Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon. J.S. Dawkins, M.P.)Computer Programs
A. Introduction
22.1 This chapter describes how the new law will apply to the writing and duplicating of computer programs.
B. Explanation and Commentary
22.2 A computer program hasthe same meaning as in the Copyright Act 1968. It is defined in that Act to mean:
"an expression, in any language, code or notation, of a set of instructions (whether with or without related information) intended, either directly or after either or both of the following:
- (a)
- conversion to another language, code or notation;
- (b)
- reproduction in a different material form
to cause a device having digital information processing capabilities to perform a particular function."
[clause 5, definition of 'computer program']
When is a computer program manufactured?
22.3 There are two steps to the production of a computer program. The first is the writing or developing of the program and the second is the duplication of the program when completed onto another or similar carrying medium.
22.4 The writing of a computer program will not be manufacture. It is considered to be the result of skilled services rather than bringing goods into existence for sale or application to own use and is caught by excluding paragraph (g) of the definition of manufacture. [clause 5, definition of 'manufacture' - paragraph (g)]
22.5 Consequently, a person who writes computer programs will not be liable to sales tax on the writing or developing of the programs. Nor will that person be entitled to obtain goods (e.g. computers, paper and writing instruments) for use in writing such programs tax-free. Any sales tax liability will be met by the program writer purchasing goods for use in writing the programs at a price that includes sales tax.
22.6 Duplicate, (in relation to a computer program), will be defined to mean to copy or reproduce the program so as to embody the program in goods or to covert the computer program to another language so as to embody the program in goods. 'Embodied' is defined to mean that a computer program is only embodied in goods where it can be reproduced from the goods either with or without the aid of some other device. The classic case of where a computer program is embodied in goods is where it is duplicated onto a disc. [clause 5, definition of 'duplicate', and clauses 5 and 13, meaning of 'embodied']
22.7 With one exception, the duplication of a computer program which involves the embodying of the program in goods, will be manufacture, whether the duplication is on a new or used disc or other carrying medium, or into the memory or hard disc of a computer. This is the same position as applies under the existing law. [clause 5, definitions of 'duplicate' (in relation to a computer program) and 'manufacture' - paragraph (e)]
22.8 The exception will be where the duplication is carried out by a person on a carrying medium (other than a microchip) that is held in tax-paid stock and the duplicated program is for retail sale. [clause 5, definition of 'manufacture' - paragraph (h)]
Example:
A retailer of computers and computer programs who, in the course of selling those goods, and as part of a service to customers, copies a program onto a disc or into the memory of the computer.
Result: Where a retailer performs this function there is no liability to sales tax.
Sales Tax Liability on Computer Programs
22.9 Computer programs will, for sales tax purposes, fall into two broad categories:
- (i)
- those that are tax-advantaged; and
- (ii)
- those that are not tax-advantaged.
22.10 Tax-advantaged computer programs: A tax-advantaged computer program will be one that is embodied on a carrying medium, other than a micro-chip, i.e. on a floppy or hard disc or in the memory of a computer. In addition, programs embodied on micro-chips will also be tax-advantaged where the program:
- (i)
- is for educational or entertainment use; and
- (ii)
- the micro-chip on which the program is embodied is contained in a cartridge that is marketed exclusively for use with a personal computer or home electronic device that is for use with a computer monitor or television screen.
Example:
Computer games that come in cartridge form and are designed to fit into a console that is linked to a television. [clause 5, definition of 'tax-advantaged computer program' and clause 14]
22.11 Where a computer program is tax-advantaged the taxable value of the computer program will be reduced by the value of the program embodied on the carrying or other medium onto which the program is duplicated. This reduction is described as an exempt part of the taxable value and has the effect that where a tax-advantaged computer program is the subject of an assessable dealing, tax will be payable only on the wholesale value of the carrying medium.[clause 45]
22.12 Although the duplication of a tax-advantaged computer program will be manufacture, a person involved in such activities will not be entitled to be registered. Consequently, such a person will be required to purchase goods for use in carrying out the duplicating at a price which includes sales tax. This will be contrary to the general rule that a manufacturer can obtain goods for use in manufacturing goods free of sales tax. However, the different treatment for duplicators of tax-advantaged computer programs is because of the special taxable value for such programs.[subclause 78(5)]
Computer programs embodied on microchips
22.13 The tax treatment of computer programs embodied on microchips will be different to other computer programs.
22.14 In the case of microchips, the ordinary rules relating to manufacturers will apply. The duplicator will be entitled to exemption from sales tax on computers and other equipment used to duplicate the programs onto the microchips. This is because with microchips, tax will be payable on the full wholesale value which includes the value of the computer program embodied on the microchip.
C. Summary of Main Changes
22.15 The main changes to the existing law discussed in this chapter are:
| CHANGE | REASON |
|---|---|
| 1. In house production of computer programs not to be regarded as manufacture to be deleted from simplified law | With the special taxable value for computer programs it is not necessary to provide any concession for in-house manufacture of computer programs |
| 2. Supply of a computer program to another person for duplication to be a supply of materials for the purposes of the deemed manufacturer provisions to be deleted from the new law. | No deemed manufacturer provisions in the new law. |
| 3. The value of the computer program embodied on a disc etc. is to be treated as an exempt part of the taxable value of a computer program. The result is that tax is payable only on the taxable value of the carrying medium | The sale value provisions in the existing law are cumbersome and complex. The different approach to determining the taxable value of a computer program does not result in a different value to that in the existing law but it is a much simpler concept to follow. |