Concepts
Digital service provider
A digital service provider is a business that supplies digital services or software, and in the ATO context it often means a software developer whose products connect to ATO systems for lodgment and reporting.
The phrase digital service provider is used in more than one way, so it helps to separate the meanings. In the ATO's own usage, a digital service provider, or DSP, is a software developer or software company whose products interact with ATO systems. Examples include accounting, payroll and tax preparation software that can lodge a BAS, send Single Touch Payroll reports or exchange information with the ATO electronically.
To connect with the ATO, these providers must meet requirements around security, authentication and the way their products handle data. The ATO publishes an operational framework for developers that sets out expectations about protecting taxpayer information, using secure access methods and responding to security incidents. As a business owner, this means that when you use well-established, compliant software, your lodgments and data are handled under a recognised set of standards.
The term is also used more broadly for businesses that sell digital products or services to customers, such as streaming, downloadable software, app subscriptions, online courses and cloud platforms. When such services are supplied from overseas to Australian consumers, special GST rules apply, which in many cases require the overseas supplier to register for GST and charge it. This is sometimes called the GST on digital products rules.
For an Australian business buying digital services, the treatment depends on where the supplier is and whether it charges GST. If a local or registered overseas supplier charges GST and gives you a valid tax invoice, you can generally claim a credit if the purchase is for your business and you are registered. If a supplier does not charge GST, there is no credit to claim, although other rules such as the reverse charge may apply to certain business purchases from overseas, depending on circumstances.
For an Australian business selling digital products or software, GST applies in the usual way if you are registered, including to sales to overseas customers in some situations, depending on where the supply is connected and who the customer is. Sales to non-residents outside Australia can be GST-free in certain cases, while sales to Australian consumers generally include GST. The details depend on the facts, so check the specific rules.
A common misunderstanding is believing that a digital service provider is automatically exempt from GST or that the GST rules do not apply to software subscriptions. They do apply. Another is assuming that all online services from overseas include GST. Some do and some do not, so check invoices and receipts. This is general information only, so confirm how this applies to your situation with the ATO or a registered tax professional.
Worked example
A graphic designer pays $33 per month, which includes GST, for a design software subscription from a provider that charges GST. Over a year she pays $396, of which the GST is $396 divided by 11, which is $36. If the software is used only for business and she holds the invoices, she can claim $36 in credits across her BAS periods. If a provider charged no GST, there would be no credit.
Practical tips
- Check whether a digital supplier charges GST by reading the invoice. No GST means no credit to claim.
- Choose accounting software from established providers that connect to the ATO securely.
- Seek advice if you sell digital products to overseas customers, as the GST treatment depends on the facts.