On Friday 25.6.21, the Commissioner issued TR 2021/D4, which considers whether, receipts from the licensing and distribution of software, qualify as royalties (under the s 6(1) ITAA 1936 definition). It focuses on 3 software distribution models – packaged software, the digital distribution of software and cloud computing arrangements.

See below for further detail.

[Tax Month – June 2021]

 


 

Draft Taxation Ruling TR 2021/D4 makes the obvious point that the character of a receipt depends on the terms of the agreement between the parties, taking into account all the facts and circumstances of the particular case.

More relevantly, m the ATO says that an amount is a royalty to the extent that it is paid or credited as consideration for:

  • granting a right to do something in relation to software that is the exclusive right of the copyright owner in the software;
  • supplying know how in relation to software; or
  • the supply of assistance furnished as a means of enabling the application or enjoyment of the supply.

The Draft replaces TR 93/12, which has now been withdrawn.

PROPOSED DATE OF EFFECT: retrospective. The ATO says that the proposed retrospective start date is not intended to prevent TR 93/12 applying prior to its withdrawal to the extent that it has been relied upon.

COMMENTS are due by 23 July 2021.

[LTN 120, 25/6/21]

Extract from draft ruling

5. An amount is a royalty as defined in subsection 6(1) of the ITAA 1936 to the extent that it is paid or credited as:

(a)   consideration for the grant of a right to do something in relation to software that is the exclusive right of the owner of the copyright in the software (paragraph (a) of the definition). Examples include payments for the grant of a licence which permits
(i)   the licensee to reproduce software or to modify or adapt software (see Examples 1 and 2 of this Ruling, and contrast Example 3 of this Ruling), and
(ii)   a distributor of software to sub-licence the use of the software, whether the software is distributed by way of physical carrying media, digital download or cloud-based technology (see Examples 4 and 5 of this Ruling, and contrast Example 6 of this Ruling).
(b)    consideration for the supply of know-how in relation to software (paragraph (c) of the definition). Examples include payments for the supply of source code relating to software (see Example 2 of this Ruling, and contrast Example 3 of this Ruling).
(c)   consideration for the supply of assistance furnished as a means of enabling the application or enjoyment of the supply (paragraph (d) of the definition) (see Example 7 of this Ruling, and contrast Example 8 of this Ruling).

 

6. The following amounts are not royalties as defined in subsection 6(1) of the ITAA 1936:

(a)   consideration for the grant of a licence which allows only the simple use of software, that is, it allows the licensee or end-user to use the software for the purpose for which it was designed, but does not otherwise permit the end-user to use the copyright in the software (see Example 3 of this Ruling).
(b)   consideration for the grant of distribution rights in relation to software where the distributor is not permitted to do anything in relation to the software that is the exclusive right of the owner of the copyright in the software (see Example 6 of this Ruling).
(c)   consideration for the transfer of all rights relating to the copyright in software.
(d)   proceeds from the sale of goods where hardware and software are sold to an end-user in an integrated form without being separately priced, or where physical carrying media on which software is stored is sold to an end-user, provided in either case that the end-user is only granted simple use rights.
(e)   consideration for the provision of services in the modification or creation of software.

[4.7.21]

 

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