House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon. J.S. Dawkins, M.P.)

Photography

A. Introduction

21.1 This chapter describes how the new law will apply to photography which is a manufacturing activity. There is no separate part of the new law that will deal with photography. Instead, it will be incorporated into the general scheme of the new law.

B. Explanation and Commentary

What is photography?

21.2 Photography comprises 3 key steps:

Step 1: A picture is taken i.e. photographic film is exposed;

Step 2: The exposed film is processed or treated so as to produce a negative, transparency or film strip;

Step 3: A print is made from the negative, transparency or film strip.

Tax consequences of photography

21.3 This chapter broadly describesthe tax consequences in 2 situations:

(i)

the 'classic case' of a customer having prints developed;

(ii)

professional photographers.

21.4 (i) The classic case: The classic case involves a person 'taking' pictures and delivering the exposed film to a commercial developer to be made up into negatives and prints. The elements of the classic case are:

Element 1: A person 'takes' a picture - i.e. the person exposes a film.

Consequence: This, by itself, does not amount to manufacture. It will be an application to own use (AOU) of the unexposed film. Generally, the film would have been acquired tax-paid by the person taking the picture, in which case the AOU will not an assessable dealing.[clause 5, definition of 'application to own use']

Element 2: The person who has exposed the film provides it to a commercial developer for prints to be made,

Consequence: Giving the film to the developer will be regarded as the supply of materials to a manufacturer by a customer to be made up into customer's materials goods. Subclause 22(3)]

Element 3: The developer produces a negative from the exposed film.

Consequence: The developer will be taken to have manufactured the negative from materials supplied by the customer. The exposed film and the negative will be treated as separate goods. The negative will be assessable goods. [clause 5, definition of 'manufacture' - paragraph (d)]

Element 4: The developer makes a print from the negative.

Consequence (a): The use of the negative to make the print will not an application to own use of the negative by either the developer or the customer. It is not an AOU by the developer because, as a general rule, only the owner of goods can apply them to their own use. Ordinarily, a use of goods in this manner would be treated under the new law as an AOU by the customer. However, there will be a specific exclusion from the definition of 'application to own use' of anything that is done with the negative by the developer before it is delivered to the customer.

Consequence (b): The developer will be taken to have manufactured the print. Unlike the manufacture of the negative, the print will not be treated as manufactured from materials supplied by the customer. The print is manufactured from the negative which was also manufactured by the developer.

[clause 5, definition of 'application to own use'-paragraph (i)]

Element 5: The developer delivers the negative and the print to the customer in return for a single charge of, for example, $20.

Consequence (a): The delivery of the negative will be a delivery of customer's materials goods - which will be an assessable dealing. [AD4a and clause 22]

Consequence (b): The delivery of the print will be a sale of the print - which will also be an assessable dealing. [AD1a or AD2a]

Consequence (c): The taxable value of the negative will be the amount charged for making it up (and the value of any always exempt materials supplied by the customer). If there is no separately identified charge for making up the negative, then there should be allocated to the taxable value the amount that would be charged for the negative if the manufacture of the negative had been the only activity undertaken by the developer. The Commissioner has a discretion to make this allocation. [Table 1 and clause 95]

Consequence (d): The taxable value of the print will be its notional wholesale selling price (if it is a retail sale to the customer), or its actual selling price (if it is a wholesale sale to the customer).[Table 1]

21.5 If the print is sold by wholesale, the making up charge on the negative will be included in the wholesale price. The taxable value is simply the amount for which the goods were sold. However, if as is the more common situation, the prints are sold by retail, then 2 taxable value calculations will have to be made - the making up charge for the negative, and a notional wholesale selling price for the print. That is also the situation under the existing law where the Commissioner has come to a special arrangement with the industry allowing them to calculate their taxable value simply as a set percentage of the total retail selling price.

21.6 (ii) Professional photographers: Some professional photographers do their own developing and processing - others simply expose the film in the camera and deliver it to a commercial developer to have negatives and prints produced. Photographers who do their own developing and processing will be regarded as manufacturers and as such will be entitled to be registered. Photographers who engage others to do their developing and processing will not regarded as manufacturers and so will not be entitled to be registered, unless they are able in some other way to satisfy the conditions of registration. If they are not registered they will be in exactly the same position as the customer described in the classic case. Unregistered persons cannot obtain their business inputs tax-free.

21.7 The elements involved if professional photographers do their own developing and processing are set out below:

Element 1: The professional photographer 'takes' a picture - i.e. the photographer exposes a film.

Consequence: This will be an application to own use of the unexposed film. The film would probably have been acquired tax-free by the photographer, who will be entitled to quote on the film as a business input. Therefore, the AOU is an assessable dealing. However, there will be an exemption Item for materials applied to own use in the manufacture of assessable goods which would exempt this AOU from tax. In this case, the manufactured goods would be the negative. [clause 5, definition of 'application to own use';ADs 3c & 13c and Exemptions and Classifications Bill, Schedule 1, Item 19]

Element 2: The photographer produces a negative from the exposed film.

Consequence: The photographer will be taken to have manufactured the negative. The exposed film and the negative will be treated as separate goods. The negative will be assessable goods.[clause 5, definition of 'manufacture' - paragraph (d)]

Element 3: The photographer produces a print from the negative.

Consequence (a): In manufacturing the print, the photographer will have applied the negative to their own use. This AOU does not fall within the paragraph (h) exclusion to the definition of 'application to own use' because the photographer has manufactured the negative on his own behalf (i.e. so that a print can be produced), and the negative will in most cases not be delivered to the customer but will be retained by the photographer. However, again the AOU of the negative will be exempted from tax by an exemption Item for materials applied to own use in the manufacture of assessable goods.

Consequence (b): The photographer will be taken to have manufactured the print. The print will be assessable goods. [clause 5, definition of 'application to own use']

Element 4: The photographer sells the print to a customer for $50.

Consequence (a): The sale is an assessable dealing. [AD1a; AD2a, or where the customer supplied any of the materials (such as the unexposed film), AD4a]

Consequence (b): If the print was manufactured by the photographer to the order of a particular customer for their own use, then a substitute taxable value will apply, being 40% of the tax-exclusive amount payable by the customer (exclusive of sales tax) to the photographer. That is, the amount payable by the customer will be discounted by 60% to reflect a wholesale value (and in recognition of the fact that part of the amount payable by the customer represents the photographer's fee for service). However, the taxable value is intended to include an amount for the manufacture of the negative.[clause 41]

Consequence (c): In any other case the taxable value of the print will be its notional wholesale selling price (if it is a retail sale to the customer) or its actual selling price (if it is a wholesale sale to the customer). Either value will include an amount for the manufacture of the negative. However, the taxable value will not include the fee charged by the photographer for taking the picture as this represents a fee for a service and not goods. [Table 1]

21.8 Sometimes a professional photographer produces proofs which are supplied to the customer for a fee. The customer selects those proofs that are to be developed into prints. The proofs will be assessable goods and their supply to the customer will be an assessable dealing upon which tax will be payable on a taxable value that will depend on whether they are produced to the order of a particular customer (see paragraph 21.7). If the proofs are retained by the photographer then they will be regarded as having been applied to the photographer's own use and tax will be payable on a taxable value equal to the notional wholesale selling price of the proofs.

Rate of tax

21.9 Having calculated the taxable value, tax is payable in all circumstances at the rate of 20%.

C. Summary of Main Changes

21.10 The main changes to the sales tax treatment of photography will be: