Issue
Is the entity, a company that produces and sells education packages, making a GST-free supply under item 4 in the table in subsection 38-190(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) where: • it supplies rights to sell its education packages to Australian resident affiliates that carry on an enterprise in Australia, and • the Australian resident affiliates then supply the education packages to non-residents?
Decision
No, the entity is not making a GST-free supply of rights for use outside Australia under item 4 in the table in subsection 38-190(1) of the GST Act.
Facts
The entity is a company that produces and sells education packages. The entity also operates an affiliate program. The entity supplies the members of the affiliate program the rights to sell its education packages upon payment of a fee. The entity is registered for goods and services tax (GST) and carries on its enterprise in Australia.
Members of the affiliate program (affiliates) are able to exercise the right to sell the education packages to both residents and non-residents. The affiliate is entitled to a portion of the sale proceeds. However, while the educational packages may be sold to non-resident entities, the affiliates carry on their enterprise in Australia and have no presence outside of Australia.
Reasons for Decision
Under section 38-190 of the GST Act, certain supplies of things other than goods and real property are GST-free. The supply of rights to sell education packages are neither that of goods or real property. As such, the supply is appropriately considered under section 38-190 of the GST Act.
Item 4 in the table in subsection 38-190(1) of the GST Act (Item 4) applies to make a supply of rights GST-free if the rights are for use outside Australia. Item 4 states that a supply is made in relation to rights and 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.
In respect of paragraph (a) in Item 4, notwithstanding that the affiliates are able to sell the entity's education packages to resident and non-resident customers, the relevant question to ask is where the rights are used. In the context of the supply in question, the supply of rights can only be used outside Australia where those rights are actually exercised by an entity that is outside of Australia. The rights to sell education packages can only be exercised outside of Australia where the affiliate is physically located outside of Australia and procures customers from this presence.
The entity supplies the right to sell education packages to Australian resident affiliates with no business presence outside of Australia. Therefore, the supply of the right to sell the education package is not used outside of Australia and the requirements of paragraph (a) in Item 4 are not met.
The requirements of paragraph (b) in item 4 will be met where the supply is made to an entity that is not an Australian resident and is outside Australia when the thing supplied is done. As the entity makes the supply of rights to Australian resident affiliates who carry on their business in Australia and are not outside of Australia in relation to the supply, the requirements of paragraph (b) in item 4 are not met.
As the requirements of paragraph (a) and (b) are not met, the supply of the right to sell education products is not GST-free under Item 4.