ATO Interpretative Decision

ATO ID 2006/305

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the Australian entity acting as agent for a non-resident licensor required, under section 12-285 of Schedule 1 to the Taxation Administration Act 1953 (TAA), to withhold tax from royalty payments it receives in Australia on behalf of the non-resident licensor?

Decision

Yes. The Australian entity acting as agent for a non-resident licensor is required, under section 12-285 of Schedule 1 to the TAA, to withhold tax from royalty payments it receives in Australia on behalf of the non-resident licensor.

Facts

Under an intellectual property agreement, a non-resident licensor grants a licence to a licensee resident in Australia. Under the agreement the non-resident licensor nominates the Australian resident entity as agent to perform various commercial and managerial responsibilities on the non-resident licensor's behalf in Australia.

Pursuant to the agreement the licensee, in carrying on its business in Australia, makes royalty payments to the Australian resident entity which receives the payments in Australia as agent for the non-resident licensor.

The payments are royalties for purposes of the Income Tax Assessment Act 1936 (ITAA 1936) and the relevant double tax agreement allows tax to be withheld in Australia.

Reasons for Decision

Under subsection 128B(2B) of the ITAA 1936 royalties derived by a non-resident are subject to withholding tax unless an exemption applies. Withholding tax applies where the royalties are paid by a resident, except where they are outgoings wholly incurred by the payer in carrying on a business outside Australia at or through a permanent establishment of the resident outside Australia.

Section 12-280 of Schedule 1 to the TAA provides that 'payers' of royalties are required to withhold tax if:

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the recipient or any of the recipients has an overseas address according to any record that is in the payer's possession, or is kept or maintained on the payer's behalf, about the transaction to which the royalty relates; or

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the payer is authorised to pay the royalty at a place outside Australia (whether to the recipient or any of the recipients or to anyone else).

Subsection 12-285(1) of Schedule 1 to the TAA provides that that an entity that 'receives' a payment of a royalty must withhold an amount from the payment if the entity is a person in Australia or an Australian government agency; and the foreign resident is or becomes entitled:

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to receive the royalty or part of it from the entity, or to receive the amount of the royalty or of part of it from the entity; or

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to have the entity credit to the foreign resident, or otherwise deal with on the resident's behalf or as the foreign resident directs, the royalty or part of it, or the amount of the royalty or part of it.

Section 12-280 of Schedule 1 to the TAA and section 12-285 of Schedule 1 to the TAA are designed to apply to different situations. It is not intended that both the payer and the entity that receives the payment must withhold. Therefore, the question at issue is whether the licensee (the payer of the royalty) or the Australian resident agent (the recipient of the payment) is required to withhold.

The Australian resident agent is an entity in Australia that receives the royalty payments. It follows that section 12-285 of Schedule 1 to the TAA is the relevant provision. Therefore, it is the Australian resident agent that is required to withhold tax from the royalty payments it receives on behalf of the non-resident licensor.

Section 12-280 of Schedule 1 to the TAA is intended to apply where the entity actually receiving the royalty payment is outside Australia or has an address outside Australia. Under the facts here, the entity actually receiving the payment is an entity in Australia - the Australian resident acting as agent in Australia for the non-resident licensor. It follows that the licensee (the payer) is not required to withhold under section 12-280 of Schedule 1 to the TAA.

Year of income:  Year ended 30 June 2006

Legislative References:
Income Tax Assessment Act 1936
   subsection 128B(2B)

Other References:
Fact Sheet - PAYG withholding from interest, dividends and royalties to non-residents

Keywords
Non resident entities
Non resident royalty withholding tax
PAYG system
PAYG withholding
PAYG withholding under dividend, interest & royalty payment category

Siebel/TDMS Reference Number:  5512898; 1-5UH1AGP

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  10 November 2006
Date reviewed:  20 November 2014

ISSN: 1445-2782