Assessability of royalty income received from the UK

Is royalty income received by an Australian resident from a UK publishing company assessable income under section 15-20 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Royalty income received by an Australian resident from a UK publishing company is assessable income under section 15-20 of the ITAA 1997.

The taxpayer is a resident of Australia for income tax purposes.

The taxpayer has written several reference books that have been published by a UK resident publishing company.

The taxpayer receives royalty payments from the UK resident publishing company.

Section 15-20 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes an amount the taxpayer receives as or by way of royalty derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Royalty payments are assessable income for the purposes of section 15-20 of the ITAA 1997.

In determining liability to Australian tax on foreign sourced income 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 1997 so that those Acts are read as one.

Schedule 1 to the Agreements Act contains the double tax agreement between Australia and the United Kingdom of Great Britain and Northern Ireland (the UK Agreement). Schedule 1A to the Agreements Act contains the Protocol amending the UK agreement (the UK Protocol). The UK Agreement and the UK Protocol operate to avoid double taxation of income received by Australian and UK residents.

Article 10 of the UK Agreement deals with the taxation of royalties. Article 10(1) of the UK Agreement provides that the UK tax on royalties derived and beneficially owned by an Australian resident shall not exceed 10 per cent of the gross amount of the royalties.

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

Article 19(2)(a) of the UK Agreement specifies that UK tax paid, by an Australian resident in respect of income or gains sourced in the UK, shall be allowed as a credit against Australian tax payable in respect of that income.

Subsection 160AF(1) of the Income Tax Assessment Act 1936 provides that where the assessable income of a resident contains foreign sourced income and foreign tax has been paid on that income a foreign tax credit will be allowed. The foreign tax credit allowed against Australian income tax is the lesser of: • the amount of that foreign tax paid, reduced in accordance with any relief available to the taxpayer under the law relating to that tax, or • the amount of Australian tax payable in respect of the foreign income.

As the taxpayer is a resident of Australia, the UK royalty income forms part of their assessable income under section 15-20 of the ITAA 1997. Where UK tax has been paid in relation to the royalty income a foreign tax credit will be allowed.