Australian businesses looking to pay for outsource or offshore services need to be aware of the royalty withholding rules under Australia’s tax laws.
For clients that are offshoring and paying a “seat lease” fee which includes rental of office equipment and software, then a payment for some of these items might arguably fall within the ambit of Royalty.
As noted in the ATO’s website: Royalties also include payments or credits of any kind in return for any of the following:
- the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark, or other similar property or right
- equipment – that is, the use of, or the right to use, industrial, commercial or scientific equipment
The following are some common payments that may be classified as royalties:
- payments for the use of, or the right to use, any copyright (“including software”), patent, design or model, plan, secret formula or process, trademark or other like property or right, including payments:
- to an author for the use of or the right to use their work (ATO TD 2006/10);
- payments for the use of, or the right to use, any industrial, commercial or scientific equipment;
- payments for the supply of scientific, technical, industrial or commercial knowledge or information
As the Australian Tax institute noted: with the current trend for outsourcing offshore and smaller businesses looking for cost-effective products and services, there is a risk that payments to overseas providers for services may be royalty payments within Australian tax law.
Depending on the substance of an Australian business’s contracts for services, agreements could create a royalty withholding obligation. It is therefore important for businesses to distinguish between payments for services and royalty payments.
A payment for services that is ancillary to or part of enabling the relevant technology, information, know-how, copyright, machinery or equipment may constitute a royalty payment.
In the absence of a tax treaty, the payments are royalties under the Australian law and therefore subject to royalty withholding tax of 30%. An Australian resident payer who fails to withhold and remit the correct amount of withholding tax to the ATO may be subject to an administrative penalty equal to the withholding tax amount and a general interest charge on the unpaid amount. Alternatively, they could be subject to a fine of up to 10 penalty units (currently a total of $1,800).