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 It replaces draft ruling TR 2021/D4 (issued in June 2021), which replaced TR 1993/12 (withdrawn effective 1 July 2021).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.

The NSW and VIC Revenue Authorities have recently published harmonised revenue rulings (Revenue Rulings PTA-041) following similar rulings in QLD and SA. These rulings confirm the Revenue Authorities official position that payroll tax is likely to apply to payments made by medical practices to medical practitioners under the ‘relevant contracts’ payroll tax provisions irrespective of whether the fees under contractual arrangements are merely processed on behalf of the medical practitioner.

This ruling has far-reaching implications for medical centres, dental clinics, physiotherapy practices, radiology centres, and similar healthcare providers that have not been treating these payments as subject to payroll tax. We recommend that immediate action to assess compliance both retrospectively and on an ongoing basis as well as consider whether arrangements are optimally structured. If retrospective issues are found, employers can consider voluntary disclosure or amnesty/exemptions if available. The SW Team is here to guide you through these complex changes.

Introduction

Followed by rulings in QLD and SA, the Victorian State Revenue Office and Revenue NSW have issued rulings that may subject many medical practices to payroll tax on practitioner payments processed through the practices. We have provided links to each of the rulings below:

• NSW | PTA 041 Payroll Tax Act- Relevant Contracts – Medical Centres | Revenue NSW
• VIC | Relevant contracts – medical centres | State Revenue Office (sro.vic.gov.au)
• QLD | Public Ruling PTAQ000.6.1 Relevant contracts—medical centres – Queensland Revenue Office (qro.qld.gov.au)
• SA | PTASA003 | RevenueSA

These rulings, influenced by recent court decisions, aim to impose payroll tax on practitioner payments processed by medical practices which would not ordinarily be considered derived as income or treated as an expense when paid by the medical practices for income tax or accounting purposes. It casts a wide net, potentially impacting a broad spectrum of healthcare providers.

While it is important to recognise that the rulings are harmonised, meaning they are consistent across different jurisdictions, each jurisdiction has responded differently to the impact of the changes, with responses mainly in relation to General Practitioner (GP) medical practices. See below for details on concessions in ACT, SA, QLD and NSW.

The rulings provide clarity on the harmonised position adopted by the Revenue Authorities but also raises urgent concerns for medical practices. It applies to existing arrangements and can have retrospective effect depending on whether amnesty or an exemption is available.

Relevant contract provisions

The recent payroll tax rulings and court decisions centre around the application of the Relevant Contract provisions and understanding how these provisions work is essential for medical practices.

A relevant contract is an agreement that can be characterised as a contract for the performance of work, such as a service or contracting agreement. Prior to the recent court decisions, it was generally only payments that were directly referrable to services rendered which were treated as subject to payroll tax. This meant many medical practices may not have included payments distributed to practitioners as subject to payroll tax on the basis that patient fees were directly derived by the practitioners as income (though the collection and distribution of the patient fees was processed by the medical practice). The medical practice then earned its income from a proportion of patient fees charged by the medical practitioner as payment for administration and facility services.

In other words, the rulings and court decisions expanded the conventional understanding of the types of payments which could be subject to payroll tax.

The rulings have determined that if a medical centre engages a practitioner to practice from its premises, or if it provides patients with access to the medical services of a practitioner, a relevant contract likely exists. Payments while not derived or treated as income by the medical practice are considered taxable payments under the ‘relevant contract’ provisions.

In other words, the medical centre is deemed to be an employer, and the practitioner is deemed to be an employee, making any payments under the contract subject to payroll tax.

While the rulings have broadened the scope of what constitutes a relevant contract and the type of payments the provisions capture, certain exclusions may still apply to mitigate or eliminate payroll tax liability. The exemptions that are more likely to apply to a contract between a medical centre and a practitioner include:

• the practitioner providing services to the public generally (e.g. if the practitioner provides services to more than one medical practice)
• the practitioner performing work for no more than 90 days in a financial year
• services performed by two or more persons (e.g., a practitioner personally providing a nurse or assistant).

It’s essential for medical centres to carefully evaluate their contractual arrangements on a case-by-case basis to determine if the work performed by the medical practitioner is considered services for the practice, whether the payments are capture by the provisions and if so, whether any of these exclusions apply. Professional advice is recommended to ensure complete understanding and accurate compliance with these provisions, and whether arrangements should be re-structured or clarified on a go forward basis.

Medical centres should also consider whether the employment agent provisions may apply to the arrangement (meaning that the Relevant Contract exclusions do not apply).

It is important to note that there are a number of jurisdictions which have not issued the harmonised ruling and we briefly summarise the “state of play” in these jurisdictions:

• ACT – Has recently announced concessions for general practitioners so it is likely that a similar position is adopted
• NT and TAS – There has not been any indication in these jurisdictions as to whether a similar view will be adopted
• WA – The legislation in WA is significantly different and in a letter to the RACGP, confirmed that most General Practitioners will continue to be treated as independent contractors (i.e. not subject to payroll tax).

What concessions have been made available?

Certain concessions have been announced/offered in ACT, SA, QLD and NSW which we briefly outlined below:

• ACT – the ACT Government announced that payroll tax on payments made to General Practitioners (GP) is waived to 30 June 2023 with the compliance deadline extended to 2025. Further, an exemption to 30 June 2025 will be available for GP payments for practices which bulk bill 65 percent of all patients and have registered for MyMedicare. Applications will need to be made to the ACT Revenue Office by 29 February 2024
• SA – An amnesty is available on GP payments up to 30 June 2024 for designated medical practices that make a voluntary disclosure and register for payroll tax if necessary. Medical practices must comply with payroll tax obligations post 30 June 2024. Expressions of interest must be made by 30 September 2023
• QLD – An amnesty is available on GP payments up to 30 June 2025 for medical practices that make a voluntary disclosure prior to 30 June 2025 and register for payroll tax if necessary. Expressions of interest must be made by 29 September 2023
• NSW – the NSW Government announced that they will pause audits on medical centres for 12 months to consult with GP groups. Interest and penalties accrued will be paused.

Who is impacted?

• Medical centres not only including GPs
• Dental clinics, physiotherapy practices, radiology centres, optometrist centres
• Other allied healthcare providers contracting with medical, dental, and other health practitioners.

It should be noted that while the cases and rulings focus on the medical industry, it would not be inconceivable for the Revenue Authorities to apply the principles to other industries which rely on similar legal constructions for structuring work performed and payments. Examples could include veterinarian practices, personal trainers in commercial gyms or sports coaches, nail technicians in nail salons etc.

What is the impact?

Immediate action is required given the ruling’s retrospective and prospective application.

The impact will differ depending on whether the medical practice is a GP medical practice. 

All medical practices will need to consider how their medical practitioner arrangements should be treated under payroll tax law, whether payroll tax shortfalls arise on a retrospective basis and whether an increase in the payroll tax oncost is likely on an ongoing basis. If payroll tax shortfalls do arise there is a potential for interest and penalties to accrue which can be mitigated by making voluntary disclosures.

GP medical practices should consider the various concessions that are available to reduce any payroll tax shortfalls or ongoing oncost, as well as interest and penalties. In particular, practices should ensure that applications or expressions of interest have been lodged by the due date if relevant.

How can SW help?

Medical practices must review their current agreements to assess whether they evidence a relevant contract and consider whether agreements should be updated or changed and any voluntary disclosures which may need to be made (even if amnesty applies).

There are essentially three limbs for payroll tax to apply under the Relevant Contract provisions:

1. that services are provided to the medical centre
2. that there is a payment for payroll tax purposes and
3. whether an exclusion applies.

Each of these should be considered in the review of retrospective arrangements, but also with a view to compliance or risk mitigation on an ongoing basis.

The SW Team, with its expertise in tax law, is ready to assist you in navigating these complex changes. Our dedicated team can:

• conduct a comprehensive review of your existing agreements and structures
• provide tailored advice on compliance and potential exclusions
• work with the business to restructure arrangements to mitigate risk with ongoing payroll tax obligations
• assist with private rulings on for prospective arrangements with the SRO
• assist with voluntary disclosure if needed
• offer ongoing support to ensure alignment with the latest legal requirements.

Contact the SW Team today to schedule a consultation and ensure that your practice is prepared for these significant payroll tax implications. Our expert team is here to support you every step of the way.

The post Payroll tax implications for medical practices – are you prepared? appeared first on SW Accountants & Advisors.

With the increase in flexible working alternatives, changes in international working arrangements, the uncertainty surrounding COVID-19 and the border restrictions that have been put in place over the recent years, the question of tax residency has become increasingly relevant and contentious.

The new ruling, TR 2022/D2, which replaces former rulings IT 2650 and TR 98/17,TR 2022/D2 does not appear to re-write the rule book but provides some firmer language on some of the ordinarily resides concepts and the factors to be considered. A contemporary interpretation of the existing legislation, it includes 14 modern examples to assist in understanding the ATO’s current view of the individual tax residency rules.

It also takes into account recent developments in case law, including but not limited to Harding v Commissioner of Taxation [2019] FCAFC 29, Pike v Commissioner of Taxation [2019] FCA 2185 and Addy v Commissioner of Taxation [2019] FCA 1768.

The ruling does not, however, provide a primary ‘bright line’ test as proposed by the former Government in the 2021-22 Federal Budget.

The primary ‘bright line’ test is where a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident. It is unknown whether the current Federal Government will continue with the previous Government’s proposed changes to replace the individual tax residency rules and introduce a ‘bright line’ test.

The ATO is seeking comments and feedback by 25 November 2022.

Key takeaway

The devil is still in the ‘facts and circumstances’ of individual cases. Whilst the Draft Ruling steps through 14 examples, each situation comes down to the particular facts and circumstances of the specific taxpayer, and varies for each person.

The SW Tax team is keen to see whether the upcoming Federal Budget; the first for the new Federal Government, will shed any further light on likely future developments.

How can SW help?

Reach out to your SW advisors if you would like more information about your tax residency or what the Draft Tax Ruling might mean for you.

Contributor

Justin Batticciotto, Associate Director, Tax

The post ATO provides examples to illustrate Tax Residency for Individuals rules appeared first on SW Accountants & Advisors.

There are a number of cases pending in relation to this controversial provision, including the Full Federal Court appeal by the Commissioner of the Guardian¹ decision of earlier this year, which dealt with section 100A and was decided in the taxpayer’s favour. To read more about our analysis of the Guardian case click here.

To recap, section 100A is a long standing anti avoidance rule originally introduced to counter aggressive ‘trust stripping’ schemes, but which can potentially be applied more broadly to certain arrangements (referred to in the legislation as ‘reimbursement agreements’) where trust beneficiaries are made entitled to trust income, but where there is a benefit or payment provided to a person other than the beneficiary to which the income is distributed.  Where section 100A applies, the result is that the beneficiary is deemed not to be entitled to the income, and the trustee is assessable in relation to that income at the top personal rate of tax (currently 47%).

In BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112, the Court held that a reimbursement agreement existed and that the arrangement was not explicable as an ordinary family or commercial dealing. As a result, the Court agreed with the Commissioner that section 100A applied.

The case | BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112

The facts

The facts of the case broadly are as follows:

• A family discretionary trust (IP Trust) held 99% of the shares in a company (IP Co) which had significant (franked) retained profits and nominal share capital
• The following steps were implemented during a particular year of income (2014):The trust deed of IP Trust was amended to ensure that the distributable income of the trust was income according to ordinary concepts (thus excluding profits of a capital nature)

1. A new family company (BE Co) was established as a beneficiary of the IP Trust Arrangements were made under which IP Trust had a modest amount of (ordinary) dividend and distribution income for the year
2. A selective share buy-back of the shares in IP Co was undertaken, the main result of which was that the franked retained profits of IP Co were flushed out to IP Co. Note that whilst the tax rules pertaining to share buybacks deem this component of the proceeds to be a dividend derived by IP Trust, it remains a capital receipt under ordinary concepts
3. The ordinary income of IP Trust for the year was distributed to BE Co and subsequently paid out
4. As a result of the operation of the normal tax rules relating to trusts, the deemed dividend component of the share buyback proceeds was taxable to BE Co, but being franked, no tax was payable by Be Co on this deemed dividend
5. The share buyback proceeds were retained by the IP Trust

• The result of the above steps (subject to the operation of the various anti avoidance rules that the Commissioner was seeking to apply) was that the retained profits of IP Co had been distributed to and retained by IP Trust without further tax being suffered.

The decision

The Court determined that section 100A applied, despite the fact that the beneficiary of IP Trust (BE Co) received in cash its full income entitlement (being the ordinary income), which is a separate entitlement to the share buyback proceeds retained by IP Trust. The Court concluded that the arrangement was implemented with a purpose of ensuring that the profits of IP Co were distributed in a tax-free form and not the result of an ordinary family or commercial dealing.

The result of the application of section 100A is that the income entitlement of BE Co is deemed to not exist. Such that the taxable income of IP Trust (inclusive of the grossed up deemed dividend from the share buyback) is assessable to the trustee at 47% (net of franking credits), the highest marginal tax rate of the beneficiary.

In relation to section 100A, the Court held that:

• a ‘reimbursement agreement’ is not constrained by the ordinary meaning of ‘reimbursement’ and has a wide meaning restricted only by the tax avoidance purpose and the ‘ordinary family and commercial dealings’ exception to section 100A
• a tax avoidance purpose arises for section 100A where there is a purpose of tax avoidance (paying no tax or less tax than the purported beneficiary). This should be contrasted with other integrity measures where the tax avoidance purpose needs to the sole or dominant purpose
• the ordinary family or commercial dealings exception needs to be applied to the arrangement as a whole rather than the individual steps.

The Court also considered the possible application of the ‘dividend stripping’ rules, which the Commissioner relied upon as an alternative to section 100A. The Court held that, although some of the elements normally associated with a dividend strip (e.g. involvement of third party) did not exist, there was sufficient similarity between the arrangements implemented and a dividend strip to apply these integrity measures in the alternative. If applicable, the dividend stripping measures would deny BE Co franking offsets in determining its tax liability for the year. However, given that section 100A applied, this secondary issue was, for the taxpayers concerned, somewhat academic.

So what does this decision mean?

On the one hand, the decision could be viewed as an appropriate outcome, given that the arrangements appear to have been somewhat artificially engineered (and indeed replicated by the taxpayer’s advisers for other clients around the same time) to achieve a beneficial tax outcome.  It is not surprising that the Commissioner sought to challenge the arrangement.  

On the other hand, the decision will potentially increase the Commissioner’s confidence to apply section 100A to circumstances that many may have thought it should not apply.

Notably, the Court determined that the fact that an income distribution was made and paid out in full was not, of itself, sufficient to conclude that section 100A had no role to play. The Court effectively viewed the income distribution as an enabling mechanism by which the retained profits of IP Co were transferred on a tax free basis to IP Trust and, more importantly, as a ‘reimbursement agreement’ with a tax benefit purpose for the purposes of section 100A. It is noted that facts in this situation are quite similar to one of the more controversial examples in Taxation Ruling 2022/D1 released earlier this year.[1]  

The case also highlighted the importance of ensuring that there is solid evidence to support arguments that the arrangement is an ordinary family or commercial dealing.  In the BBlood case, general assertions by the taxpayer that the arrangements were motivated by commercial (not tax) reasons, such as estate planning and group simplification, were not compelling and failed to discharge the taxpayer’s onus of proof.

Reach out to our SW team if you would like to further understand or discuss the implications of this case.

Our previous articles on 100A:

Guardian case – section 100A win for the taxpayer

Trust distributions – the game has changed

Contributors

Ned Galloway

¹ Guardian AIT Pty Ltd v Commissioner of Taxation [2021] FCA 1619;114 ATR 136

² Example 8 in Draft Taxation Ruling TR 2022/D1

The post Trusts & section 100A | Commissioner draws first blood appeared first on SW Accountants & Advisors.

While the application of the exemption has not changed, Taxation Ruling 2022/2 does provide further clarifications and references the Word Investments High Court case. This ruling replaces Taxation Ruling 97/22, which has now been withdrawn.

TR 2022/2 relates to the exemption of not-for-profit clubs from income tax. The games and sports exemption is applicable to a club (including societies and associations) where it:

• is founded for the primary goal to promote a sport or game
• does not have a profit motive for its individual members
• meets other special conditions under section 50-70 (including, is not carried on for profit or gain of its individual members)

What is included as a ‘sport’ or ‘game’?

TR 2022/2 clarifies that the terms ‘game’ and ‘sport’ also encompasses nonathletic activities such as chess or bridge, activities which involve machines to take part such as motor racing, and non-competitive activities such as mountaineering.

A requirement to qualify as a game or sport for the exemption include key features that it typically has rules, expectations and conventions. Competition is also another general feature of a game or sport, however this is not essential.

When determining if a club qualifies for the exemption, it is important to consider the club’s primary purpose. To be eligible, the club’s main purpose must be the encouragement of a game or sport. Where another purpose, such as the encouragement of sociability, participation and relaxation dominates the promotion of the sport or game, this would not meet the criteria of a sport or game.

Commercial activities and purpose

Clubs that engage in commercial activities to earn revenue are required to objectively establish the degree to which commercial activities are a means to the required primary purpose of encouragement of a game or sport.

A club is able to establish a purpose of supporting a game or sport where it provides financial and in-kind contributions to other organisations that directly carry out those activities.

Examples of direct or indirect activities that show the promotion of a game or sport include:

• organising and conducting tournaments
• improving the abilities of participants
• providing purchased or leased facilities for the activities or the game or sport for the use of club members and visitors, and
• marketing.

It needs to be objectively demonstrated that these activities are conducted as a means to further the main purpose of encouraging the game or sport.

In cases where a club has another purpose outside sporting purposes, it will not meet the games and sports exemption unless the non-sporting purpose is merely in relation to carrying out its sporting business or independent from the sporting purpose but is less significant than the sporting purpose.

To establish whether the club has a primary propose of promoting a game or sport, the circumstances and facts of each case needs to be considered objectively, considering the following factors deemed relevant by courts and tribunals:

• the club’s constituent documents
• extent of sporting activities
• the conduct of activities directly connected to the game or sport
• member participation in the game or sport
• marketing of the organisation to the public as one that encourages a game or sport
• involvement of the committee management in the promotion of sport
• the use of surplus funds for promoting the game or sport, and
• the provision of financial and in-kind support for encouraging the game or sport.

Factors that work against the conclusion that a club’s main purpose is the encouragement of a game of sport, include:

• an emphasis in its constitution to provide a social club for members
• the provision of social facilities for members
• no direct involvement in fielding sporting teams or entering into competitions
• funding of game or sport only on an inconsistent basis with its members taking priority
• the relative size and extent of social facilities provided for the benefit of members compared to the financial and in-kind support provided to sport and games.

Surplus funds

Where clubs accumulate surplus funds, they should have a detailed plan that show how the funds will be used to support the encouragement of sport or game.

Self review form

Clubs with an active Australian Business Number will be required to complete an online self-review form of their eligibility to the income tax exemption each year from 1 July 2023.

How we can help

Whilst it is pleasing that further examples have been provided in this ruling, there is still a significant grey area when determining if the games and sport exemption applies.

This is particularly the case for large clubs with significant commercial activities that have multiple purposes of encouraging a sport or game as well as providing significant benefits to members. Therefore, it is important for club’s objectives to be clearly documented and for any plans to clearly highlight how the club encourages a sport or game.

If you require further advice regarding this tax exemption, please reach out to our SW team.

Contributors

Alice Mulvogue, Assistant Manager, Tax

Sharon Lee, Consultant, Tax

The post ATO Tax Ruling – ‘Games and sports exemption’ TR 2022/2 appeared first on SW Accountants & Advisors.