Whether non-resident royalty withholding tax is based on the GST inclusive or GST exclusive amount paid in respect of royalties

Where section 12-280 of Schedule 1 to the Taxation Administration Act 1953 (TAA) requires an entity to withhold an amount from a payment that it makes to a non-resident in respect of royalties, is the withholding based on the GST inclusive or GST exclusive amount of the payment?

Where section 12-280 of Schedule 1 to the TAA requires an entity to withhold an amount from a payment that it makes to a non-resident in relation to royalties, the withholding is based on the GST inclusive amount of the payment.

A resident entity, AusCo, makes payments to ForCo, a non-resident.

The payments include amounts which are royalties within the meaning in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) and for the purposes of Australia's various tax treaties.

ForCo is registered for goods and services tax (GST) in Australia pursuant to Division 23 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The payments from AusCo are for goods and services which are taxable supplies within the meaning of section 9-5 of the GST Act.

The contractual agreement between the parties specifies the payment of a base amount calculated by reference to the use made by AusCo of the rights granted to it by ForCo without the addition of GST (the GST exclusive amount). The contract also includes a 'GST clause' that provides (where applicable), an amount for GST will be added which is calculated on the base or GST exclusive amount resulting in final payments that are GST inclusive.

Section 12-280 of Schedule 1 to the TAA imposes a withholding obligation in respect of royalty payments. However no withholding is required from a royalty payment where no withholding tax is payable pursuant to Division 11A of the ITAA 1936 (section 12-300 of Schedule 1 to the TAA).

Subsections 128B(2B) and 128B(2C) in Division 11A of the ITAA 1936 relate to royalty withholding tax. Whilst they cover different circumstances they only apply where the recipient derives income that consists of a royalty. By virtue of subsection 128A(1AA) of the ITAA 1936, income includes a royalty.

Relevantly, a royalty is defined in subsection 6(1) of the ITAA 1936 as: ... any amount paid or credited, however described or computed, and whether the payment or credit is periodical or not, to the extent to which it is paid or credited, as the case may be, as consideration for : ...(emphasis added)

any of the items specified in paragraphs (a) to (f) of that definition.

'Consideration' is not defined in the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997) but when used to identify 'income', as it is in the definition of 'royalty', it refers to the total amount paid or credited in respect of a specified item.

The notion of consideration in the context of stamp duty on insurance premiums was discussed by the Victorian Supreme Court of Appeal in Commissioner of State of Revenue v. Royal and Sun Alliance Insurance Australia Ltd [2003] VSCA 177; 2003 ATC 4998; (2003) 54 ATR 339 (the Sun Alliance case ). In that case, the issue was whether the words 'premiums' and 'gross premiums', for the purposes of determining Victorian state stamp duty, should be treated as including the amount payable in respect of the GST. Ormiston JA stated at paragraphs 27-28: 27. As ordinarily understood, a premium is the consideration, usually in the form of a monetary obligation, paid or payable by the insured for the grant or renewal of insurance cover or of other rights under a policy of insurance ........ ... 28. Moreover the artifice of designating some of the consideration as fire services levy, stamp duty or GST, though acceptable in practice (and indeed in law), could not detract from the fact that cover would not be granted unless the whole of the stipulated sums had been paid, whether called premiums, GST or whatever. The insured was denied any right to claim under the policy unless the total was paid timeously. The total amount to be paid was (and still is) in fact the premium, unless by law it can otherwise be characterised or understood.

In other words, consideration for goods or services comprises everything that must be paid to the deliverer, regardless of its description.

The term 'consideration' is defined in section 195-1 of the GST Act and refers to the application of section 9-15. Relevantly subsection 9-15(1) provides that consideration includes: • any payment, or any act or forbearance, in connection with a supply of anything; and • any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.

Subsection 9-15(2) of the GST Act further provides that consideration includes payments made voluntarily and payments made by persons other than the recipient of the supply.

Section 9-75 of the GST Act provides a formula for calculating the 'value of a taxable supply' for the purposes of imposing the GST which section 9-70 of the GST Act sets at the rate of 10%. Essentially the value of a taxable supply is ten elevenths of 'price', where price is the sum of: (a) so far as the consideration for the supply is consideration expressed as an amount of money - the amount (without any discount for the amount of GST (if any) payable on the supply); and (b) so far as the consideration is not consideration expressed as an amount of money - the GST inclusive market value of that consideration.

It follows that GST is a part of the consideration derived by an entity for making a 'taxable supply'. However, the liability for GST falls on the supplier and not the recipient of the taxable supply. Accordingly, whether or not GST is separately invoiced to the purchaser, it is plain that what the recipient pays the supplier is all 'consideration' for the goods or services supplied.

By the operation of the GST Act, in particular Division 11, and depending on whether the purchaser of the taxable supply acquires the supply in the course of its business, that part of the consideration paid for the supply that is economically speaking GST may be converted into an 'input tax credit' for offset against the purchaser's own GST liability as a supplier of taxable supplies. The effect of the GST Act in this regard however does not compromise the character of the outlay as consideration for a taxable supply.

Note that section 17-5 of the ITAA 1997 provides that an amount that relates to GST payable on a taxable supply is non-assessable and non-exempt income of the entity making the supply. This statutory removal of the GST element of the consideration payable for a taxable supply from assessable income would suggest that all of the consideration, including that part designated to compensate for the supplier's GST liability, constitutes income of the supplier.

The provisions of the GST Act, together with their complement at section 17-5 of the ITAA 1997, and the decision in the Sun Alliance case , all point to the GST component of a payment being income which is part of the consideration for a taxable supply. In these circumstances, there is no reason to infer that the charging provision of subsection 128B(5A) of the ITAA 1936 that imposes income tax on royalties does not apply to the whole of the royalty, including the amount identified as GST payable by the supplier of the item for which the royalty is paid.

Therefore royalty withholding tax is imposed on the GST inclusive amount of any royalty payments and the payer should withhold accordingly. By way of an example, if the supply granted by ForCo to AusCo results in a base amount of $100 payable under the contract; by virtue of the GST clause, an amount of $10 GST would be added to this sum making the total consideration $110. Royalty withholding tax and the associated withholding obligation would be imposed in respect of this GST inclusive amount ($110) of the payment at the relevant rate.

Date of amendment Part Comment 6 September 2013 Reasons for decsion Legislative References Updated for the changes in the appropriations legislation which involved the repealing of 9-15(3) of the GST Act and replacing it with section 9-17 of the GST Act. This change was included in the "Tax and Superannuation laws Amendment (2012 Measures No:1) Bill: 2012

Date of amendment | Part | Comment

6 September 2013 | Reasons for decsion Legislative References | Updated for the changes in the appropriations legislation which involved the repealing of 9-15(3) of the GST Act and replacing it with section 9-17 of the GST Act. This change was included in the "Tax and Superannuation laws Amendment (2012 Measures No:1) Bill: 2012