Notes for the Minister's Second Reading Speech
The main purpose of this Bill is to correct some short-comings in the income tax law relating to the taxation of royalties derived from Australia by persons resident in other countries.
In brief, it is proposed by the Bill to insert a definition of 'royalty' in the income tax law and to specify the circumstances in which a royalty derived by a non-resident is to be treated as having a source in Australia.
Honourable Members will recall that the general principle of the income tax law is that a non-resident is subject to Australian tax in respect of income that has its source in Australia. The law contains provisions under which an amount derived as or by way of royalty by a non-resident is, subject to any exempting provisions, liable to Australian tax if the payment has an Australian source.
There is, however, no clear definition of royalty in the income tax law. This means that many items of income that are in the general nature of royalties - for example, payments for industrial 'know-how' or for the right to show films - have, in effect, to be treated as income other than royalties. The provisions I have mentioned do not then apply and difficulties can also arise in respect of some of our double taxation agreements.
Under these agreements Australia retains the right to tax royalties but the term is not, except in the new agreement with the United Kingdom, defined for the purposes of the agreement. The result is that the term must take whatever meaning it has for the purposes of the Australian income tax law. But, as I have said, there is no clear definition in the Australian income tax law, and the lack of such a definition tends to place narrow constraints on the operation of the agreements as regards this type of income.
Probably a more important reason for our inability to tax much of this income flowing overseas is that, although it has a very definite connection with Australia in that it is paid out of profits earned here and for rights used here, it does not have a source in Australia as the term 'source' is interpreted under our existing income tax law. An Australian source for the income can be avoided by executing the relevant contracts abroad and by providing for payment to be made abroad. There is an increasing tendency for arrangements of this kind to be made.
The Government has concluded that steps are necessary to secure an appropriate contribution to the Australian revenue on income of this kind that now escapes Australian tax.
Accordingly, it is proposed by this Bill, as a first step, to enact a definition of 'royalty' for the general purposes of the taxation law. The term will include payments - received in the form of income - for the right to use items of industrial property, such as patents and copyrights, and for the supply of know-how. It will also include payments received in an income form for the use or letting of machinery or other equipment and for the right to show films.
The definition is identical with a definition included in our new double taxation agreement with the United Kingdom, and is in line with modern international usage. For example, a substantially similar definition has been included in the model double taxation agreement devised by the Organisation for Economic Co-operation and Development.
The other major step proposed is the provision of a statutory source in Australia for royalties. In legislation passed by the Parliament last year a withholding tax was imposed on interest paid to non-residents. The legislation specified the circumstances in which, in effect, interest was to be treated as arising in Australia. It is now proposed to follow the same broad rules for ascribing an Australian source to royalties derived by non-residents.
A royalty payable by an Australian resident will be treated as having a source in Australia except to the extent that it is attributable to a business carried on by the payer outside Australi.t Likewise an Australian source will be attributed to a royalty payable by one non-resident to another to the extent that it is an expense of a business carried on in Australia by the payer. I mention that these proposed source rules are ones that receive wide international recognition.
Amounts to which the proposed new provisions apply will be subject to tax in Australia by assessment processes. This means that deductions will be allowed to the non-resident, in accordance with ordinary principles, for expenses incurred in deriving the royalties, and the net amount of the royalties will be taxed at appropriate general rates of tax. As the Treasurer indicated when introducing the legislation on the United Kingdom agreement, the Australian tax on royalties flowing to the United Kingdom will be limited to 10 per cent of the gross royalties.
Although the royalties are to be taxed by assessment, and not by way of a withholding tax, there are provisions in the law by which the payer of royalties is obliged to deduct from royalties amounts sufficient to cover the tax that will ultimately be assessed. These provisions, which the Bill proposes to strengthen in minor respects, will continue to apply.
The new provisions are to apply to royalties paid on or after 1st July next.
Royalties that are exempt from Australian tax under specific provisions of double taxation agreements will continue to be exempt. In this category are copyright royalties derived by residents of the United States, Canada and New Zealand.
Other provisions of the Bill are of a purely technical nature associated with the new double taxation agreement with the United Kingdom. I will not refer to them now as they are explained in the explanatory memorandum on the Bill, which also gives more detailed information about the proposed royalty amendments.
I commend the Bill to the House.