TAXATION RULING NO. ST 2415
ST 2415
COMPUTER PROGRAMS : ASSIGNMENT OF COPYRIGHT
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FOI status:
May be releasedFOI number: I 1183624PREAMBLE
The Sales Tax Laws Amendment Act 1986 - Act No.99 of 1986 - which amended the various Sales Tax Assessment Acts, dealt, in broad terms, with sales tax payable in respect of goods containing computer programs. Under the present sales tax law, the development "in-house" of computer programs that are applied to the developer's own use is free of sales tax. One important issue in this regard is just what is meant by "in-house".
2. This particular question was examined in paragraphs 9 to 12 of Taxation Ruling No. ST 2305 in which the most common "in-house" software development was described as the development of a computer program by an employee of the developer/employer. Another situation accepted in that Ruling as "in-house" development was the development of a computer program where section 197 of the Copyright Act 1968 applied.
3. This Ruling does not alter the views expressed in Ruling ST 2305. Rather, it re-states the operation and effect of section 197 of the Copyright Act as it relates to the assignment of future copyright in a computer program.
4. For ease of reference, paragraphs 9 to 12 of Ruling ST 2305 are repeated in this Ruling:-
"9. The copying of a computer program from a carrying medium into a computer or onto another carrying medium for a person's own use is technically within the amended definition of "Manufacture". No sales tax liability arises, however, in respect of this "manufacturing" process. New sub-section 17(1A) of Assessment Act (No.1) operates to ensure the development "in house" of computer programs, that are applied to the developer's own use, is free of sales tax. There are 2 important issues in relation to "in-house" development of computer programs. These are:
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- the meaning of "in-house"; and
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- how the goods are applied to own use.
10. The most common "in-house" software development will arise in relation to the development of a computer program by an employee of the developer/employer. In these circumstances, the author of the computer program (the employee) has no interest in the copyright in the program. Under sub-section 35(6) of the Copyright Act 1968, the employer is the owner of the copyright subsisting in the program written by the author in pursuance of the terms of his employment under a "contract of service".
11. The other situation which is accepted as being "in-house" development of a computer program is where section 197 of the Copyright Act is applicable. Generally speaking the author of a computer program is the owner of any copyright subsisting in it: subsection 35(2) of the Copyright Act. Section 197 of that Act deals with prospective ownership of copyright and overrides subsection 35(2). Under section 197, an agreement may be entered into, in writing between a person who would be the owner of the copyright in a computer program on its coming into existence and another person, whereby the future copyright may be assigned on its coming into existence to that other person. For example, a person may need some specialist or custom made software to be developed for use in carrying on his or her own business and engages a consultant to carry out the work. If a section 197 agreement is entered into between the person and consultant in relation to the development of the software, i.e., the copyright in the computer program will vest in the person who engaged the consultant by force of that provision, the development of that software will, subject to the comments in paragraph 12 be accepted as "in-house" and free of any sales tax liability. Such an agreement must be in writing and entered into before the software is written.
12. This rule will not apply, however, where it is clear that there is an intention to avoid sales tax payable on the transaction between the statutory owner of the copyright and the consultant, e.g., a collateral agreement is entered into between the parties whereby the section 197 statutory owner agrees to return to the consultant any rights the consultant would have retained under an ordinary or commercial licence agreement. Put another way, the statutory assignment of the copyright in the work, that is the software, must be absolute and unfettered before it will be accepted as "in-house"."
5. In relation to the copyright law, paragraph 11 of Ruling ST 2305 made it clear that for an assignment of copyright to be legal, it must be in writing between the developer and the future owner and it must be entered into before the computer program, the subject of the assignment, is written. Section 197 deals with the assignment of future copyright, not existing copyright. It is also an assignment that takes place at the request of the assignee (user) and not the assignor (developer). In an assignment of future copyright, the software developer can never have a legal interest in the copyright of the particular program to be developed because the assignment takes place before the programmer has developed any ideas. Such an assignment is made on the clear understanding that at no time can the programmer have any legal interest in the program because the copyright when it comes into existence automatically vests in the person to whom it has been assigned.
6. When the operation of section 197 is properly understood, it would be rare for a computer programmer to assign the copyright in the ideas or systems to be developed because at the time of the assignment he/she would not be aware of the true value of the copyright in the ideas or systems he/she would be assigning.
7. Another point is that an assignment of copyright in itself, whether legal or otherwise, will not relieve a person from having a sales tax liability in relation to the development of a computer program. An assignment of copyright does not prevent the assignor from being the manufacturer of a computer program on whom the liability to account for sales tax falls.
8. Assignment of copyright in computer programs has to be considered in the context in which it was discussed in Ruling ST 2305. In that Ruling the assignment of copyright was discussed in connection with the production of computer programs developed "in-house". In some instances, outside computer software consultants are engaged in a capacity where they are more or less employees of the company hiring their services. In this situation, it would be common for the hirer to demand that the consultant assign copyright at the outset in any computer programs to be written because it is the hirer who wishes to control ownership of the copyright. The programmer has effectively no interest in the copyright because he/she is hired on an employee-type basis. The programs written are developed in a situation akin to "in-house" and should be so treated. This situation is not common because programmers ordinarily do not assign copyright, particularly future copyright, because the ideas they develop in writing programs represent their livelihood. Thus, where a programmer is employed on this basis and assigns future copyright in the computer programs to be written, the manufacture of those computer programs is accepted to be "in-house".
9. This Ruling does not change that position. It will still be accepted that where a person is hired to write software programs in circumstances where he/she is akin to an employee and the future copyright is assigned to the hirer at the outset, the software programs produced will be regarded as "in-house".
10. It was also stated in Ruling ST 2305 that the "in house" treatment on assignment of copyright will not apply where there is an intention to avoid sales tax payable on computer programs, e.g., by the use of collateral agreements.
RULING
11. It is repeated that an assignment of copyright will not, by itself, relieve a person from a liability to pay sales tax. It is merely one factor which might point to an outside programmer being contracted on an "in-house" basis. An example where the assignment of future copyright under section 197 in relation to the development of software will relieve a person from liability to pay sales tax is where a programmer is engaged under a contract relating to the supply of a range of consulting services that places him/her in an "in-house" situation as explained above, i.e., the hirer insists on a future assignment of copyright for his/her own protection. These assignments are usually limited to circumstances where a company with its own computer facilities and experts needs to supplement its programming capacity, because of a shortage of staff or expert use, to assist the company to implement various programming tasks. Whether working alone or as part of a team, these programmers are ordinarily obliged under the contract to work under agreed conditions such as:
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- to adhere to normal working hours and conditions, usually similar or identical to the company's staff;
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- to work under direction and control of a team leader;
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- to be entitled to payment calculated at an hourly rate;
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- to generally develop the program at the client's premises on the client's computers;
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- a right of termination is granted to the client in the event of non-performance, not associated with or dependent upon the furnishing of a completed program; and
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- a contract invariably includes a clause to the effect that ownership of all property rights including copyright, patents etc., in any computer program, documents etc., that might come into existence during the course of the work is assigned to the client company.
12. The effect of the use of such agreements under section 197 is similar to the position that would arise if the independent contractor had been employed under a contract of employment. Note, however, that, as indicated in Ruling ST 2305, the agreement must be at the request of the hirer, in writing and entered into before the software is written. Generally, in a situation akin to "in-house" this normally would be the case.
13. Instances have been encountered where taxpayers have purported:
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- to assign copyright where they develop basic programs and personalise the programs to suit clients by making minor or major changes. Copyright has purportedly been assigned each time an amended program is sold, yet these programs retain the same techniques and routines developed by the programmer in the basic program.
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- to assign copyright once the development of the software has been commenced or completed.
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- to assign copyright in standard programs to each customer.
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- to assign copyright to a customer and the customer returns or re-assigns the copyright back to the consultant after development.
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- to verbally assign copyright.
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- to assign copyright under a contract specifically entered into for the supply of goods, e.g., the development and production of a computer program embodied in goods as distinct from the supply of consulting services. In the latter, the contract is not contingent upon the supply of goods.
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- to assign copyright where the object code only is supplied to the client and the source code and working papers remain the property of the consultant.
14. The purported assignment of copyright in circumstances such as those mentioned in paragraph 13 above will not result in the development of the computer program being accepted as "in-house". Apart from the fact that there is no legal future assignment of copyright as required in section 197, the circumstances in which the computer programs are written are not comparable to an "in-house" situation. Taxpayers entering into such arrangements still have a liability to account for sales tax on the computer programs written. Further, if they continue to operate in this way they will incur an escalating liability and risk the imposition of substantial penalties.
15. Taxpayers who are unsure about their sales tax liability in relation to computer programs written by them or who are concerned that they have entered into arrangements of the type referred to in paragraph 13 should contact the Taxation Office.
COMMISSIONER OF TAXATION
19 May 1988
References
ATO references:
NO 87/3779-7
Date of effect:
Immediate
Related Rulings/Determinations:
ST 2305
Subject References:
COMPUTER PROGRAMS
COPYRIGHT
Legislative References:
SALES TAX ASSESSMENT ACT (NO.1), SECTIONS 3,
17(1A)