With the introduction of the Duties Act 2008 (Duties Act) to replace the Stamp Act 1921 (Stamp Act) in Western Australia, there has arguably been a change in the duty treatment of a transfer of a right to receive income under a royalty agreement.

Under the Stamp Act, if a royalty agreement (whether created by deed or agreement) was taken to be located in Western Australia, stamp duty was payable on the assignment of the royalty agreement in Western Australia (the legal nature of the property being a chose in action, the transfer of which was dutiable under the Stamp Act). Common law rules were applied to determine the location of the rights under a royalty agreement.

Under the Duties Act, it is arguable that an assignment of a right to receive income under a royalty agreement is not dutiable. Under the Duties Act, not all choses in action are dutiable in Western Australia and further, the legislation rather than common law is now likely to determine the location of the of the right under the royalty agreement.

Nature Of Right Under Royalty Agreement

Rights to receive royalties arise for various reasons, sometimes as a result of pure financing arrangements and sometimes as consideration for a right to mine a tenement owned by a third party.

In order to determine how the Duties Act will apply to an assignment of a royalty agreement, it is necessary to consider the terms of the relevant royalty agreement in detail and identify the nature of the right conferred by the royalty agreement.

The right considered by this article is limited to a transfer of a right to income under a royalty agreement without a contemporaneous transfer of an interest in a mining tenement. That is, a pure right to income with no other potentially dutiable property attaching to that right.

For example, say company A grants to company B a right to explore and mine for uranium on mining tenements owned by company A with the consideration for the grant of the right being $100,000 and a grant of a royalty by company B to Company A payable upon the extraction of the uranium.1 Sometime later, company A sells the right to receive the royalty to company C, while retaining the interest in the mining tenement. It is the transaction between company A and company C which is the focus of this article.

Duties Act

When considering whether an assignment of the royalty agreement from company A to company C is dutiable under the Duties Act, it is necessary to determine whether an assignment of the right to receive the royalty income is dutiable. This requires working through various sections of the legislation.

The starting position under the Duties Act, is that a transfer of or an agreement for the transfer of "dutiable property" is dutiable in Western Australia.2

It is then necessary to determine whether a right to income under a royalty agreement is "dutiable property". "Dutiable property" is defined as any of the following:

  • land in Western Australia;
  • a right;
  • a chattel in Western Australia;
  • a Western Australian business asset.3

Each category of "dutiable property" must then be considered to determine whether it encompasses the rights under a royalty agreement.

Land

An interest under a royalty agreement does not create an interest in land.4 Accordingly, a transfer of an interest in a royalty agreement is not a transfer of an interest in land.

Right

A "right" is expressly defined in the Duties Act and includes a "right to income from dutiable property".5 Further, a "right" exists in relation to dutiable property only if the transfer of the property would be a dutiable transaction.6

The relevant rights being transferred under the assignment of the royalty agreement from company A to Company C are rights to income, so the first element of the definition of "right" is satisfied. However, the next issue to consider is whether the right to income is from "dutiable property".

In considering whether the right to income is "from dutiable property", royalty agreements can arguably be construed at three levels, namely:

  • as a right to the income arising from a chose in action (that is, the right to income arises from the royalty agreement itself);
  • as a right to the income from minerals (chattels) located in Western Australia; or
  • as a right to the income from land.

In order for any of these types of property to be "dutiable property" under the Duties Act, the property must be located in Western Australia. Therefore, if none of the chose in action, chattels or land (being the mining tenement) are located in Western Australia, there is no need to undertake any further consideration of whether the property is a "right".

We now consider each level below.

  • A Right To The Income Arising From A Chose In Action
    • In our view, "dutiable property" cannot be the chose in action otherwise the definition of "right" would be circular and nonsensical. Accordingly, it is reasonable to conclude that the chose in action itself is not the dutiable property referred to in the definition of "right".
  • A Right To The Income From Chattels
    • A royalty is often payable following production of unprocessed ore.7 In our view, the right to income is not "from" the product itself. That is, the income does not come "from" the chattels, rather an amount is payable by reference to the chattels. If this is the case, a right under a royalty agreement will not be within this class of right.
    • In any event, in Western Australia a transfer of a chattel alone is usually not dutiable.8 Therefore, given that a "right" exists in relation to dutiable property only if the transfer of the property would be a dutiable transaction,9 it seems that the transfer of a right to income from a chattel would not be dutiable.
  • A Right To The Income From Land
    • Mining tenements located in Western Australia are "land" for the purpose of the Duties Act.10 However, in our view, the income payable under a royalty agreement is not from the mining tenement. The income from the mining tenements would be payments made pursuant to the mining leases (in the nature of rent), however, this is not the relevant income stream. Accordingly, in our view, the income is not from an interest in land. This view is supported by the position that a royalty agreement does not give rise to an interest in land.11
    • Accordingly, we form the view that a royalty agreement containing a right to income would not be within the definition of "right" for the purpose of the Duties Act.

      The reasoning above in relation to a "right" has been tested and accepted in the Queensland jurisdiction. That is, the Queensland Office of State Revenue has accepted that an assignment of a chose in action is not an assignment of a right. This is relevant as the Queensland jurisdiction has provisions very similar to Western Australia. However, the authors have not yet had the opportunity to test these arguments in Western Australia under the Duties Act.

Chattels And Western Australian Business Assets

For completeness, we consider the last two types of dutiable property.

  • A right to income under a royalty agreement is not a "chattel" and accordingly, a right to income under a royalty agreement is not dutiable property of this type.
  • We are of the view that a right to income under a royalty agreement is not within any of the categories of "business asset" under the "Western Australian business asset" head of duty. Accordingly, a right to income under a royalty agreement is not dutiable property of this type.

It is our view at this time that an assignment of a royalty of the nature discussed above from company A to company C will not be dutiable in Western Australia. However, the authors have not yet had the opportunity to make submissions to the OSR on point and accordingly, have not been made aware of the position the OSR will take to an assignment of royalties under the Duties Act.

The focus of this article has been duty in Western Australia. However as the duties regimes across the Australian States are complex and not uniform, the application of the duties legislation across other States may need to be considered when determining the duty implications of an assignment of a royalty.

Footnotes

1. Although not the subject of this article, the authors are of the view that under the Duties Act 2008 the original grant of the right to mine would be dutiable with the issue being the valuation of the royalty or grant for duty purposes. The grant of the royalty itself would not be dutiable.

2. Duties Act 2008 section 11(1)(a) and (b)

3. Duties Act 2008 section 15

4. See Rural and Industries Bank of WA v Hamilton and King (unreported, Leonora Warden's Court 19 December 1989) and Ryan, G, 'Petroleum Royalties' [1985] AMPLA Yearbook 328

5. Duties Act 2008 section 16(1)(f)

6. Duties Act 2008 section 16(2)

7. This position may vary depending upon the precise terms of the royalty agreement which must be considered in detail

8. Duties Act 2008 section 14

7. This position may vary depending upon the precise terms of the royalty agreement which must be considered in detail

8. Duties Act 2008 section 14

9. Duties Act 2008 section 16(2)

10. Duties Act 2008 section 3

11. See Rural and Industries Bank of WA v Hamilton and King (unreported, Leonora Warden's Court 19 December 1989) and Ryan, G, 'Petroleum Royalties' [1985] AMPLA Yearbook 328

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.