The Full Federal Court has unanimously dismissed the taxpayer’s appeal from the decision in Task Technology Pty Ltd v FCT [2014] FCA 38 and confirmed that licensing payments by the taxpayer company (an Australian distributor) to a Canadian software supplier were not excluded from being royalties that were subject to Australian withholding tax.
The taxpayer argued that the “proviso” in Article 12(7) of the Australia/Canada DTA applied in the circumstances. The proviso stated that “royalties” shall not include payments made as consideration for the supply of, or the right to use, source code in a computer software program, if the right to use the source code is limited to such use as is necessary to enable effective operation of the program by the user.
However, the Full Court agreed with the decision at first instance that the payments that the taxpayer made under the distribution agreement did not satisfy the proviso. In particular, it affirmed that the payments were not excluded by the proviso because the nature of the rights the taxpayer acquired under the distribution agreement were not limited to such rights as were necessary for the effective operation of the software by the taxpayer itself.
(Task Technology Pty Ltd v FCT [2014] FCAFC 113, Full Federal Court, Dowsett, Gordon and Jagott JJ, 5 September 2014.)
[LTN 172, 5/9/14]