Singapore resident receiving Australian sourced excluded royalties

Are royalties that are sourced in Australia, from the granting of copyright derived by a Singapore resident, included in assessable income under section 15-20 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Royalties that are sourced in Australia, from the granting of copyright derived by a Singapore resident, are included in assessable income under section 15-20 of the ITAA 1997.

The taxpayer is a Singapore resident and a non-resident of Australia for income tax purposes.

The taxpayer wrote a book which was published in Australia under a contract.

The taxpayer owned the copyright over the book.

The taxpayer received payments in relation to the Australian publication of the book based upon the number of units sold.

Australian tax was not withheld from the payment by the Australian publisher.

The taxpayer's income tax assessment for the 2005 income year imposed non-resident marginal tax rates on the receipts from the publisher.

The taxpayer is required to pay income tax on the gross amount in Singapore.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. The assessable income of a non resident includes statutory income from all Australian sources (subsection 6-10(5) (a) of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is section 15-20 of the ITAA 1997 which deals with royalties.

Section 15-20 of the ITAA 1997 provides that assessable income includes an amount you receive as, or by way of, royalty within the ordinary meaning of 'royalty' (disregarding the definition of royalty in subsection 995-1(1) of the ITAA 1997) if the amount is not assessable as ordinary income under section 6-5 of the ITAA 1997.

In other words, royalty payments that are not already assessable income under section 6-5 of the ITAA 1997 (as ordinary income), are assessable as statutory income under section 15-20 of the ITAA 1997 and are included in assessable income under section 6-10 of the ITAA 1997.

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 which the taxpayer received as a result of the publication of their book in Australia, falls within the meaning of royalty. It is a payment they have received in consideration of the Australian use of the taxpayer's copyright.

In determining liability to tax on Australian sourced income, 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 (Agreements Act).

The taxpayer is a resident of Singapore, a country with which Australia has entered into a tax treaty. Therefore, the tax treaty between Australia and Singapore (the Singapore Agreement) and the protocols to that agreement contained in Schedules 5 and 5A of the Agreements Act respectively, must be considered in determining whether the excluded royalty paid to the taxpayer is taxable in Australia.

Section 7 of the Agreements Act gives the Singapore Agreement the force of law in Australia. Subsection 4(1) of the Agreements Act provides that the Income Tax Assessment Act 1936 and ITAA 1997 must be read as one with the Agreements Act.

Article 10(1) of the Singapore Agreement provides that 'the Australian tax on royalties derived by a Singapore resident who is beneficially entitled to the royalties shall not exceed 10 percent of the gross amount of the royalties.'

Article 10(3) of the Singapore Agreement provides that

In this Article "royalties" means payments or credit, whether periodical or not and however described or computed, to the extent to which they are received as consideration for- (a) the use of, or the right to use, any- (i) copyright (other than literary, dramatic, musical or artistic copyright), patent design or model, plan, secret formula or process, trademark or other like property or right; or (ii) industrial, commercial or scientific equipment; (b) the supply of scientific, industrial or commercial knowledge or information; or (c) total or partial forbearance in respect of the use or supply of any property or right referred to in this paragraph,

but does not include royalties or other payments in respect of the operation of mines or quarries or of the exploitation of natural resources or payments to the extent to which they are received as consideration for the use of, or the right to use, motion picture films, tapes for use in connection with radio broadcasting or films or video tapes for use in connection with television.

The Explanatory Memorandum to Income Tax (International Agreements) Bill 1969, states that, article 10(1) limits to 10 per cent the Australian tax on the gross royalties paid to a Singapore resident.

Article 10(3) defines the term 'royalties' in a way that gives it a somewhat more restricted meaning than the term has for the general purposes of the Income Tax Assessment Act. Under article 10(3) 'royalties' means, in general, industrial royalties (including various 'know-how' payments) but does not include literary and artistic copyright, film and related royalties, or royalties or other payments in respect of the operation of mines or quarries or of the exploitation of natural resources. The tax in the country of source, on the payments which are not treated as 'royalties' for the purposes of the Singapore Agreement, will therefore not be limited to 10 per cent.

It should be noted that the definition of royalties in the tax treaty is exclusive, whereas the definition in subsection 6(1) of the ITAA 1936 is inclusive. Consequently, any general law royalties which do not fall within the definition in article 10 of the Singapore Agreement may be royalties for Australian domestic tax law purposes (as per paragraph 10 of IT 2660) but will not be royalties for the Singapore Agreement purposes.

Article 16A of the Singapore Agreement provides that

Items of income which are not expressly mentioned in the foregoing Articles of this Agreement shall be taxable according to the laws of (Australia) relating to tax.

Under the Singapore Agreement, the royalty payment received by the taxpayer is excluded from meaning of 'a royalty' given by article 10, and consequently, from the operation of that article.

Subsection 17A (4) of the Agreements Act deals with basic and excluded royalties. Subsection 17A (4) provides that if: (a) a provision ( basic royalty provision ) of an agreement is covered by either of the following subparagraphs: (i) paragraph 1 or 2 of Article 12 of the Chinese Agreement; (ii) a corresponding provision of another agreement and (b) another provision of the agreement expressly excludes particular royalties ( excluded royalties ) from the scope of the basic royalty provision;

section 128B of the Assessment Act (which deals with liability for withholding tax) does not apply to the excluded royalties.

The royalties received by the taxpayer are excluded from the operation of Article 10 of the Singapore agreement by the definition of royalty in Article 10(3) and will accordingly, be excluded from the withholding tax provisions of Section 128B of the ITAA 1936.

However, excluded royalties retain the characteristics of 'a royalty' as defined by subsection 6(1) of the ITAA 1936 and paragraph 10 of IT 2660.

Section 15-20 of the ITAA 1997 assesses the amount of excluded royalties received by the taxpayer that are not otherwise assessable as 'ordinary income'.