ATO Interpretative Decision
ATO ID 2008/140
Income Tax
Royalty withholding tax: lease payments to United States tax treaty resident for hiring substantial equipment - royalty withholding taxFOI status: may be released
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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 lease payments made by an Australian resident company to a United States (US) resident company for the hire of substantial equipment subject to royalty withholding tax under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No, these lease payments are not subject to royalty withholding tax under the ITAA 1936.
Facts
The taxpayer is a US resident for the purposes of the tax treaty between Australia and the United States (the US Convention).
The taxpayer leases substantial equipment to a company that is resident of Australia for the purposes of the US Convention. The paramount purpose of the lease is for the hire, not the purchase, of the equipment.
The substantial equipment is equipment of an industrial nature.
The taxpayer receives lease payments from the Australian company in accordance with the lease agreement.
Reasons for Decision
Under subsection 6(1) of the ITAA 1936, the definition of 'royalty' or 'royalties' includes payments for 'the use of, or right to use, any industrial, commercial or scientific equipment'. The definition of royalty in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) takes its meaning from the definition in the ITAA 1936. The payments made by the Australian company to the taxpayer pursuant to the lease agreement are royalties for the purposes of the ITAA 1936 and ITAA 1997 as they are payments made by the Australian company for the right to use industrial equipment.
With effect from 1 July 2003 for withholding taxes, the definition of 'royalties' in the Royalties Article of the US Convention (Article 12(4)) does not include 'payments for the use of or the right to use industrial, commercial or scientific equipment' Accordingly, the equipment lease payments are not 'royalties' for the purposes of Article 12(4) of the US Convention.
Subparagraph 17A(5)(b) of the International Tax Agreements Act 1953 (the Agreements Act) provides that section 128B of the ITAA 1936 (which deals with liability to withholding tax) does not apply to payments that are royalties for the purposes of the Assessment Act (that is the ITAA 1936 and the ITAA 1997) where a tax treaty does not treat the payments as royalties.
Therefore, as the equipment lease payments made by the Australian company to the taxpayer are not royalties for the purposes of Article 12(4) of the US Convention, the Convention does not treat those payments as royalties for the purposes of paragraph 17A(5)(b) of the Agreements Act. Accordingly, subsection 17A(5) of the Agreements Act applies and payments for the lease of industrial equipment made after 30 June 2003 are not subject to royalty withholding tax.
Date of decision: 18 January 2008Year of income: Year ended 31 March 2008
Legislative References:
Income Tax Assessment Act 1936
section 6(1)
section 128B
section 995-1 International Tax Agreements Act 1953
subparagraph 17A(5)(b)
Schedule 2
Keywords
Double tax agreements
Equipment royalties
International tax
Non resident royalty withholding tax
Royalties
Royalty article
Treaties
ISSN: 1445-2782