The AAT has held that regular international payments received by a taxpayer in relation to the sale of a website domain name were ordinary income and not capital.

The Applicant, who is a resident of Australia, created a domain name and website in 2006 (“the domain name”). The website generated revenue through Google Advertising. In the preparation of the website, independent contractors created certain portions of the content. Such contractors were based overseas.

On 22 April 2009, having signed an agreement for the sale of the domain name to the organisation (“the sale agreement”), and completed the transaction, the Applicant returned to Australia. Payment for the sale was structured by an initial payment, followed by earn-out payments contingent upon the purchaser “monitoring” the asset. A final payment to be made contingent on a set revenue target being exceeded.

The Commissioner learned that payments were made from a foreign source to the Applicant and, relying upon Australian Transaction Reports and Analysis Centre (“AUSTRAC”), the Commissioner compiled a list of payments made to the Applicant paid from the United States by HGM (the Purchaser)  or by another organisation, namely Federated Media Publishing Inc. In the absence of returns by the taxpayer, the Commissioner issued default assessments to the taxpayer for the total of the amounts AUSTRAC advised, for each of the 2010 and 2012 Years and imposed a 75% ‘deliberate disregard of the taxation law’ administrative penalty. The Taxpayer objected and the Commissioner adjusted the amounts (a bit).

There was a paucity of evidence, with no sale contract and no information about the purchase price before the Tribunal. There were, however, some emails, which talked about the sale agreement having a ‘revenue share’ clause, depending on various gross advertising revenue amounts.

This case aroused my interest, in that ‘earn-out’ receipts are generally accepted to be capital in nature (even if there is a debate about, whether they were consideration for the sale of the relevant asset, or the disposal of a right, received at the time of sale, to these performance based payments). I would have been concerned if ‘earn-out payment were assessed as income. But, something an agreement called ‘revenue share’ amounts does give a definite ‘income basis’. Also, in the 2010 Year there were 18 payments of an average amount of about $3,000. In the 2012 Year, there were three payments of $62k, $38k & $21k.

The Tribunal found that there was both a sale agreement and a ‘Revenue Share Agreement’. It took that the assessed payments were received under the Revenue Share Agreement, and were income in nature. It also concluded that the 75% penalty was appropriately assessed.

(VPRX and FCT [2017] AATA 2156, AAT, File Nos: 2017/0354; 2017/0355, Cowdroy DP, 31 October 2017.)

[FJM; LTN 224, 22/11/17; Tax Month Nov 2017]

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