Case V122

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 29 July 1988.

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P.M. Roach (Senior Member)

The applicant is a company resident in Australia, owned by overseas interests. Its business is music publishing. I shall refer to it as ``Soundco''. It holds copyright in music and derives substantial revenues from within Australia in relation to its investment. It also derives significant revenues from overseas countries, from those who publish material in which Soundco holds copyright. One such country is New Zealand. New Zealand is party to a double tax agreement with Australia. It is also a country which operates a system of withholding tax.

2. Persons in New Zealand who avail themselves of copyright material may do so without infringing copyright, so long as they comply with a system described by Aickin J. of the High Court of Australia as a ``compulsory licence'' or ``statutory licence'' system (
R.C.A. Limited v. F.C. of T. 77 ATC 4275 at pp. 4279-4280; (1977) 137 C.L.R. 583 at p. 592). The system provides that persons resorting to copyright material must give notice of their intention to do so to the owner of the copyright and thereupon they become liable to pay a fee for the use in question. Such New Zealand users paid moneys to Soundco, but only after deducting ``withholding tax'' from the amount due and remitting it to the Commissioner for Inland Revenue, New Zealand.

3. Despite its substantial revenues, Soundco was neither particularly profitable nor attentive to its fiscal duties. It only lodged its returns for years of income ended 30 June 1980 and 1981 in March 1983; and that for the year ended 30 June 1982 in July 1983. The 1983 return was lodged in April 1984.

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ATC 765

4. The applicant would have it that in those years the company only derived taxable income in the year of income ended 30 June 1983 and that the taxable income so derived amounted to no more than $30,042. The initial contention of the Commissioner on the other hand was that Soundco derived a taxable income in all years, save the year ended 30 June 1982 when it suffered a loss. In the years of income ended 30 June 1980 and 1981, the Commissioner issued original assessments and, subsequently, twice amended them. In doing so he adjusted his original calculations to take account of different considerations as follows:

                                                  1980               1981
                                                   $                  $
Taxable income                        (1)        24,908             54,319
                                      (2)        24,908             54,319
                                      (3)       (18,690)            35,629
Tax assessed                          (1)        11,457.68          24,986.74
                                      (2)        11,457.68          24,986.74
                                      (3)           -               16,389.34
Additional tax for late lodgment      (1)         2,432              3,173
                                      (2)           -                   -
                                      (3)           -                   -
      

An assessment of Div. 7 tax was also made for the year of income ended 30 June 1981.

5. For the year of income ended 30 June 1982 it is common ground that there was no taxable income, but the amount of available losses is in dispute. The latter factor accounts for the difference between the parties for the year of income ended 30 June 1983. The Commissioner claims that taxable income arose amounting to $52,617, whereas the applicant concedes a taxable income of only $30,042.

6. The differences between the respective assertions as to taxable income can be summarised as follows:

                                          Soundco              Commissioner
                                             $                       $
         To 30 June 1980
      c.f. losses                         (43,598)                (43,598)
      Taxable income
          -    not disputed                 4,771                   4,771
          -    disputed                                            20,137
                                          --------                --------
         To 30 June 1981
      c.f. losses                         (38,827)                (18,690)
      Taxable income
          -    not disputed                35,961                  35,961
          -    disputed                                            18,358
                                          --------                --------
         To 30 June 1982
      c.f. losses                          (2,866)                 35,629
      Taxable income
          -    not disputed               (50,864)                (50,864)
          -    disputed                                            19,709
                                          --------                --------
         To 30 June 1983
      c.f. losses                         (53,730)


                      (31,155)

                                          Soundco              Commissioner
                                             $                       $
      Taxable income
        not disputed                       83,772                  83,772
                                          -------                 -------
                                          $30,042                 $52,617
                                          -------                 -------
      

In each instance what is in dispute is whether or not the amounts of withholding tax withheld in New Zealand are to be brought to account as assessable income.

7. In its essence, the argument before the Tribunal revolves around construction of sec. 25 and 26(f) of the Income Tax Assessment Act 1936, (``the Act''), rather than concepts involved in and about double taxation conventions. The argument is that the royalties could only constitute assessable income by reason of sec. 26(f) of the Act; and that only so much of the royalties paid as was ``received'' (that is, the amount delivered up from New Zealand to the applicant after withholding tax levied in that country was withheld) constituted assessable income. The former proposition is founded on a contention that, just as the particular provisions of sec. 26(d) of the Act, take precedence over, and exclude from operation, the provisions of sec. 25 of the Act, so too does sec. 26(f). The latter contention relies on the view that ``received'' in sec. 26(f) is to be narrowly construed and understood only in the spirit of the comment that ``receivability without receipt is nothing''. The total argument is supported by the circumstance that, although the United Kingdom double tax convention expressly makes provision for dealing with royalties such as this, no such provision is to be found in the New Zealand convention. That being so, Soundco has accepted that the Commissioner correctly brought to account the $41 withholding tax retained by United Kingdom authorities, but incorrectly asserts that he treated the several amounts of withholding tax retained by New Zealand authorities as portion of royalties received.

8. My view of the matter is that the arguments are not sound. I find that the provisions of sec. 25 and 26(f) of the Act are not mutually exclusive. Section 26(f) of the Act constitutes as assessable income some amounts which would not constitute assessable income pursuant to sec. 25 (cf.
McCauley v. F.C. of T. (1944) 69 C.L.R. 235; sed cf.
Stanton v. F.C. of T. (1955) 92 C.L.R. 630). But in my view, unlike sec. 26(d) as interpreted by the High Court of Australia in
Reseck v. F.C. of T. 75 ATC 4213; (1975) 133 C.L.R. 45, sec. 26(f) does not reduce the amount which would otherwise constitute assessable income for the purposes of sec. 25.

9. Having reached that conclusion, it is not strictly necessary to consider the second point. However, I doubt that it is sound. For the applicant, it is argued that the word ``received'' expresses a narrower concept than ``derived''; and that ``received'' is a term used in many of the subparagraphs of sec. 26 (cf. subsec. (g), (h), (i), (j), (ja), (k); sed cf. (b) ``derived''; (d) ``paid''; (e) and (ea) ``given or granted''; (eb) ``paid''). None the less, I am not persuaded that the term is used in either a narrow or technical sense, or so used as to indicate an intention to attribute to it a meaning distinct from ``derived''. In particular, I am not persuaded that it is intended to convey the notion that moneys withheld from a debt by a payee by way of any form of tax and remitted to the appropriate taxing authorities, whether it be by way of a system of PAYE or of prescribed payments or of withholding tax, is to be excluded on that account from the computation of assessable income.

10. Nor am I persuaded that the absence of reference in the New Zealand convention to the method for particularly dealing with this problem is to be understood as indicating that, but for such a provision as appears in the United Kingdom convention (Art. 10), the moneys so withheld are not to constitute assessable income.

11. In the view I have formed of the matter, the taxable income of the applicant is to be determined by taking into account all of the relevant assessable income regardless of source. Nothing is to be excluded by reason of having been derived overseas, if indeed the moneys in question were derived from sources

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ATC 767

outside Australia, whether by reason of sec. 23(q) of the Act, or any provision of any double taxation convention.

12. Accordingly, I conclude that it is appropriate that the determinations of the Commissioner upon the objections under review be affirmed in so far as that affirmation will confirm the calculations of taxable income. However, it seems that there is yet some confusion about the figures.

13. Although the Commissioner issued an amended assessment for the 1980 year which resulted in the complete remission of tax and the abandonment of any assertion that the company had derived a taxable income in that year, none the less the applicant paid the fee then required of $2 [sic]; requested an independent review of that determination; and the Commissioner complied with it. That being so, there is no matter properly before the Tribunal. Having formed that view it is neither appropriate to confirm the Commissioner's decision upon the objection nor to dismiss the application - for there is no application properly before the Tribunal. Accordingly, for the reasons stated in Case U131,
87 ATC 767, I will direct that the matter be removed from the list of matters awaiting determination by the Tribunal.

14. As to the 1981 year, it appears that there is no subsisting difference between the applicant and respondent as to either the fixing of taxable income, or as to credits to be given by reason of tax withheld in New Zealand. In consequence, the decision of the Commissioner upon the objections under review will be confirmed as to both the assessment of company tax and Div. 7 tax.

15. However, the situation in relation to 1983 is not so clear. It is agreed that the determination as to taxable income is to be confirmed, but it is said that the parties may yet have to check calculations as to credits by reason of New Zealand withholding tax. That being so, from an abundance of caution, I will reserve liberty to the parties to apply for further directions and, subject only to that, shall direct that the determinations of the Commissioner upon the objections under review be affirmed.