Q: In 2008, parties entered into a royalty contract for the use of a computer software developed by another independent entity. Under the terms of the terms of the royalty contract, the intellectual property rights subsisting in the software were assigned to my client in consideration of ongoing royalty payments, which were calculated at 15% of income generated by the use of the software (approximately $110,000 per annum). The parties have now agreed to vary the contract to end the ongoing royalty payments and replace them with a one-off payment of $650,000 for the ongoing use of the software. During the contract period, no GST.
- Is GST attributed to the one-off payment for the right to use the software?
- Should GST have been attributed to the ongoing royalty payments?
- What is the taxation accounting entry for the one-off payment?
- Is the one-off payment an expense? Can it be amortized and how many years can that amortization be over?
A: Based on the facts, GST is payable on both the one-off payment and the previous ongoing royalties. GST is payable when an entity makes a taxable supply. A taxable supply defined as GST Act s 9-5.
In this case, the supply was the right to use the software and the consideration was the royalty payments (in the first instance) and the one-off payment (in the later transaction)
- If the software was supplied as part of an enterprise carried on by the supplier.
- If the entities are both carrying on enterprises in Australia;
- The case does not mention that whether the supplier is registered for GST, but since the consideration exceeds the registration turnover threshold of $75,000, the supplier would in any event have been required to register for GST.
- The supply is neither GST-free nor input-taxed (not within Div. 38 or 40)
The tax accounting treatment of this transaction will depend on the actual nature of the supply. If the ownership of the rights was transferred to your client, then the rights would be treated as a non-current asset in the statement of financial position; From a tax perspective, these rights would be a depreciating asset under s 40 30(2)(d) of the lncome Tax Assessment Act 1997 (TAA 1997) and can be written off over its effective life (usually the term of the right). If, on the other hand, the rights were merely to your client, then the royalties would be deductible under s 8-1, but the one-off payment would need to be deducted over the remaining term of the deal.