Definition for royalty and tax consequences
Enquiry:
We are an Australian based company in the business of creating content for books printing, eBooks and short films.
In Aug 2016, we assigned the copyright to print a book to a publishing house in return for a 10% fee for each book sold.
In Sep. 2016, we assigned the film rights to the book to a film company 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?
Explanation:
The High Court in Stanton v FC of T(1955) 92 CLR 630 defined the essence of 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 your firm 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 your firm in return for assigning the film rights to the book to the film company 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.