8 also state:
91. Where a one-off solution is developed by a computer programmer for a client, the correct analysis of the supply will depend on all the facts and circumstances, including the terms of the contract between programmer and client. For example, a one-off program may be developed as a solution to a particular information technology problem at great expense over a period of months. 92. Where, under the terms of the agreement, copyright in the program will vest upon its creation in the client, whether the program is delivered to the client electronically or on disk, the supply is a supply of services. There is no right supplied in these circumstances. 93. If the programmer contracts to develop a solution and make it available for the client, on terms that copyright in the program, once developed and accepted by the client, will be assigned to the client, the supply will be a mixed supply, comprising the development and a supply of the program and assignment of copyright in the program. Assignment of the copyright is the supply of a right, but supply of the program is not. The supply of the program is not a supply of goods even if it is delivered in tangible form on a disk.
You are developing a polynomial constraint software which will assist in edge computing by improving response times and saving bandwidth. Intellectual property rights is defined in the Agreement to be all present and future rights conferred by statute, common law or equity in or in relation to any copyright, trademarks, designs, patents, circuit layouts, business and domain names, invention and other results of intellectual activity in the industrial, commercial, scientific, literary or artistic fields. Based on the above information and the Agreement, which states that title will vest in the purchaser upon payment of the final development phase, we consider that supply of the software and installation, a supply of services and the supply of the Intellectual property to be a supply of a right. Based on the information you have provides, you will satisfy the requirements in paragraphs 9-5(a) to (d) of the GST Act when you supply software and intellectual property rights of that software to the non-resident company as: a) you will make your supply for consideration; b) you will make the supply in the course of an enterprise that you carry on in Australia;
c) your supply will be connected with Australia as the supply will be made through a business that you carry on in Australia; and d) you are registered for GST. However, your supply of software and intellectual property rights of that software will not be a taxable supply to the extent that it is GST-free or input taxed. There is no provision under the GST Act that makes the supply of software and intellectual property rights of that software input taxed. What remains to be considered is whether your supply is GST-free as the supply is made to a non-resident entity. GST-free supply Relevant to your supply of software development services is item 2 in the table of subsection 38-190(1) of the GST Act (item 2). Item 2: supply to non-resident outside the indirect tax zone Item 2 provides that a supply of a thing (other than goods or real property) made to a non-resident is GST-free if it is 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-resident's enterprise, but is not registered or required to be registered for GST. Only one of the paragraphs in item 2 needs to be satisfied. Paragraph (a) of item 2 Goods and Services Tax Ruling, Goods and Services Tax: what do the expressions 'directly connected with goods or real property' and 'a supply of work physically performed on goods' mean for the purposes of subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 ? GSTR 2003/7 provides guidance on when a supply is a supply of work physically performed on goods and when a supply is directly connected with real property. Based on the information received, your supply of IT services and software development services will satisfy paragraph (a) of item 2 since: • your supply will be made to a non-resident entity that will not be in Australia in relation to your supply; and
• your supply of IT services and software development services will neither be 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. Your supply of software development services will be GST-free under paragraph (a) of item 2 to the extent that the supply is not negated by subsection 38-190(2), 38-190(2A) and 38-190(3) of the GST Act. There is no need to consider paragraph (b) of item 2 since paragraph (a) is satisfied. Limitations of item 2 Subsection 38-190(2) of the GST Act Subsection 38-190(2) of the GST Act provides that a supply covered by any of the items 1 to 5 in the table of 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. From the information received, this subsection does not apply to your supply of software development services since your supply is neither a supply of a right nor an option to acquire something, the supply of which would be connected with Australia and would not be GST-free.
Subsection 38-190(2A) of the GST Act Subsection 38-190(2A) of the GST Act provides that a supply covered by any of items 2 to 4 in the table in subsection 38-190(1) of the GST Act is not GST-free if the acquisition of the supply relates (whether directly or indirectly, or wholly or partly) to the making of a supply of a real property situated in Australia that would be input taxed under Subdivision 40-B or 40-C of the GST Act. For example, a non-resident individual, who owns residential rental property situated in Australia and who is not registered or required to be registered, acquires gardening services for the property and also acquires the services of a local real estate agent to advertise the property for rent. The acquisition of each service relates to the making of an input taxed supply of real property. The supplies of those services are therefore not GST-free. From the facts given, subsection 38-190(2A) of the GST Act does not apply as your supply of software development services does not relate to the making of a supply of a real property situated in Australia. 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 status of your supply under item 2 to be negated.
From the facts given, subsection 38-190(3) of the GST Act does not apply as you are not required to provide your software development services to another entity in Australia. Your supply of software development services is made and provided to the non-resident company. Item 4: rights Relevant to your supply of intellectual property rights of the software is item 4 in the table of subsection 38-190(1) of the GST Act (item 4). Item 4 provides that 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. Only one of the paragraphs in item 4 needs to be satisfied. You have not confirmed whether the intellectual rights of the software will be utilised entirely outside Australia by the purchaser as you are unsure of what they will be using the software for. However, the supply is being made to an entity that is not an Australian resident and is outside Australia when the software and installation is supplied, which satisfies paragraph (b) of item 4.
This is confirmed in GSTR 2003/8, which states that the supply of intellectual property rights is covered by item 4 (paragraph 29). Therefore, Therefore, your supply of intellectual property rights of the software will be GST-free under paragraph (b) of item 4 to the extent that the supply is not negated by subsection 38-190(2) or 38-190(2A) of the GST Act. Limitations of item 4 Subsection 38-190(2) of the GST Act Subsection 38-190(2) of the GST Act provides that a supply covered by any of the items 1 to 5 in the table of 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. GSTR 2003/8 states that subsection 38-190(2) applies to 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.(paragraph 144).
Further to this, paragraph 145 provides that if there is a supply of a right or option to acquire a supply that would be GST-free, subsection 38-190(2) does not negate the GST-free status of the supply of the right or options accorded by one of the items in the table in subsection 38-190(1). This includes a case where the underlying supply is itself GST-free under one of the items in the table in subsection 38-190(1) of the GST Act. Considering the Agreement between you and the non-resident company, we do not consider that subsection 38-190(2) of the GST Act negates the GST-free status of the supply of intellectual property rights of the software. Subsection 38-190(2A) of the GST Act As provided above, subsection 38-190(2A) of the GST Act does not negate the GST-free status of as your supply of intellectual property rights over the software as it does not relate to the making of a supply of a real property situated in Australia. Summary Your supply of software development services to the non-resident company is GST-free under paragraph (a) in item 2. Your supply of intellectual property rights of the software to the non-resident company is GST-free under paragraph (b) in item 4.