Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1013043437673

Date of advice: 1 July 2016

Ruling

Subject: Taxation obligations under a contractual arrangement

Question 1

Are the funds initially received into the Taxpayer's holding account, income of the Taxpayer?

Answer

No.

Question 2

Do the initial funds received into the Taxpayer's holding account give rise to a GST liability for the Taxpayer?

Answer

No.

Question 3

Is the interest earned on the funds in the holding account, assessable income of the Taxpayer?

Answer

Yes.

Question 4

Do the payments to the licensees trigger PAYG withholding obligations to the Taxpayer?

Answer

No.

This ruling applies for the following period(s)

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commences on

1 July 2013

Relevant facts and circumstances

The Taxpayer enters into Licensor/Licensee agreements with different entities.

Under the agreement the licensee has to pay an initial purchase fee and ongoing royalty fees.

The Licensor also provides other services on behalf of the licensee.

All licensees have an ABN and are registered for GST.

The Taxpayer is registered for GST.

The Taxpayer's business is governed by the Competition and Consumer (Industry Codes - Franchising) Regulation 2014.

Relevant legislative provisions

Tax Administration Act 1953 Schedule 1 Section 12.35

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Question 1

Are the funds initially received into the Taxpayer's holding account, income of the Taxpayer?

Under the Licence Agreement, the Taxpayer is authorised by the licensees to act as their agent to exclusively undertake billing and collection services on behalf of the licensees in relation to their business operations.

The payments are made for the services provided by the licensees and they have derived the income. They will be assessable on these amounts under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). The Taxpayer is only acting as agent for them in collecting the amounts. (see GST discussion below)

The Taxpayer is not assessable on the amounts received into their holding account.

Question 2

Do the initial funds received into the Taxpayer's holding account give rise to a GST liability for the Taxpayer?

Goods and Services Tax Ruling GSTR 2000/37: agency relationships and the application of the law (GSTR 2000/37) describes what is meant by principal/agent relationships. Paragraphs 10 to 15 of the ruling discuss general law and agency relationships. Specifically, it explains that an entity may be authorised by another entity to do something on that party's behalf. The authorised entity is called an agent and the party who authorises the agent to act on their behalf is called the principal.

It is further explained at paragraph 12 that the principal is bound by the acts of an agent as a result of the authority given to the agent.

Paragraph 28 of GSTR 2000/37 explains that in most cases, any relevant documentation about the business relationship, the description used by the parties and the conduct of the parties establish the existence of an agency relationship. It also outlines factors that may show that an entity is an agent under an agency agreement, although no single factor is determinative.

The Taxpayer's Licence Agreement sets out parameters of the relationship between the Taxpayer (licensor) and the Licensee.

On the basis of the terms of the Licence Agreement it can be established that the Taxpayer and the licensee are in an agency relationship. However, on the facts provided, Division 153 of the A New Tax Services (Goods and Services Tax) Act 1999 (GST Act) would not apply as the licensee does not make any supplies or acquisitions through the Taxpayer as their agent.

Under the GST legislation, GST is payable on taxable supplies. You make a taxable supply if you satisfy all the requirements of section 9-5 of the GST Act. First requirement is that you make the supply for consideration.

The money that the Taxpayer receives in their holding account as per the Licence Agreement is received by the Taxpayer as agent and on behalf of the licensee. The Taxpayer does not make any supply for which the Taxpayer receives that money as consideration. That is, there is nothing that the Taxpayer does in order to receive the money. The relevant entity that makes the supply is the licensee, with the money being consideration for the supplies made by the licensee. The Taxpayer holds the money for the licensee in accordance with the agency relationship as established by the Licence Agreement.

Therefore, the Taxpayer has no GST liability in relation to licensee funds received into the holding account.

Question 3

Is the interest earned on the funds in the holding account, assessable income of the Taxpayer?

The Taxpayer has maintained a bank account in their name.

Based on the binding Licence Agreement, interest earned on the bank account will be the Taxpayer's income. The Taxpayer does not hold the bank account on trust for, or on behalf of the licensees. The interest from the operation of the account is retained as part of the Royalty Fee under the Licence Agreement.

The interest from the account will be assessable to the Taxpayer as ordinary income under section 6-5 of the ITAA 1997.

Question 4

Do the payments to the licensees trigger PAYG withholding obligations to the Taxpayer?

Taxation Ruling TR 2005/16 discusses Pay As You Go - withholding from payments to employees. It outlines a number of factors that are taken into account when considering a contractual agreement between two parties to determine if there is an employer-employee relationship. The key indicators of whether an individual is an employee or independent contractor are:

Paragraph 53 outlines where an entity is neither an employee nor independent contractor. It discusses lease and bailment agreements. It concludes that: "Consequently, the lessee or bailee, rather than being a provider of services to the owner of the asset, acquires a right to exploit that asset for their own benefit in return for a 'rental' payment to the owner."

Paragraph 10 states Section 12-35 of Schedule 1 of the Taxation Administration Act 1953 (TAA 1953) applies to payments made to individuals in their capacity as employees. It does not apply to payments made to other entities - provided the arrangement is not a sham or a mere redirection of an employee's salary or wages.

Paragraph 58 in part states a sham is an arrangement that creates the appearance of rights and obligations different from those actual rights and obligations that the parties intended to create.

The existing agreements are between the Taxpayer/Licensor (a trust) and the licensees (companies). There is no agreement between the trust and any individuals. The individuals involved in the companies are not employees of the trust. The individuals providing the services will have a relationship with the company (either an employee or sub-contractor) but not with the trust. The trust has no obligation in respect to Section 12-35 of Schedule 1 of the TAA 1953 as there are no payments made to an individual. The trust is acting as an agent for the licensee and collecting payments on its behalf and charging a fee for these services. This arrangement is what both parties (the trust and the company) intended to create, by agreeing to the terms in the Licensor/Licensee agreement.

It does not appear to be a condition in the Licensor/Licensee agreement that the Licensee has to be an entity other than an individual. There are circumstances in which the relationship between a person who engages another to perform work and the person engaged does not give rise to a payment for services rendered or provision of labour but rather a payment for something entirely different, such as a lease or bailment as discussed above.

In this arrangement, the individual (licensee) enters into a licence arrangement that gives them the right to use the intellectual property and systems of the licensor. The licensor is also acting as agent for the licensee in collecting payments. As a result, the licensee, rather than being a provider of services to the licensor, acquires a right to use these assets for their own benefit in return for an initial licence fee and ongoing royalty fees.

Examination of the facts provided in relation to the key indicators discussed in Taxation Ruling TR 2005/16 as set out above, and the general terms and circumstances of the formation of the contract, leads us to conclude that the licensees are not employees of the licensor, but that each is operating an independent business.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).