Edited version of your written advice

Authorisation Number: 1012738274603

Ruling

Subject: Exemption from royalty withholding tax

Question and Answer:

Are royalty payments made to an overseas cultural organisation, not prescribed under the income tax regulations, subject to Australian foreign resident withholding tax?

Yes

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

B Company (B) is a publishing company located in Australia.

B deducts 5% foreign resident withholding tax from payments made to an overseas organisation in Country X named C.

C is a cultural organisation.

C is exempt from income tax in Country X.

C is not listed as a prescribed institution located outside Australia under the Income Tax Assessment Regulations 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1936 Subsection 128B(3)

Income Tax Assessment Act 1936 Paragraph 128B(3)(a)

Income Tax Assessment Act 1997 Section 50-5

Income Tax Assessment Act 1997 Section 50-45

Income Tax Assessment Act 1997 Section 50-70

Income Tax Assessment Regulations 1997

International Tax Agreements Act 1953.

Reasons for decision

Section 128B of the Income Tax Assessment Act 1936 (ITAA 1936) imposes withholding tax on payment of dividends, interest and royalties made by Australian residents to foreign residents.

However, section 128B(3) of the ITAA 1936 lists certain types of income to which withholding tax under section 128B of the ITAA 1936 does not apply. In particular, paragraph 128B(3)(a) of the ITAA 1936 exempts from withholding tax dividends, interest and royalties paid to foreign residents that are:

The applicable provision in this case is item 9.2 of section 50-45 of the ITAA 1997 which exempts the income of a society, association or club established for musical purposes. C is a musical organisation engaged in theatre production, and thus falls for consideration under section 50-45 of the ITAA 1997.

However, the exemption under section 50-45 of the ITAA 1997 is subject to the organisation satisfying the special conditions listed in section 50-70 of the ITAA 1997. The special conditions are that the entity is not carried on for the purpose of profit or gain of its individual members and that it:

(a) has a physical presence in Australia, and to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

(b) is a deductible gift recipient falling under item 1 of the table in section 30-15 of the ITAA 1997; or

(c) is a prescribed society, association or club which is located outside Australia and is exempt from income tax in the country in which it is resident.

Prescribed by law test

A cultural organisation located outside of Australia, such as C will only satisfy the condition in section 50-70 of the ITAA 1997 if it is a prescribed society, association or club.

Organisations can be prescribed by name in the Income Tax Assessment Regulations 1997 (the income tax regulations). The government decides which organisations will be prescribed by name in the income tax regulations. An organisation can send an application for prescription to us and we will forward them to the government for consideration. More information on how to apply for the prescribed organisation status is available on our website www.ato.gov.au (search code QC 27150).

If an overseas organisation is not listed by name in the income tax regulations for exemption purposes, it will not be considered to be a prescribed organisation for the purposes of section 50-70 of the ITAA 1997. B is not listed in the income tax regulations and therefore does not satisfy the 'prescribed by law test'.

If an overseas organisation does not satisfy section 50-70 of the ITAA 1997, any dividends, interest or royalties paid to it cannot be exempt under section 50-45 of the ITAA 1997. Therefore, such payment made by an Australian resident to a foreign resident entity would not be exempt from withholding tax under section 128B(3) of the ITAA 1936.  

In determining the liability to tax on Australian sourced income received by a foreign resident, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

The Country X Agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. It operates to avoid the double taxation of income received by residents of Australia and Country X.

An Article in the Country X Agreement provides that royalties paid to a resident of Country A may be taxed in Country A. The Article also states that such income may also be taxed in Australia, according to the law of Australia, but the tax so charged shall not exceed 5% of the gross amount of the royalties.

Accordingly, royalty payments made by an Australian resident to a resident of Country X will be subject to 5% withholding tax, if the payment is not exempt under section 128(3) of the ITAA 1936. Royalty payments made by B to C are subject to 5% withholding tax.