Effects of tax legislation on APRA

A number of issues arise in relation to the effects of tax legislation on APRA and its members and, in particular, the payment of royalties. This document is intended to bring together as many of these issues as possible to assist members in their understanding of how they are affected by PAYG and GST.

1 - "Supply" and "Consideration"

The GST laws look at each transaction between business entities to determine who makes a "taxable supply" of goods or services and who pays (the consideration) for them. Writer members supply their services (by assigning rights in their musical works) to APRA: in return APRA pays consideration by way of royalties.

2 - Business Entity

A "business entity" is any person or organisation which makes a taxable supply of goods or services in return for a payment: this excludes employment.

A business entity for this purpose may be a person, including a person registering as a sole trader, a partnership, proprietary limited company, family trust or incorporated association.

An APRA member is therefore a sole trader for this purpose insofar as his/her relationship with APRA is concerned

3 - Australian Business Number (ABN)

From 1st July 2000 the ABN is the identifying number by which the ATO will identify all businesses. All businesses will have to quote their ABN on their invoices to other businesses. If they don't they'll automatically have tax deducted at the highest marginal rate (currently 46.5%) on all payments over $500.

Tax withheld will be paid over to the ATO and may only be reclaimed or offset when the next annual Tax Return is completed. All APRA members earning over $500 per distribution must have an ABN or suffer the withholding tax. Members may of course be registering themselves, individually, as "sole traders" for the purpose of obtaining an ABN and this will be acceptable when it is clear the "business entity" is the writer member him or herself.

4 - Payments to 3rd parties:

An APRA member may direct APRA to pay his/her royalties to a third party e.g. a management company, family trust etc. However, the member is required to supply APRA with his/her own ABN if the payment is not to be subjected to withholding tax. It is not sufficient for APRA to receive an ABN from the party to which the payment is actually paid. This is because the payment is deemed (under Section 11-15(2) of Schedule 1 to the Tax Administration Act) to be made to the party making the supply (i.e. the member) not the recipient.

5 - Goods and Services Tax (GST)

All businesses must register for GST if:

• it is carrying on an enterprise, and
• its annual turnover is $50,000 or more

As stated above, APRA members earning royalties are considered to be businesses which "carry on an enterprise" for this purpose.

A member with an annual turnover which exceeds the threshold for GST will also be required to charge GST at 10% of the consideration (or payment for services provided) including royalties from APRA. The ATO has authorised APRA to raise these "recipient created tax invoices" on the member's behalf.

Businesses with an annual turnover of less than $50,000 may elect to register for GST to enable them to recover GST on goods and services purchased ("inputs"). However, GST registration will give rise to extra paperwork.

If you are not registered for GST you will not be able to recover inputs on business expenditure.

6 - Band members and members' relationships with other parties

If APRA members are also members of a band they actually, or effectively, have a contract between them as individuals and "the band". When the band plays gigs - or makes recordings etc. - the question will be whether the band, as an entity, is contracted to play or whether the individual members are contracted. If the band is contracted it is making the "taxable supply" and the same considerations apply as discussed above: it will have to have an ABN in addition to any ABN's held by individual members. Therefore the band and the individual members may need separate ABNs - and possibly be registered for GST - depending on their various business activities.

7 - Can an APRA member be considered a "Hobbyist"?

The short answer is that an APRA member cannot be considered a "hobbyist" in the event he/she receives royalties from APRA. This is because the distribution by APRA of royalties is the consideration for the "supply" made by the member to APRA when he/she executed the deed of assignment on joining.

The exceptions to the obligation to withhold tax from royalties payable to a member would arise if:

1. the assignment of rights was made in the course or furtherance of an activity, or series of activities, done as a "private recreational pursuit or hobby"; or
2. the supply is wholly of a private or domestic nature from the perspective of the member.

Whilst an individual musical work may be created in the course of a private recreational pursuit or a hobby, there does not appear to be a reasonable basis for claiming that the assignment of the rights in the copyright work to APRA occurs in the course of, or furtherance of, such a private recreational pursuit or hobby. APRA has, however, obtained a concession in the form of a private ruling from the ATO limiting the application of withholding tax to royalty payments greater than the $500 minimum threshhold. It is therefore necessary for an APRA member to obtain an ABN and advise APRA of it if the member wishes to avoid having withholding tax deducted at the full marginal rate, currently 46.5%, from all future royalty payments of $500 or more.

8 - Tax Advice

Please note that whilst APRA is required to have a broad knowledge of the Act it is not an advisor on GST or PAYG; please contact your professional advisor for more information.

You can also get information on ABNs and GST on the ATO websites:
ato.gov.au and www.gststartup.gov.au