Annemarie Wilmore and Francesca Teng, Legal and Tax specialists, explain the issues in the Commissioner v Seven Network case, regarding the definition of royalties for tax purposes.
The Commissioner of Taxation has filed a special leave application to the High Court of Australia, appealing the decision of the Full Federal Court in Commissioner of Taxation v Seven Network Limited  FCAFC 70 handed down earlier this year.
The Court upheld the primary judge’s finding that payments by Seven Network Limited (Seven) (an Australian resident) to the International Olympic Committee (IOC) (a resident of Switzerland) for exclusive rights to access and use the IOCs digital signal (ITVR Signal) in Seven’s broadcast of the Olympic games, were not royalties for the purposes of section 6 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936 ) and Art 12(3) of Agreement between Australia and Switzerland for the Avoidance of Double Taxation with respect to taxes on Income  ATS 5 (Swiss DTA). Accordingly, section 128B ITAA 1936 did not apply and Seven was not required to pay royalty withholding tax totaling almost $98 million.
In coming to this conclusion, the Court explored extensively, with the assistance of expert evidence, the complexities of the ITVR signal technology, as well as the characteristics of the rights that Seven paid for.
Ultimately the Court accepted that the ITVR Signal, in the form that was transmitted by the IOC, required further work before it was capable of use in Seven’s broadcast. The payments did not relate to the use of, or right to use, copyright or “other like property or right”. Rather they were consideration for the use of the ITVR Signal which did not contain or store any physical form of picture, image or sound as required for the purposes of the Copyright Act 1968 (Cth). As it was held that copyright did not exist in the ITVR Signal at the time it was transmitted by the IOC, the payments made by Seven were not royalties.
Not only does this decision highlight the need to examine precisely the nature of the right seeking to be protected, but in a rapidly developing digital environment, the interpretation and application of legislation becomes significant in determining whether an entity has complied with its tax obligations.