The industry is buzzing over a new ruling from the Australian Taxation Office (ATO) on how tax is to be levied on IT hardware containing a software component. Sales Tax Determination 96/5 Calculation of tax payable on goods containing tax-advantaged computer programs is intended to clarify the problem of determining the taxable content of bundles such as modems or multimedia add-on kits.
Although the sales tax on these items is 22 per cent, some vendors have been specifying effective rates as low as half of this, citing the exempt software component. For instance, many modem manufacturers have used effective tax rates of around 13 or 14 per cent. The ATO was annoyed that this was being portrayed as a net rate of 13 per cent for modems.
The new ruling allows vendors to claim a TACP component using one of two methods. They can either use the default which says that the TACP component is 10 per cent (for goods up to $5,000), or, if they can justify it, use a higher figure based on true replacement cost of the TACP component. For instance, if a PC comes with $500 worth of OEM software, the vendor must prove that this is a true wholesale value of the goods if supplied separately, but in the same form (such as white box). This will typically be the royalty rate in an OEM supply agreement.
Until now it has been common practice for vendors to "borrow" effective rates of sales tax for their products by looking at what their competitors were charging. The ATO now says this must not be done, and all vendors must be able to prove their claims.
While the ruling is effective immediately, some vendors have been allowed until July 1 to comply. David Stewart, MD of Banksia, said he was still looking into it, but it appeared that most modem manufacturers would now be charging an effective rate of 19.8 per cent. "And that's around a $20 retail price increase on the average modem," he explained.