The Federal Court is cracking down on Australian companies
paying license fees to offshore entities.
In a recent court hearing (Task Technology Pty Ltd v FCT 
FCAFC 113), the Federal Court confirmed that royalty
withholding taxes were applicable for license fee payments made by
an Australian distributor to its Canadian supplier.
The term royalty is generally defined to include any amount paid
however described or computed, as consideration for the use of, or
the right to use (amongst other things) any copyright, patent,
design or model, plan, secret formula or process, trademark or
other like property or right.
The Federal Court asserts that whether license fee payments by
an Australian company to an overseas software owner represents a
royalty or not (and therefore subject to withholding tax), will
The nature of the payment by the Australian company and what
rights (e.g. rights to make copies of the application) the
Australian company has in relation to the software. In this regard,
it is important to analyse the terms of the agreement between the
Australian company and the software supplier.
The wording of the Double Tax Agreement (DTA)
How the use of the software is provided to the end user.
Specifics of the case
The Federal Court found that royalty withholding tax was
applicable for payments made by an Australian distributor to a
Canadian software supplier in accordance with its signed
'Distribution Agreement'. This is premised on the Canadian
supplier not having a permanent establishment in Australia and as a
result was not subject to income tax in Australia.
The signed Distribution Agreement (as noted in cl 2.2) granted
the distributor the exclusive right (in Australia, New Zealand and
New Guinea) to undertake the following:
2.2.1 market End User Licenses and Application
2.2.2 make Copies of Licensed Software and CaseWare
2.2.3 supply Copies of Licensed Software to End
Users pursuant to End User Licenses and Application Template
2.2.4 supply Copies of CaseWare
2.2.5 supply Professional Services specified in
Section 2.5.1 to End Users pursuant to Professional Services
2.2.6 develop Application Templates for use by End
2.2.7 supply Application Templates developed by
Distributor to End Users pursuant to Application Template
The Commissioner claimed that payments for the 'rights'
listed above were classified as 'royalties' according to
the definition of the DTA between Canada and Australia; as such,
the payments were subject to royalty withholding tax.
Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
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