House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 2 - Copyright collecting societies

Outline of chapter

2.1 Schedule 2 to this bill amends the Income Tax Assessment Act 1997 (ITAA 1997), the Income Tax (Transitional Provisions) Act 1997 and the Taxation Administration Act 1953 (TAA 1953) to modify the tax treatment of copyright collecting societies and their members.

Context of amendments

2.2 Copyright collecting societies are organisations that administer certain rights of copyright on behalf of copyright owners (including authors and composers) who generally become members of the societies. Income received in relation to copyrights is held by societies pending identification of, and allocation to, the appropriate copyright owners.

2.3 In response to recommendations of the Simpson Report into copyright collecting societies (1995), the Australian Taxation Office (ATO) conducted a review of the tax treatment of such societies. The ATO concluded that, due to the nature of the arrangements in place for the collection, administration and distribution of royalties and licence fees, and the fact that the societies have the power to deal with their members' funds, a trust relationship exists between the societies and their members. Accordingly, the societies are considered discretionary trusts for income tax purposes, the trustees of which are the directors of the societies and the beneficiaries of which are the members/copyright owners. The ATO determined that the societies would be taxed as discretionary trusts from 1 July 2002.

2.4 Under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936), where there is a part of the net income of a trust estate to which no beneficiary has been made presently entitled, the trustee is assessed and is liable to pay tax on that income at the top personal tax rate. As a matter of administrative practice, Taxation Ruling IT 328 generally allows until two months after the end of the income year for a beneficiary to be made presently entitled to a share of the trust income. Due to practical difficulties in matching payments to members, a significant percentage of income derived by copyright collecting societies is generally not allocated within this time frame. Therefore, in the absence of legislative amendments, a substantial proportion of the income of copyright collecting societies would face tax at the top personal tax rate.

2.5 On 1 August 2002, the former Minister for Revenue and Assistant Treasurer announced that the tax law would be amended, effective from 1 July 2002, to ensure that copyright collecting societies are not taxed on income they collect on behalf of copyright owners. Amendments to give effect to this announcement, contained in this bill, have been developed in consultation with representatives of the copyright collecting societies.

Summary of new law

2.6 These amendments will:

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ensure that copyright collecting societies are not taxed on any copyright income that they collect and hold on behalf of members, pending allocation to them;

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minimise compliance costs for copyright collecting societies by ensuring that they are not taxed on the non-copyright income they derive, provided that the amount of non-copyright income derived falls within certain limits; and

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ensure that any copyright and non-copyright income collected or derived by copyright collecting societies that is exempt from income tax in their hands, is included in the assessable income of members upon distribution.

Comparison of key features of new law and current law

Detailed explanation of new law

Exemption for certain types of income of copyright collecting societies

2.7 Certain types of income collected or derived by copyright collecting societies that are operating under a trust relationship with their members will be exempt from income tax at the society level. The definition of a 'copyright collecting society' is discussed in paragraphs 2.20 and 2.21.

Exemption for copyright income

2.8 'Copyright income' collected or derived by a copyright collecting society to which the trust provisions in the ITAA 1936 apply will be exempt from income tax at the society level. [Schedule 2, item 5, paragraph 51-43(2)(a)]

2.9 Copyright income is defined to mean ordinary or statutory income of the following kinds: royalties and interest on royalties collected or derived by the society; and such other amounts relating to copyright that are derived by the society as are prescribed by the regulations. [Schedule 2, item 8 and the definition of 'copyright income' in subsection 995-1(1)]

2.10 The term 'royalty' is already defined in subsection 995-1(1) of the ITAA 1997, by reference to the definition in the ITAA 1936. This definition is broad, and encompasses equitable remuneration collected by societies under statutory licences, as this is in effect remuneration received as consideration for the use of copyright.

Exemption for certain non-copyright income

2.11 'Non-copyright income' means any income derived by a copyright collecting society other than copyright income [Schedule 2, item 10 and the definition of 'non-copyright income' in subsection 995-1(1)]. Examples of non-copyright income would include consulting fees, fees received for the provision of administrative services to smaller societies and grant income.

2.12 Non-copyright income derived by a copyright collecting society to which the trust provisions in the ITAA 1936 apply will also be exempt from income tax, to the extent that this non-copyright income does not exceed the lesser of:

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five per cent of the total amount of the copyright collecting society's copyright income and non-copyright income for the income year; and

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$5 million or such other amount as is prescribed by the regulations (no other amount has been prescribed at this time).

[Schedule 2, item 5, paragraph 51-43(2)(b)]

2.13 This de minimis rule is designed to minimise compliance costs for collecting societies by exempting relatively small amounts of non-copyright income ancillary to the copyright collecting business. Currently, societies distribute non-copyright income to members in conjunction with distributions of copyright income. In the absence of the exemption, societies wanting to avoid tax at the top personal income tax rate would be required to incur considerable costs in revising their existing systems for distributing non-copyright income to members. Non-copyright income exempt at the collecting society level will be included in the assessable income of members when it is distributed.

2.14 Any non-copyright income that a society derives in excess of the de minimis threshold will be subject to the normal provisions applying to trusts in Division 6 of the ITAA 1936. This means, for example, that any non-copyright income above the de minimis threshold will be assessed to the directors of the societies, as trustees, under section 99A, if no members of the society are made presently entitled to it within two months of the end of the income year.

Example 2.1

A copyright collecting society collects $84 million of copyright income and derives $6 million of non-copyright income in an income year. The $84 million of copyright income will be exempt from income tax in the hands of the copyright collecting society.

The total income of the society is $90 million. Five per cent of $90 million is $4.5 million. As this is less than $5 million, only $4.5 million of non-copyright income is exempt from tax. The remaining $1.5 million of non-copyright income will be dealt with under the trust provisions in Division 6 of the ITAA 1936.

Assessable income of members of copyright collecting societies

2.15 When a copyright collecting society makes a payment of certain amounts of copyright and non-copyright income to a member of the society, the amount of the payment is included in the member's assessable income except to the extent that it represents an amount on which the directors of the society, as trustees, are assessed, or have been assessed, and are liable to pay tax under section 98, 99 or 99A of the ITAA 1936. This ensures that there is no double taxation on any amounts of income collected or derived by copyright collecting societies [Schedule 2, item 4, section 15-22]. This provision applies instead of the provisions contained in Division 6 of the ITAA 1936 [Schedule 2, item 4, subsection 15-22(1)].

2.16 Where this provision applies, section 15-20 of the ITAA 1997, which would ordinarily include payments of royalties in the assessable income of members, will not apply. [Schedule 2, item 3, subsection 15-20(2)]

2.17 A member of a copyright collecting society is defined as any person who has been admitted as a member under the society's constitution or any person who has authorised the society to license the use of his or her copyright material. [Schedule 2, item 9 and the definition of 'member' in subsection 995-1(1)]

Notice of payment to members

2.18 To assist members of societies to determine how much of a payment to include in their assessable income, societies are required to provide notices to members each time they make a payment to them. The notice must be in writing and set out:

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the name of the society and the member;

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the total amount of the payment;

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that amount of the payment on which the directors of the society, as trustees, are or have been assessed and are therefore liable to pay tax under sections 98, 99 and 99A of the ITAA 1936; and

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the amount of the payment which the member has to include in his or her assessable income.

[Schedule 2, item 6, section 410-5]

2.19 Failure to provide a notice, or to provide a notice in the manner required, will result in an administrative penalty of 20 penalty points. [Schedule 2, item 12, section 288-75]

Definition of a copyright collecting society

2.20 A copyright collecting society may be declared under the Copyright Act 1968 to have the statutory right to collect copyright income under schemes that fall within that Act. Alternatively, societies may be voluntarily established to assist certain groups of copyright holders to manage their rights (i.e. non-declared societies).

2.21 For income tax purposes, a copyright collecting society is defined to include both declared and non-declared societies, subject to certain conditions. The conditions ensure that, to be eligible for the income tax exemptions discussed in paragraphs 2.8 and 2.12, non-declared societies must broadly meet the same requirements that declared societies must meet under the Copyright Act 1968. In addition, the definition provides additional integrity in relation to the way societies distribute income to members. In particular, no member can direct a society to pay them an amount of income at a particular time, and societies must distribute amounts of income as soon as is reasonably possible to members once amounts have been allocated to them. These conditions ensure that the timing of payments cannot be manipulated to achieve tax advantages and that tax cannot be indefinitely deferred by societies retaining tax exempt amounts for significant periods of time. [Schedule 2, item 7 and the definition of 'copyright collecting society' in subsection 995-1(1)]

Application and transitional provisions

2.22 The amendments apply from 1 July 2002 to all copyright and non-copyright income collected or derived by copyright collecting societies, and to all payments of copyright and non-copyright income made by copyright collecting societies to members.

2.23 Due to the possibility of some societies being disadvantaged by the retrospective operation of the amendments, societies may elect to defer entry into the new taxation regime until 1 July 2004. In order for such an election to be valid, it will need to be made to the Commissioner of Taxation in writing within 28 days of this bill receiving Royal Assent. Societies making a valid election will only be exempt on relevant copyright and non-copyright income collected or derived on or after 1 July 2004. [Schedule 2, item 11, section 410-1]

2.24 To avoid imposing retrospective obligations on copyright collecting societies, the requirement for societies to provide a notice to members outlining details of payments (see paragraph 2.18) will only apply from the income year following the income year in which this bill receives Royal Assent. [Schedule 2, item 13]