House of Representatives

Explanatory Memorandum

Circulated By the Authority of the Treasurer, the Hon Wayne Swan Mp

Chapter 1 - Resale royalty right for visual artists

Outline of chapter

1.1 This Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to provide a streamlined tax treatment for payments made in relation to the resale royalty right for visual artists. This Bill also makes several minor amendments to simplify the tax treatment for payments made by copyright collecting societies.

Context of amendments

1.2 The Resale Royalty Right for Visual Artists Bill 2008 establishes a resale royalty right for visual artists and provides an accompanying statutory scheme.

1.3 The resale royalty right entitles eligible visual artists to a royalty payment on the sale price of any commercial resale of their original works of art over $1,000 for works acquired after the legislation takes effect. This allows visual artists to share in the commercialisation of their work in the secondary art market. The resale royalty payable is 5 per cent of the sale price.

1.4 The responsible Minister may appoint a body as the resale royalty collecting society. The collecting society is responsible for collecting resale royalty payments and distributing these amounts (minus an administration fee) to the respective resale royalty right holders.

1.5 The tax law currently provides for a streamlined approach to payments held by copyright collecting societies. In most circumstances this approach does not tax copyright payments in the hands of the collecting society. The final recipient is taxed on the payments when received.

1.6 These amendments extend analogous treatment to the resale royalty collecting society. They apply to resale royalty payments in place of the trust tax rules in Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). This ensures that the resale royalty collecting society is not taxed on payments received and held on behalf of the resale royalty right holder.

Summary of new law

1.7 The amendments ensure that the resale royalty collecting society is not taxed on amounts it collects on behalf of resale royalty right owners and holds pending allocation to them.

1.8 Nor is the resale royalty right collecting society taxed on other income it derives, provided that the amount of this other income falls within certain limits.

1.9 Amounts received by resale royalty right holders from the resale royalty collecting society are included in their assessable income, to the extent these amounts are not subject to income tax in the hands of the collecting society.

Comparison of key features of new law and current law

Detailed explanation of new law

Streamlined tax treatment for resale royalty payments

1.10 The Resale Royalty Right for Visual Artists Bill 2008 establishes a resale royalty right for visual artists. The resale royalty right entitles eligible visual artists to a royalty payment on the sale price of any commercial resale of their original works of art over $1,000 for works acquired after the commencement of the resale royalty right scheme. This allows visual artists to share in the commercialisation of their work in the secondary art market. The resale royalty payable is 5 per cent of the sale price.

1.11 The responsible Minister may appoint a body as the resale royalty collecting society. The collecting society is responsible for collecting resale royalty payments and distributing these amounts (minus an administration fee) to the respective resale royalty right holders.

Resale royalty collecting society

1.12 The amendments apply a streamlined tax treatment to resale royalty payments received by resale royalty right holders from a resale royalty collecting society in place of the trust taxation rules in Division 6 of Part III of the ITAA 1936. [Schedule 1, item 8, subsection 51-45(1)]

1.13 This is achieved by exempting from income tax in the hands of the society resale royalties, and interest on resale royalties, collected or derived by the resale royalty collecting society. [Schedule 1, item 8, paragraph 51-45(2)(a)]

1.14 The resale royalty collecting society may derive other income not directly relating to resale royalty rights. Such income is also made exempt from income tax in the hands of the society, to the extent that it does not exceed either $5 million or 5 per cent of its total income in the income year. This income could comprise, for example, consulting fees, fees received for the provision of administrative services and grant income. [Schedule 1, item 8, paragraph 51-45(2)(c)]

1.15 The amendments also allow for regulations to make exempt from income tax additional amounts of income derived by the resale royalty collecting society. [Schedule 1, item 8, paragraph 51-45(2)(b)]

1.16 The body appointed to be the resale royalty collecting society may also be a copyright collecting society, as defined by section 995-1 of the ITAA 1997. [Schedule 1, item 11]

Example 1.1 : Resale royalty collecting society is also a copyright collecting society

CollectTrust is the body appointed by the Minister for the Arts as the resale royalty collecting society. It is also a copyright collecting society as defined by section 995-1 of the ITAA 1997. CollectTrust's 2009-10 income is $1.6 million, comprising:

•

$1 million in royalties, interest on royalties and other amounts relating to copyright as defined by paragraph 51-43(2)(b);

•

$500,000 in resale royalties, interest on resale royalties and other amounts relating to resale royalties as defined by paragraph 51-45(2)(b); and

•

$100,000 in other income, including from government grants.

The first two amounts are made exempt from income tax by paragraphs 51-43(2)(a) and (b), and paragraphs 51-45(2)(a) and (b) respectively.

CollectTrust's other income is also exempt from income tax, to the extent it does not exceed the lesser of 5 per cent of its total ordinary and statutory income and $5 million. In this case $80,000 (5 per cent of $1.6 million) is exempt from income tax. The remaining $20,000 constitutes CollectTrust's taxable income for 2009-10.

Resale royalty right holder

1.17 When an artist (or any other owner of a resale royalty right) receives a resale royalty payment from the collecting society, the amount of this payment will generally be included in their assessable income.

1.18 However if, for any reason, any part of this amount is or has been taxable in the hands of the collecting society, the amount to be included in the artist's assessable income is reduced to reflect this. [Schedule 1, item 7, section 15-23]

1.19 This treatment is analogous to the tax treatment afforded to payments made to members of copyright collecting societies.

Example 1.2 : Streamlined tax treatment for resale royalty right amounts

David produces an artwork which is resold commercially, triggering a resale royalty under the Resale Royalty Right for Visual Artists Bill 2008. The resale price of the artwork is $20,000, so the resale royalty amount is 5 per cent of this, $1,000.

The reseller of the artwork pays the $1,000 to the resale royalty collecting society. It takes the collecting society several months to contact David, who has been travelling overseas. The collecting society then makes a payment to David, adjusted for interest and administration costs.

The $1,000 resale royalty amount received by the collecting society, along with any interest earned in the period prior to making a payment to David is exempt from income tax. The payment received by David is included in his assessable income in the income year he receives it.

Notice requirements

1.20 The existing provisions requiring a copyright collecting society to give notice when it makes a payment to a member are generalised to include the resale royalty collecting society. [Schedule 1, item 10]

1.21 The resale royalty collecting society must notify the resale royalty right holder whenever it makes a resale royalty payment to them. [Schedule 1, item 10, subsection 410-50(1)]

1.22 This notice must be given at the time of the payment and must be in the approved form, as determined by the Commissioner of Taxation. [Schedule 1, item 10, subsections 410-50(2) and (3)]

1.23 If these requirements are not met, the resale royalty collecting society is liable to an administrative penalty of 20 penalty units. [Schedule 1, item 19]

Copyright collecting societies amendments

1.24 The tax law currently provides that copyright income and a limited amount of non-copyright income is exempt from income tax when collected or derived by a copyright collecting society.

1.25 Copyright income and non-copyright income are currently defined terms in section 995-1 of the ITAA 1997. However, these definitions are not necessary to achieve the desired outcome. Accordingly, the amendments repeal these definitions. This is consistent with the general policy of removing unnecessary definitions, whenever possible, to reduce the complexity of the tax law. [Schedule 1, items 13 and 14]

1.26 The treatment of income collected or derived by a copyright collecting society is governed by section 51-43 of the ITAA 1997. The amendments rewrite this section, without altering its effect, by replacing the references to copyright income and non-copyright income with more general terms. [Schedule 1, item 8, section 51-43]

1.27 Specifically, the amendments maintain the existing exemption from income tax for royalties, interest on royalties and other amounts relating to copyright prescribed by regulation that are collected or derived by the copyright collecting society. [Schedule 1, item 8, paragraphs 51-43(2)(a) and (b)]

1.28 The amendments also exempt from income tax other ordinary and statutory income, unrelated to copyright, derived by the copyright collecting society, to the extent that such income does not exceed either $5 million or 5 per cent of its total income in the income year. [Schedule 1, item 8, paragraph 51-43(2)(c)]

Application and transitional provisions

1.29 The measure applies in relation to the 2009-10 and later income years. [Schedule 1, item 20]

1.30 A transitional amendment ensures that existing regulations which further define copyright income as it is collected or derived by a copyright collecting society continue to operate, notwithstanding the removal of the definition of non-copyright income. [Schedule 1, item 9]

Consequential amendments

1.31 'Resale royalty', 'resale royalty collecting society' and 'resale royalty right' are added as defined terms in subsection 995-1(1) of the ITAA 1997. Each term has the meaning given to it by the Resale Royalty Right for Visual Artists Bill 2008. [Schedule 1, items 15 to 17]

1.32 Section 10-5 of the ITAA 1997 includes a list of provisions about assessable income. The reference to 'payments to members of copyright collecting societies' is replaced by the broader term 'collecting societies'. References to the provisions dealing with payments of royalties by copyright collecting societies and by the resale royalty collecting society are included as sub-items under this new item. [Schedule 1, items 1 and 2]

1.33 Section 11-15 of the ITAA 1997 includes a list of those provisions dealing with the exemption of income if it is derived by certain entities. The reference to copyright collecting societies is amended to reflect the removal of the concept of non-copyright income, and a cross-reference to the resale royalty collecting society provisions is added to this list. [Schedule 1, items 3 and 4]

1.34 A taxpayer's assessable income ordinarily includes any amounts received as a royalty (section 15-20 of the ITAA 1997). This section is amended to exclude resale royalty payments, to clarify that these payments are instead subject to the new dedicated provisions. [Schedule 1, item 5]

1.35 The definition of 'copyright collecting society' in subsection 995-1(1) of the ITAA 1997 is amended to replace the reference to copyright income with the more general 'income of a kind mentioned in paragraph 51-43(2)(a) or (b)' of the ITAA 1997. [Schedule 1, item 12]

1.36 The reference to 'copyright, and non-copyright' income in subsection 410-1(1) of the Income Tax (Transitional Provisions) Act 1997 is replaced by 'ordinary income, and statutory income'. [Schedule 1, item 18]