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11 Feb 14 Payments for software were royalties for purposes of DTA - Task Technology

The Federal Court (Davies J) has held that payments made by the taxpayer, an Australian distributor of software known as the “CaseWare Working Papers” (“the CWI software”), to a Canadian resident entity, CaseWare International Inc (“CWI”), the developer of the CWI software, pursuant to the distribution agreement in the income years ended 30 June 2007 to 30 June 2011 (“the relevant period”) were “royalties” for the purposes of the Australia-Canada Double Tax Agreement (“the DTA”). On this basis, the taxpayer was required to withhold 10% of each payment that it made to CWI as required by ss 12-280 and 12-300 of Schedule 1 to the Taxation Administration Act 1953.

The taxpayer argued unsuccessfully that the payments were excluded from the definition of "royalties" by reason of the operation of Article 12(7) of the DTA, which provided that the term royalties "shall not include payments... made as consideration for the supply of, or the right to use, source code in a computer software program, provided that the right to use the source code is limited to such use as is necessary to enable effective operation of the program by the user."

The Court said at para 20:

"The payments are not excluded by Article 12(7) from the definition of the term 'royalties' in the DTA because the nature of the rights that Task Technology acquired under the distribution agreement, in relation to the use of the software for which the payments were made, were not limited to such rights as were necessary for the effective operation of the software by Task Technology itself but for the commercial exploitation of that software by Task Technology through the right to copy the CWI software for sale to end users and the right to use the copyright for the purposes of developing its own templates to sell in conjunction with the CWI software."

Task Technology Pty Ltd v FCT [2014] FCA 38 (Federal Court, Davies J, 6 February 2014).

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