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Edited version of your written advice

Authorisation Number: 1012774937143

Ruling

Subject: Royalty payments

Questions and Answers

1. Do payments made to Company X, fall under the definition of royalty payments and attract withholding tax?

2. If not a royalty, are there any withholding obligations?

3. If there are withholding obligations, is a 5% rate of withholding tax is applicable?

This ruling applies for the following period

1 July 2013 to 30 June 2017

The scheme commenced on

1 July 2013

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.

As the service fee is not of a kind set out in the regulations.

Company X is an overseas company that does not have a permanent establishment in Australia.

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 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:

Section 6(1) of the Income Tax Assessment Act 1936 provides a definition of royalty:

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:

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:

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.


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