ATO Interpretative Decision
ATO ID 2006/307
Income tax
Whether payments for use of broadcasting and apparatus licences fall within the domestic law definition of a royaltyFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Are payments for the exclusive right to use a broadcasting licence and an apparatus licence 'royalties' under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No. Payments for the exclusive right to use a broadcasting licence and an apparatus licence are not royalties under subsection 6(1) of the ITAA 1936.
Facts
An owner of a Broadcasting Licence and an Apparatus Licence (the Licensor Entity) entered into an agreement with another entity (the Licensee) for the exclusive right to use the two licences for a certain period of time.
The Licensee is required to pay an annual fee to the Licensor Entity for the use of both of the licences. The fee is calculated as a percentage of the gross earnings of the Licensee for the 12 month period.
The Broadcasting Licence is issued under sections 36 and 38 of the Broadcasting Services Act 1992.
The Apparatus Licence is issued under section 102 of Part 3.3 of the Radiocommunications Act 1992.
Reasons for Decision
The definition of 'royalty' or 'royalties' in subsection 6(1) of the ITAA 1936 is an inclusive definition. This means that the definition of the term includes not only the types of payments listed in the definition, but also payments that are royalties within the ordinary meaning of the term.
The ordinary meaning of a royalty has been considered by the Courts on many occasions. In Stanton v. Federal Commissioner of Taxation (1955) 92 CLR 630; 11 ATD 1 the Full Court of the High Court of Australia described the essence of a royalty. The court said at pages 641 and 642 that:
... the modern applications of the term seem to fall under two heads, namely the payments which the grantees of monopolies such as patents and copyrights receive under licences and payments which the owner of the soil obtains in respect of the taking of some special thing forming part of it or attached to it which he suffers to be taken.
In the case of monopolies and the like the essential idea seems to be payment for each thing produced or sold or each performance or exhibition in pursuance of the licence. In the same way in the case of things taken from the land the essential notion seems to be that the payment is made in respect of the taking of something which otherwise might be considered to belong to the owner of the land in virtue of his ownership. In other words it is inherent in the conception expressed by the word that the payments should be made in respect of the particular exercise of the right to take the substance and therefore should be calculated either in respect of the quantity or value taken on the occasions upon which the right is exercised.
A royalty, under the common law meaning of the term, therefore covers payments for the use of intellectual property or natural resources taken from the land, provided the quantum of the payment corresponds with the quantum of the use of the relevant property or resource.
With respect to that part of the payment that relates to the use of the Broadcasting Licence, the Licensee is paying for the exclusive right to use the Broadcasting Licence, which provides the underlying right to use a specific band of radiofrequency spectrum. Radiofrequency spectrum forms part of the range of electromagnetic spectrum within which radio waves are transmitted. It is a natural phenomenon that is not created, like an item of intellectual property is created.
The bands of radiofrequency spectrum used by the Licensee cannot be removed from the electromagnetic spectrum in the way that natural resources can be removed from the land. Rather, the Licensee simply utilises the bands of radiofrequency spectrum to transmit their information.
The amount of the payment for the use of the Broadcasting Licence is also not calculated in respect of any quantity or value taken from the exercise of the right. The payment is calculated as a percentage of the Licensee's gross earnings from its overall radio broadcasting business.
Consequently, the payment for the exclusive use of the Broadcasting Licence is not a royalty within the common law ordinary meaning of the term.
The payment for the exclusive use of the Broadcasting Licence is also not a royalty under paragraph 6(1)(db) of the ITAA 1936. This part of the royalty definition relates to payments for the use of 'sounds' transmitted by various forms of technology in connection with radio broadcasting. The payment must therefore be for the use of sound content, such as a song or radio program, used in radio broadcasting in order to be a royalty under this aspect of the definition. The Licensee is not paying for the use of any sound content.
The payment is also not a royalty under paragraph 6(1)(dc) of the ITAA 1936. Although, this part of the royalty definition relates to the use of the radiofrequency spectrum along which sounds can be transmitted, it only relates to spectrum specified in a 'spectrum licence' under the Radiocommunications Act 1992.
A spectrum licence is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as having the meaning given by section 5 of the Radiocommunications Act 1992. A spectrum licence is defined under section 5 of the Radiocommunications Act 1992 to mean a spectrum licence issued under Part 3.2 of the Radiocommunications Act 1992.
As the Broadcasting Licence is issued under the Broadcasting Services Act 1992, not under Part 3.2 of the Radiocommunications Act 1992, it is not a spectrum licence for the purposes of paragraph 6(1)(dc). Accordingly, the payment for the use of the Broadcasting Licence is not a royalty under paragraph 6(1)(dc) of the ITAA 1936.
With respect to that part of the payment that relates to the Apparatus Licence, the Licensee is paying for the exclusive right to use the Apparatus Licence, and the underlying right conferred by that licence for the authorisation to operate one or more specified radiocommunications devices.
The payment for the exclusive use of the Apparatus Licence is not a royalty within the ordinary meaning of the term. In exercising their right under the licence, the Licensee is neither using intellectual property created by the Licensor Entity, nor taking a natural resource belonging to the Licensor Entity, as per the two heads of the common law meaning of a royalty.
The payment for the exclusive use of the Apparatus Licence is also not a royalty under paragraph 6(1)(b) of the ITAA 1936. This aspect of the definition relates to payments for the use of or right to use any industrial, commercial or scientific equipment. While, a radiocommunication device of a type covered by an Apparatus Licence is 'commercial equipment' for the purposes of this provision, the payment for the use of the Apparatus Licence is not a payment for the 'use of or right to use' a radiocommunication device, such as a payment for the 'rental' or 'hire' of a radiocommunication device.
The payment for use of the Apparatus Licence gives the Licensee the right to be Government 'authorised' to operate certain radiocommunication devices, if and when it later obtains access to any such devices. The Apparatus Licence does not involve the Licensor Entity providing any radiocommunication devices to the Licensee, nor is the Licensee using or gaining access to use any such devices under the licence.
Date of decision: 31 August 2006Year of income: Year ended 30 June 2007
Legislative References:
Income Tax Assessment Act 1936
subsection 6(1)
subsection 995-1(1) Radiocommunications Act 1992
Broadcasting Services Act 1992
Case References:
Stanton v. Federal Commissioner of Taxation
(1955) 92 CLR 630
11 ATD 1
ATO ID 2006/308
ATO ID 2006/309
Other References:
Taxation Ruling IT 2660
Keywords
Non resident royalty withholding tax
Radio broadcasting
Royalties
Royalty income
Spectrum licences
United Kingdom
ISSN: 1445-2782
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