The Full Federal Court has unanimously dismissed the Commissioner’s appeal from the decision of Bennett J in Seven Network Limited v FCT [2014] FCA 1411, effectively holding that payments made by Seven Network Limited [Seven] to the IOC for broadcasting rights to the Olympic Games were not royalties under Article 12(3) of the Australia-Switzerland DTA, and that it was therefore not required, under s128B of the ITAA 1936, to withhold amounts from the payments.
Seven made a series of payments between March 2006 and August 2008 to the International Olympic Committee (IOC) for the broadcasting rights to the Olympic Games. Those payments totalled just over $122m. The payments were consideration for the Signal Utilisation Deed, including the “use” of a signal, the ITVR Signal, which was used by Seven in its live television broadcasts in Australia of the 2002, 2004, 2006 and 2008 Olympic Games. The IOC is a resident of Switzerland and is subject to an unlimited tax liability in Switzerland. The Commissioner argued that Seven, an Australian resident corporation, was obliged to withhold part of the payments on account of the IOC’s liability for withholding tax. Seven disputed the Commissioner’s contention with respect to $97.7m of the total $122m payment.
The Federal Court found for the taxpayer and the Full Federal Court said it did not discern any “relevant error in the judgment of the primary judge”.
The Full Court said the payment in question “was not for any forbearance in respect of the use of any relevant property or right belonging to the IOC or any other relevant entity”. The Court said it accepted Seven’s argument that it paid for access to the ITVR Signal, as an ingredient in its broadcasting in Australia of the relevant Olympic Games and in order that no other licensed broadcasting service would have that access to make such broadcasts. The fact that the host broadcaster had a recording of the IVTR Signal was, in the Court’s view, “immaterial since the host broadcaster did not have the right to broadcast in Australia and nor did the IOC”. The Full Court dismissed the Commissioner’s appeal.
(FCT v Seven Network Limited [2016] FCAFC 70, Full Federal Court, Kenny, Perram and Davies JJ, 23 May 2016.)
[LTN 99, 25/5/16]
Catchwords in Full Federal Court decision
TAXATION – whether penalty notices issued to taxpayer liable to be set aside – whether payment [of] a royalty within the meaning of Art 12(3) of Agreement between Australia and Switzerland for the Avoidance of Double Taxation with respect to Taxes on Income [1981] ATS 5 – payment for digital signal for use in connection with exclusive broadcasting in Australia of Olympic Games – not consideration for use of, or right to use, copyright – future copyright – not for “other like property or right” – not for use of right within class of IP rights – whether payment for functionally equivalent rights irrelevant – no forbearance in respect of use of any relevant IP property or right – only respondent could acquire copyright in relevant broadcasts in Australia – payment not a royalty for purposes of Art 12(3) – appeal dismissed
INTELLECTUAL PROPERTY – whether copyright in a cinematograph film within meaning of Copyright Act 1968(Cth) – live digital signal transmitting data that, at any moment, comprises only a tiny fraction of relevant images and sounds –– whether embodiment in copper cable, electrons and ITVR Signal – no embodiment of an aggregate of visual images in an article or thing – no copyright in cinematograph film
Definition of ‘royalties’ in relevant Double Tax Agreement
Article 12 – Royalties
3. The term “royalties” in this Article means payments (including credits), whether periodical or not and however described or computed, to the extent to which they are consideration for the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trade-mark, or other like property or right, or industrial, commercial or scientific equipment, or for the supply of scientific, technical, industrial or commercial knowledge or information, or any assistance of an ancillary and subsidiary nature furnished as a means of enabling the application or enjoyment of such knowledge or information or any other property or right to which this Article applies, or for the use of, or the right to use, motion picture films, films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, or for total or partial forbearance in respect of the use of a property or right referred to in this paragraph.
Extract from the Full Federal Court decision
Copyright
- The first question is whether, as the Commissioner contended, the Disputed Payment was for the use of, or the right to use, copyright in a cinematograph film. This in turn depends, for present purposes, on whether, as the Commissioner argued, the images and sounds from the field of play (which he beguilingly termed “Games Footage”) were embodied in the ITVR, copper cable and electrons so as to be a cinematograph film in which copyright existed. We do not consider that this latter question can be resolved by reference to “royalty” or “copyright” characterisations in Games TV Deeds. Rather we accept that, as Seven submitted, whether or not copyright subsisted in these images and sounds in the way the Commissioner claimed must be determined in this case by reference to the Copyright Act: see s 8.
- Part IV of the Copyright Act concerns copyright in subject-matter other than literary, dramatic, musical or artistic works, such as sound recordings (s 89), cinematograph films (s 90), television broadcasts and sound broadcasts (s 91). In particular, at the relevant time, s 90 of the Copyright Act provided for cinematograph films in which copyright subsisted as follows:
(1) Subject to this Act, copyright subsists in a cinematograph film of which the maker was a qualified person for the whole or a substantial part of the period during which the film was made.
(2) Without prejudice to the last preceding subsection, copyright subsists, subject to this Act, in a cinematograph film if the film was made in Australia.
(3) Without prejudice to the last two preceding subsections, copyright subsists, subject to this Act, in a published cinematograph film if the first publication of the film took place in Australia.
A “qualified person” in s 90(1) was defined as an Australian citizen or a person (other than a body corporate) resident in Australia; or a body corporate incorporated under a law of the Commonwealth or of a State: Copyright Act, s 84.
- Section 90 therefore required that, in order for there to be copyright under the Copyright Act in a cinematograph film, there must be some territorial nexus between the film and Australia. This is consistent with s 184(1) of the Copyright Act, which provides for the making of regulations (the CIP Regulations) applying the provisions of the Copyright Act to a country other than Australia where the same kind of territorial nexus exists between the subject of copyright and that other country.
- Also at the relevant time, s 10(1) of the Copyright Act provided that, unless the contrary intention appeared, “cinematograph film” meant
… the aggregate of the visual images embodied in an article or thing so as to be capable by the use of that article or thing:
(a) of being shown as a moving picture; or
(b) of being embodied in another article or thing by the use of which it can be shown;
and includes the aggregate of the sounds embodied in a sound-track associated with such visual images.
Section 24, set out below, operates to explain the use of the word “embodied” here and in other contexts: for example, see the definition of “sound-track” below. What is protected is not only an aggregation of visual images but also an aggregation capable of “being shown as a moving picture”. Further, this definition takes two aggregates—visual images and sounds—each as found in a distinct fixed embodiment: The Panel [2004] HCA 14; 218 CLR 273 at [57] (see further below).
- The word “sound-track” was also defined in s 10(1) to mean, in relation to visual images forming part of a cinematograph film,
(a) the part of any article or thing, being an article or thing in which those visual images are embodied, in which sounds are embodied; or
(b) a disc, tape or other device in which sounds are embodied and which is made available by the maker of the film for use in conjunction with the article or thing in which those visual images are embodied.
- Section 24 of the Copyright Act explained the concept of embodiment, as follows:
References to sounds and visual images embodied in an article
For the purposes of this Act, sounds or visual images shall be taken to have been embodied in an article or thing if the article or thing has been so treated in relation to those sounds or visual images that those sounds or visual images are capable, with or without the aid of some other device, of being reproduced from the article or thing.
- Also at the relevant time, s 22 made provision for the making of literary, dramatic, musical or artistic works (s 22(1)), sound recordings (s 22(3)), broadcasts (s 22(5))and, relevantly, cinematograph films (s 22(4)). Section 22(4) provided that, for the purposes of the Copyright Act:
(a) a reference to the making of a cinematograph film shall be read as a reference to the doing of the things necessary for the production of the first copy of the film; and
(b) the maker of the cinematograph film is the person by whom the arrangements necessary for the making of the film were undertaken.
It may therefore be accepted that a cinematograph film was not made until the first copy was made. The word “copy” was relevantly defined in s 10(1), in relation to a cinematograph film as “any article or thing in which the visual images or sounds comprising the film are embodied”.
- In summary, a cinematograph film in which copyright subsisted under the Copyright Act is not made until the first copy is made. There must also be some relevant territorial nexus between the film and Australia (unless the CIP Regulations apply, in which case there must be another relevant territorial nexus). Further, having regard to the definitions of “cinematograph film”, “soundtrack” and “copy” in s 10(1), as well as s 24 in the Copyright Act, it is, we consider, plain enough that the concept of embodiment relevant to “cinematograph film” means some “material embodiment”. “Embodied” in the definition of cinematograph film in s 10(1) is equivalent to the phrase “that has been embodied”, as further indicated by the definition of “copy” in s 10(1).