What Kind of Payments Constitute Royalites?

Q&A Tax

Question :

Creativity Pty Ltd (CPL) is an Australian based company in the business of creating content for books printing, eBooks and short films.  

In Aug 2016, CPL assigned copyright to print a book to a publishing house in return for 10% fee for each book sold. 

In Sep. 2016, CPL assigned the film rights to the book to Film Oz Pty Ltd (FOPL) for a lump sum, based on a pre-estimate of each occasion on which the film would be shown. 

Do any of these payments constitute royalties and if so, what are the tax consequences?


Answer :

The High Court in Stanton v FC of T(1955) 92 CLR 630 defined the essence of a royalty as payments “made in respect of the particular exercise of the right to take the substance and therefore should be calculated either in respect of the quantity of value taken or the occasions on which the right is exercised.” 

Copyright Assignment -10% fee

The 10% fee received by CPL fits the definition of royalty. It will be assessed as ordinary income under s6-5.

Lump-sum payment for anticipated future use

The lump-sum received by CPL in return for assigning the film rights to the book to FOPL may qualify as royalty because it is based on a pre-estimated of future use. This payment would then be assessable as ordinary income under s6-5.  

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