The over-arching view remains that payments made for vast majority of software arrangements may be royalties when made by an Australian entity to an offshore entity. This includes cloud-based distribution, distributors of tangible hardware with a software component licensing, software-as-a-service.

The current draft is in essence a comprehensive rewrite, notably removing the concept of a ‘simple use of software’ but further considers the interactions and applications of the royalty definitions in domestic tax laws and Double Tax Agreements (DTAs). It replaces draft ruling TR 2021/D4 (issued in June 2021), which replaced TR 1993/12 (withdrawn effective 1 July 2021).

What has changed?

Under the current draft:

• The ruling applies to all cross-border payments relating to ‘software agreements’, defined as

an agreement, arrangement or scheme under which a distributor makes payment(s) directly or indirectly to the owner or licensee…of the copyright (or other intellectual property (IP)) for the right to be in a position to earn income relating to the use of, or right to use, software.

• Removed notion of payment for simple use will not constitute royalty i.e. using a software as designed or intended to be used
• Substantial emphasis placed on substance over (legal) form – Contractual terms of an agreement are relevant but not determinative of the payment characterisation. Rather, the ATO will undertake an objective assessment of the agreement and consider the commercial and practical context. Where distribution agreements cannot be performed or without using the IP rights granted, the entire consideration will be characterised as a royalty.
• Where a distributor is granted more than one right, (e.g. to distribute, use of copyright, etc.) under a single contract, the ATO accepts a ‘reasonable’ method of apportionment if the rights are independent. However, no further deliberation is provided in the ruling as to how to achieve this.    
• The ATO takes a narrow interpretation of the example in the OECD Commentary and does not accept the a distributor could obtain certain rights for distributing the relevant software, without utilising the software copyright.
• As the term ‘copyright’ is not defined in DTAs, the Commissioner will take a ‘liberal interpretation’ of the meaning under the Copyright Act 1968. The copyright laws of foreign countries participating in various international copyright conventions may be considered.

Royalty ‘defined’

The table below sets out the ATO’s distinction when consideration constitutes a royalty payment.

How does the ruling apply in practice?

To illustrate its view the ATO has replaced the eight high-level examples with two detailed scenarios.

In one scenario, the Australian entity (AusCo) is granted a non-exclusive right to resell its foreign parent’s (ForCo) software products in Australia. Whilst the agreement does not set out all the necessary rights and obligations to give effect to the software arrangement, certain key terms are provided, including:

• AusCo does not have any right / licence to any IP owned by ForCo
• End users enter into sales contracts with and pay AusCo
• Consideration for granting of non-exclusive right to distribute is determined based on sale of products, less an arm’s length fee for distribution services
• The products are stored in servers owned by the ForCo – for download / cloud-based access
• AusCo is required to maintain and enhancing the branding of ForCo.

The ATO considers payments made by the AusCo to ForCo is royalty because the rights and entitlements to use the software cannot be provided with the authorisation or communication by the ForCo (the copyright owner). Furthermore, AusCo has obtained other rights (e.g. use of ForCo’s trademarks, brands, enter into commercial rental arrangement (recurring licensing fee), etc.) under the agreement.

Reasonable apportionment may be applicable if sufficient evidence is provided to support the notion that the distribution right had substantial value independent of any right to use copyright or IP rights.

What is the (potential) impact?

The ATO is currently seeking comments on the draft ruling, with the consultation period closing on 1 March 2024. Once finalised, the ruling will apply to both prospective and retrospective arrangements.

Where a payment is royalty, it is subject to royalty withholding tax in Australia – either at the treaty rate (where there is a DTA) or the default rate of 30 percent. If the Australian resident makes overseas payments but failed to withhold and/or remit, deduction of these payments will be denied for income tax purposes until such time the withholding tax is remitted.

Whilst the draft ruling concerns payments relating to ‘software arrangements’, the ATO may also potentially extend its application to distribution / licensing arrangements to other industries (e.g. pharmaceutical), where the rights to distribute, copyright, technical know-how and/or provision of ancillary services may also typically be ’bundled up’ under a single agreement.

How SW can help

Our experts can assist with:

• further clarification regarding the draft ruling
• assessing and advising how the ruling may affect your existing and prospective cross-border arrangements.

Reach out to your SW advisor for support from our specialist tax team.

Contributors

Anthony Cheung

Emily Lowe

The post Updated Tax Ruling on character of software payments appeared first on SW Accountants & Advisors.

During this time, I’ve specialised in migration and software adoption, guiding and assisting dozens of clients on the latest and most reliable software stack for their specific needs. We are assisting with the internal processes to see you operating in a totally paperless office, achieving maximum efficiency and automation, and having real time visibility and data that many talk of, but rarely have.

The majority of junior explorers we speak with look for software with a solid market reputation that’s easy to use and familiar to most bookkeepers and accountants. We often see MYOB or Reckon as the likely preferred platforms followed by Pronto for those that have really reached production phases. More recently the likes of Xero and QuickBooks Online have become more prevalent themselves.

Reporting processes

Companies in the junior explorer or small cap mining space need to be aware of additional reporting requirements including to the Department of Mines, preparation of quarterly Cash Flow Statements, consolidation of subsidiaries and dealing with Joint Venture arrangements. These all require the assistance of our favourite tool in Excel, and an adept financial operator to pull together.

This process requires manual effort and processing at every turn as well as regular duplication. Most of these platforms do not give you the layers of reporting to breakdown your data as required on demand.

In this space, we very regularly see shortfalls in operational efficiencies and are charging ourselves with the responsibility to bring this to life for junior exploration companies.

The Solution

Get your processes in the Cloud. We would recommend migrating to Xero and utilising it’s open API and multitude of direct partner integrations to fulfil the various requirements.

We have identified the ideal software stack on page three of the download below and the processes to automate and streamline the entire end-to-end financial, accounting and taxation processes of your business.

We cover all critical items including:

• Mobile app processing of timesheets for geologists and contractors, giving you real time project/tenement based costings
• Streamlined and automated processing of all accounts payable, expense claims and credit card expenditure, including real time tenement allocations
• Paperless, expense and payroll approvals, based on projects, tenements – any approval you want
• Build in fixed asset register for automated monthly depreciation
• Automated and templated Cash Flow Statements for your Appendix 5B, costings for the Department of Mines, Annual Tenement Expenditure reports, etc.
• Online BAS lodgement within the accounting software
• Direct link of mapped Chart of Accounts to Income Tax software that provides tax deferred journal entries and tax return preparation
• Live dashboards in Power BI to be customised and married with your geological data
• Rolling 3 way financial forecasts and budget monitoring
• Consolidated financial reporting for Joint Venture arrangements and subsidiaries – in any currency

The Cost

The software subscription costs detailed in the download below would typically equate to $150 to $300 per month. A no-brainer isn’t it?

* We also capture the notoriously difficult aspect of statutory reporting through cloud-based software for interim and annual reporting and streamline this process. Please reach out if you would like to explore this to facilitate an easier statutory reporting framework.

Contact us

Get in touch via our experts below to discuss how we can help streamline your business.

The post Latest mining accounting technology appeared first on SW Accountants & Advisors.

Complete Tax Solutions (CTS) is an intelligent and automated tax solution that improves accuracy and delivers increased efficiency to a diverse range of businesses and industries.

The CTS suite of products enable businesses to streamline and automate the entire tax reporting and compliance process. This includes accounts integration, tax management, accounting for income taxes, consolidated tax return preparation and generation of tax journals and disclosures for the financial statements.

Excel-based and fully compatible with all current accounting systems, CTS is a fast and user-friendly interface with desktop, network and cloud options available.

Are you ready for 30 June reporting deadlines?

Significant Global Entities (SGE) with a 30 June balance date will have their first reporting deadline on 30 June 2018, which means the time to prepare is now. Such groups may also look to their tax advisors to assist with the completion and lodgement of the Country-by-Country files.

We can do the hard work for you

Whether you are an SGE or advising your clients, we can assist you with your software or lodgement needs.

Designed by ShineWing Australia – the CTS Country-by-Country Reporting (CbCR) software enables the compilation, risk analysis and lodgement of your master file, local file and Country-by-Country report with the Australian Taxation Office (ATO).

CbCR has its genesis from Action 13 of the G20 and Organisation for Economic Co-operation and Development’s (OECD’s) Action Plan on Base Erosion and Profit Shifting (BEPS).

SGEs in Australia, regardless of their size, have an annual obligation, unless exempt by the Commissioner, to submit:

• A master transfer pricing file which provides a high level description of the global operations of the group
• A local file which describes the Australian operations of the group together with relevant intra-group agreements
• A CbC report which includes the following information by entity and by jurisdiction:

• • Revenue (split between related and unrelated parties)

• • Profit before tax

• • Income tax paid and accrued

• • Accumulated earnings

• • Number of employees

• • Tangible assets held

• • Activities undertaken by constituent entities in the tax jurisdiction

• • Any further information which may assist with understanding the CbC report submitted 

CTS CbCR allows you to:

• Prepare and lodge your Local File (Short form, Part A and Part B), Master File and attachments in XML format with the ATO
• Prepare and lodge your Country-by-Country (CbC) report per the OECD’s XML schema
• Robotic process automation (RPA) can be utilised for files with large volumes of data. This increases accuracy and saves time in the preparation process.

If you would like a FREE demonstration of CTS CbCR, or if you have any tax queries, please email our CTS team and we will be in touch with you within the next business day.

The post CTS Country-by-Country Reporting appeared first on SW Accountants & Advisors.