Tax Knowledge
      Back to home
      1. Ideas Knowledge
      2. Tax Knowledge

      Royalty Payment

      GST treatment

      Scenario:

      In 2008, we entered into a royalty contract for the use of computer software developed by another independent entity. Under the terms of the royalty contract, the intellectual property rights subsisting in the software were assigned to us in consideration of ongoing royalty payments, which were calculated at 15% of the income generated by the use of the software (approximately $110,000 per annum). We and the other party have now agreed to vary the contract to end the ongoing royalty payments and replace them with a one-off payment of $650,000 for the ongoing use of the software. During the contract period, no GST.  So, my questions are:
      • Is GST attributed to the one-off payment made for the right to use the software? 
      • Should GST have been attributed to the ongoing royalty payments? 
      • What is the taxation accounting entry for the one-off payment? 
      • Is the one-off payment an expense? Can it be amortized and how many years can that amortization be over?

       

      Explanation:

      Based on the facts, GST is payable on both the one-off payment and the previous ongoing royalties. GST is payable when an entity makes a taxable supply. A taxable supply defined as GST Act s 9-5. 
      • In this case, the supply was the right to use the software and the consideration was the royalty payments (in the first instance) and the one-off payment (in the later transaction) 
      • If the software was supplied as part of an enterprise carried on by the supplier. 
      • If the entities are both carrying on enterprises in Australia; 
      • Your scenario did not mention that whether the supplier is registered for GST, but since the consideration exceeds the registration turnover threshold of $75,000, the supplier would, in any event, have been required to register for GST. 
      • The supply is neither GST-free nor input-taxed (not within Div. 38 or 40) 
      The tax accounting treatment of this transaction will depend on the actual nature of the supply. If the ownership of the rights was transferred to you, then the rights would be treated as a non-current asset in the statement of financial position; From a tax perspective, these rights would be a depreciating asset under s 40 30(2)(d) of the lncome Tox Assessment Act 1997 (TAA 1997) and can be written off over its effective life (usually the term of the right). If, on the other hand, the rights were mere to you, then the royalties would be deductible under s 8-1, but the one-off payment would need to be deducted over the remaining term of the deal.