Supplementary Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon J. Dawkins M.P.)2. External costs
A. Summary of changes
2.1 There are two broad changes proposed to be made to the external costs provision. The first change is the removal of the liability to be imposed on the retail sale or AOU of goods by a person who has incurred design, formulation and development costs in relation to those goods. Retailers and other persons who incur these costs, and who are not otherwise liable to tax, will not have a liability on them if they are involved only in the retail sale or application to own use of tax-paid goods.
2.2 The second change is to the taxable value of the goods covered by the external costs dealing. These are goods in respect of which a royalty payment has been made. In these cases, the taxable value will be limited to the notional wholesale purchase price of the goods if the manufacturer or importer had incurred that royalty payment.
B. Explanation of the changes
2.3 Under the new law certain costs associated with the manufacture of goods can attract a sales tax liability if they are incurred by a person who is not otherwise liable to tax (for example, a retailer of tax-paid goods) (existing clause 19 of the Assessment Bill). The costs involved are:
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- costs incurred in connection with the design, formulation or development of the goods; or
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- royalties paid in connection with the goods.
2.4 In response to the identification of practical difficulties in the application of the design, formulation and development costs component of the new law, the amendments will exclude these costs from the provision. [Amendment No. 5 of the Assessment Bill (New clause 19)]
2.5 With the exception of taxable value, there will be no change to the position of royalties under the new law [clause 19 of the Assessment Bill] in relation to tax liability. The inclusion of royalties in the external costs dealing was designed to replace the taxation treatment of royalties under existing Sales Tax Assessment Act (No. 10) 1985. It is not a new liability. Under the new law, royalties will either be caught by the special taxable value rules for royalty payments [clause 36 of the Assessment Bill] or under clause 19 as an external cost.
2.6 The liability on royalty payments that are not caught by the special taxable value rules for royalties will be imposed by amended clause 19 of the Sales Tax Assessment Bill which will be titled "Royalty-inclusive sale or AOU." in lieu of "external costs". [Amendment No.5 of the Assessment Bill (New clause 19)]
2.7 There will be a change to the taxable value of goods which are the subject of a royalty-inclusive sale or AOU. Under the Bill the proposed taxable value for these dealings is the notional wholesale selling price [assessable dealings AD2c, AD3d, AD12c and AD13d in Table 1, Schedule 1 to the Assessment Bill] . The intention, however, is that the taxable value should be limited to the actual amount of royalty payment recouped in the selling price of the goods. The amendments will achieve this by altering the taxable value to the notional wholesale purchase price of the goods if the manufacturer or importer had incurred the royalty payments . This change will effectively mean that the taxable value of the goods sold or applied to own use by a person who incurs royalty costs, and who is not otherwise liable to tax, will be the wholesale purchase price of the goods plus the value of the royalty recouped in the selling price of the goods.
2.8 Amendments will also be made to column 5 of Table 1, Schedule 1 for the relevant assessable dealings to omit the reference to notional wholesale selling price and replace it with a taxable value based on the notional wholesale purchase price of the goods including the royalty cost . [Amendments Nos. 16, 18, 20 and 22 of the Assessment Bill (assessable dealings AD2c, AD3d, AD12c, AD13d, Table 1, Schedule 1)]
2.9 As a consequence of the removal of the design costs component of this dealing, and its restriction to royalty payments, the dealing is to be renamed a 'royalty-inclusive sale or a royalty inclusive AOU' . A number of minor amendments will be required to column 2 of Table 1, Schedule 1 for the relevant assessable dealings to omit the words "external costs" and replace them with "royalty-inclusive". [Amendments Nos. 15, 17, 19, and 21 of the Assessment Bill (assessable dealings AD2c, AD3d, AD12c, AD13d, Table 1, Schedule 1)]
2.10 It is possible that a liability to pay tax on a royalty payment could arise under existing Assessment Act (No.10) and the same royalty payment could be caught under the royalty-inclusive dealing in the new law. To overcome the possibility of double taxation occurring, there will be a transitional provision to provide that if tax was or is payable under Assessment Act (No.10), then no liability to tax on the royalty payment associated with the goods will arise under the royalty-inclusive dealings. These dealings are AD2c, AD3d, AD12c and AD13d. [Amendment No.1 of the Transitional Bill (New subclause 5(2))]