Withholding Tax - UK resident receiving Australian sourced royalties

Are Australian sourced royalties derived by a United Kingdom (UK) resident subject to withholding tax under subsection 128B(2B) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. Australian sourced royalties derived by a UK resident are subject to withholding tax under subsection 128B(2B) of the ITAA 1936 limited to the rate of 10 per cent.

The taxpayer is a resident of the UK and a non resident for Australian taxation purposes.

The taxpayer wrote an article in the UK which was published in Australia.

The taxpayer owned the copyright over this article.

The taxpayer received a one off payment in relation to the Australian publication of the article.

Australian tax was withheld from the payment.

The taxpayer is required to pay income tax on the gross amount of this payment in the UK.

Subsection 6(1) of the ITAA 1936 provides that the term 'royalty' includes any amount paid or credited, and whether the payment or credit is periodical or not, to the extent to which it is consideration for the use of, or the right to use any copyright.

Taxation Ruling IT 2660 discusses the ordinary meaning of 'royalty' and how that meaning is extended by the definition in subsection 6(1) of the ITAA 1936. At paragraph 10 of IT 2660 it states that at common law a royalty: '... is a payment made in return for the right to exercise a beneficial privilege or right (eg ... to use a copyright...). ...Amongst other things, copyright can cover music, literary and artistic works...'

The payment to the taxpayer received as a result of the publication of their article in Australia fits within the meaning of royalty. It is a payment they have received in consideration of the Australian use of the taxpayer's copyright.

Dividends, interest and royalties paid to non-residents are generally subject to withholding tax under subsections 128B(1), 128B(2) and 128B(2B) of the ITAA 1936 respectively.

Dividend, interest and royalty withholding taxes represent the final Australian tax liability for those payments and therefore, the payments are not included in the Australian assessable income of a non resident (section 128D of the ITAA 1936).

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

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 so that those Acts are read as one. Subsection 4(2) of the Agreements Act provides that the Agreements Act overrides the ITAA 1936 where there are inconsistent provisions (except for some limited provisions).

Schedule 1 to the Agreements Act contains the double tax agreement between Australia and the UK (the UK Agreement). The UK Agreement operates to avoid the double taxation of income received by Australian and UK residents.

Article 10 of the UK Agreement deals with the taxation of royalties. Paragraph (2) of Article 10 of the UK Agreement provides that the Australian tax on royalties derived and beneficially owned by a UK resident shall not exceed 10 per cent of the gross amount of the royalties.

The Australian sourced royalty payment received by the taxpayer will therefore be subject to withholding tax in Australia but the rate of tax is limited to 10 per cent of the gross amount of the payment.

Note: Paragraph (1) of Article 19 of the UK Agreement provides that, subject to the provisions of the law of the UK, Australian tax payable directly, or by deduction, on income from sources in Australia shall be allowed as a credit against any UK tax payable on the same income.