Private ruling: Royalty payments
Published: March 2015
Ruling period: 1 July 2013 to 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Questions and Answers | 1. Do payments made to Company X, fall under the definition of royalty payments and attract withholding tax? | No | 2. If not a royalty, are there any withholding obligations? | No | 3. If there are withholding obligations, is a 5% rate of withholding tax is applicable? | Not applicable


Relevant legislative provisions: Income Tax Assessment Act 1936 section 6(1) | Taxation Administration Act 1953 section 12-280 of schedule 1 | International Tax Agreements Act 1953

Reasons for decision: Summary: The payments made to Company X do not fall under the definition of royalty payments and do not attract withholding tax. | Detailed Reasoning - Detailed Reasons: Section 12-280 of Schedule 1 to the Taxation Administration Act 1953 (TAA) requires an entity to withhold an amount from a royalty it pays to an entity or to entities jointly, if: a. the recipient or any of the recipients has an address outside Australia, or b. the payer is authorised to pay the royalty at a place outside Australia. Section 6(1) of the Income Tax Assessment Act 1936 provides a definition of royalty: royalty or royalties includes any amount paid or credited, however described or computed, and whether the payment or credit is periodical or not, to the extent to which it is paid or credited, as the case may be, as consideration for: (a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trade mark, or other like property or right; (b) the use of, or the right to use, any industrial, commercial or scientific equipment; (c) the supply of scientific, technical, industrial or commercial knowledge or information; (d) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); (da) the reception of, or the right to receive, visual images or sounds, or both, transmitted to the public by: (i) satellite; or (ii) cable, optic fibre or similar technology; (db) the use in connection with television broadcasting or radio broadcasting, or the right to use in connection with television broadcasting or radio broadcasting, visual images or sounds, or both, transmitted by: (i) satellite; or (ii) cable, optic fibre or similar technology; (dc) the use of, or the right to use, some or all of the part of the spectrum (within the meaning of the Radiocommunications Act 1992 ) specified in a spectrum licence issued under that Act; (e) the use of, or the right to use: (i) motion picture films; (ii) films or video tapes for use in connexion with television; or (iii) tapes for use in connexion with radio broadcasting; or (f) a total or partial forbearance in respect of: (i) the use of, or the granting of the right to use, any such property or right as is mentioned in paragraph (a) or any such equipment as is mentioned in paragraph (b); (ii) the supply of any such knowledge or information as is mentioned in paragraph (c) or of any such assistance as is mentioned in paragraph (d); (iia) the reception of, or the granting of the right to receive, any such visual images or sounds as are mentioned in paragraph (da); (iib) the use of, or the granting of the right to use, any such visual images or sounds as are mentioned in paragraph (db); (iic) the use of, or the granting of the right to use, some or all of such part of the spectrum specified in a spectrum licence as is mentioned in paragraph (dc); or (iii) the use of, or the granting of the right to use, any such property as is mentioned in paragraph (e). In determining the responsibility to withhold tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 and the Income Tax ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The overseas countries agreement (the agreement) is listed in section 5 of the Agreements Act. The overseas countries agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. Article 12 of the overseas agreement advises that: 1. Royalties from sources in Australia, being royalties to which a resident of the overseas country is beneficially entitled, may be taxed in the overseas country. 2. Such royalties may be taxed in Australia, and according to the law of Australia, but the tax so charged shall not exceed 10 percent of the gross amount of the royalties. 3. Paragraph (2) shall not apply if the person beneficially entitled to the royalties, being a resident of the overseas country, has a permanent establishment in Australia or performs independent personal services in Australia from a fixed base situated therein, and the property or rights giving rise to the royalties are effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 (Business profits) or Article 14 (Independent personal services), as the case may be, shall apply. 4. The term "royalties" in this Article means: (a) payments or credits of any kind to the extent to which they are consideration for the use of or the right to use any: (i) copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right; (ii) industrial, commercial or scientific equipment, other than equipment let under a hire purchase agreement; (iii) motion picture films; or (iv) films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting; (b) payments or credits of any kind to the extent to which they are consideration for: (i) the supply of scientific, technical, industrial or commercial knowledge or information owned by any person; (ii) the supply of any assistance of an ancillary and subsidiary nature furnished as a means of enabling the application or enjoyment of knowledge or information referred to in sub-paragraph (b)(i) or of any other property or right to which this Article applies; or (iii) a total or partial forbearance in respect of the use or supply of any property or right described in this paragraph; or (c) income derived from the sale, exchange or other disposition of any property or right described in this paragraph to the extent to which the amounts realized on such sale, exchange or other disposition are contingent on the productivity, use or further disposition of such property or right. As the definition of royalty is inconsistent between the ITAA 1936 and the overseas countries agreement, the definition in the overseas agreement overrides the ITAA 1936 definition. The service fees is not related to any the payments described in the overseas agreement definition, accordingly, the service fee is not a royalty. As the service fees are not royalties, there is no obligation for Company Y to withhold under section 12-280 of Schedule 1 to the TAA. Section 12-315 of schedule 1 to the TAA provides that: An entity (the payer) that carries on an enterprise must withhold an amount from a payment it makes to another entity, in the course or furtherance of the enterprise if: (a) the entity receiving the payment, is: i. a foreign resident; ii. the payer believes, or has reasonable grounds to believe, that the entity is a foreign resident; (b) the payment is of a kind set out in the regulations; and (c) the payment is not: i. dividend of a company; or ii. interest; or iii. a royalty; or iv. a departing Australia superannuation payment; or v. a payment worked out wholly or partly by reference to the value or quantity of natural resources produced or recovered in Australia; or vi. a mining payment; or vii. an amount represented by or reasonably attributable to a fund payment; and (d) the entity receiving the payment is not covered by an exemption in force under subsection 12-319(1). As the service fee is not of a kind set out in the regulations, the service fee is not subject to withholding under section 12-315 of schedule 1 to the TAA.

Relevant facts: Company Y has entered into an agreement with Company X wherein Company X performs services in return for a monthly service fee. | Service fees are not related to any the payments described in the overseas countries agreement definition of Royalty. | Company X is an overseas company that does not have a permanent establishment in Australia.