House of Representatives

Income Tax Laws Amendment (Royalties) Bill 1976

Income Tax Laws Amendment (Royalties) Act 1976

Second Reading Speech

by the Treasurer, the Hon. Phillip Lynch, M.P.

This Bill will amend the Income Tax Law to remove doubts about the operation of provisions that require foreign residents to pay Australian income tax on Royalties derived from this country.

For the purpose of these provisions Royalties include payments for the supply of industrial know-how and other amounts in the general nature of Royalties.

The need for the amendments arises from a recent decision by the Victorian Supreme Court in a tax appeal brought by a Canadian Company.

The company received substantial payments for the use in Australia of its know-how.

It claimed that these payments were not liable to Australian tax under the provisions enacted in 1968 for the specific purpose of subjecting such payments to tax.

In the particular case, the Court upheld the company's claim.

While the legal position may be further clarified by later decisions in the courts, the Government considers that there are strong reasons for putting to rest immediately the doubts that have been shown to exist.

Royalties paid by Australian businesses are a charge against the profits of the businesses for tax purposes and it is fair that they should bear Australian tax in the hands of the foreign recipient.

If they do not, profits earned in Australia and remitted overseas as Royalties bear no Australian tax at all.

This situation cannot be accepted as it enables overseas company groups to take profits from Australian activities out of the country free of tax.

For these reasons, the Government has decided to seek amendments which will resolve the legal doubts.

The main purpose of this Bill is, therefore, to re-express the law so as to make it clear, in relation to payments to residents of all overseas countries, that the provisions requiring payment of tax on Royalties are to operate in the way intended when the 1968 amendments were enacted.

The Bill technically achieves this purpose by directly defining the term "Royalties" in the Income Tax Assessment Act instead of defining it by reference to a definition in the double taxation agreement with the United Kingdom.

This measure will remove any possible implication that the defined term applies only to payments made to residents of the United Kingdom.

The Income Tax (International Agreements) Act is also being amended to eliminate any doubt that the definition in the Assessment Act has effect for the purpose of double taxation agreements in which the term "Royalties" is not defined.

By a provision in those agreements, the terms that are not defined are to have the same meaning as they have in the Income Tax Laws of the country applying the agreements.

In the 8 years since the provisions now being amended were enacted, no other country that is party to an agreement with Australia has ever questioned that the law operated in that way as regards Royalties.

The Bill will apply to income in respect of which an assessment is made after 4 July 1976.

That is the date on which I announced that the amendments were to be made.

The amendments will not affect the determination of valid objections lodged against assessments made on or before 4 July 1976.

A memorandum containing more detailed explanations of technical aspects of the Bill is being made available to Honourable Members.

I commend the Bill to the House.