A recent case before the AAT has shed light on the importance of establishing residence for tax purposes while deriving an income offshore.
The case considered the question of whether the royalty payments from an Australian resident customer to a Singapore resident company for the use of the copyright included in assessable income of the Singapore resident company for Australian tax purposes?
Under Australian tax law, the royalty payments constitute taxable income in the hands of the Singapore resident company for tax purposes. The ordinary income rules specify that income derived by a foreign resident taxpayer includes ordinary income derived directly from all Australian sources during the year. The royalty income derived from Australian sources would meet this definition and is assessable income to the taxpayer.
Even though the Australia/ Singapore Double Tax Agreement (DTA) deems that royalties would only attract a 10% withholding tax in Australia (the royalties are only fully assessable income in Singapore), the definition of royalties in the DTA excludes 'literary works' such as the computer programs.
This means that they are not subject to the withholding tax rules of the DTA. Because the amounts are not taxed as royalties or business profits from a permanent establishment, the amounts would be taxable in Australia in full as ordinary income.
Where foreign resident taxpayers are earning royalties from literary works, there may be an obligation to lodge an Australian tax return and pay income tax in Australia. Any taxpayers earning royalties from literary works should consider the terms of the relevant DTA to confirm whether the payment would be subject to withholding tax or income tax.
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Last updated September 2012. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.