Question

Commissioner of Taxation v Seven Network Ltd [2016] FCAFC 70.(Case study analysis: what did judges say, what did the tax payer say, major issue, and judgement)

Answer 1

The Full Federal Court has dismissed an appeal from the Commissioner of Taxation in regards to whether payments the Seven Network made to the International Olympic Committee (IOC) should be considered royalties for the purposes of the Income Tax Assessment Act 1936 (Cth). The decision revolved around the issue of whether copyright or some other right subsisted in the ITVR Signal, which was a digital signal transmitted from the “host broadcaster” from the relevant Olympic Games to the Seven Network (and other international broadcasters). This process of transmission did not involve any recording or storage of the ITVR signal.

Facts of the Case

The Seven Network made a number of payments to the IOC for broadcasting rights to the Olympic Games. The Commissioner of Taxation argued that the Seven Network should have withheld part of the payment on account of the IOC’s liability for withholding tax. The Commissioner issued three penalty notices in respect of the payments, on the basis that the payments were “royalties” under Article 12(3) of the Agreement between Australia and Switzerland for the Avoidance of Double Taxation with respect to Taxes on Income [1981] ATS 3 (the “Swiss Treaty”). The Seven Network objected to each of the penalty notices, but the Commissioner maintained his position in a Notice of Objection decision. The Seven Network then filed an application in the Federal Court for judicial review.

Federal Court Decision

The central issue in the case was whether the payment was a “royalty”, defined in the Swiss treaty as being “payments… to the extent to which they are consideration for the use of, or the right to use, any copyright… or other like property or right…” Thus the case turned on the characteristics of the ITVR signal that Seven received from the various host broadcasters.

Justice Bennett’s conclusion was summed up at [38] of the Full Federal Court decision:

• The subject matter of the [Disputed] Amount is not a cinematograph film, and [it is] not a copyright or other like property or right.
• The [Disputed] Amount is not a “royalty” within the terms of Art 12(3) of the Swiss Treaty.
• Seven is and was not liable under s 12-280 of Schedule 1 to the [TAA] to withhold any amount from the Payment.

• Seven is and was not liable under s 16-30 of Schedule 1 to the [TAA] for penalties for failing to withhold.

The Commissioner appealed from the decision.

Full Federal Court Decision

The Full Federal Court held that whether copyright subsisted in the ITVR signal should be determined by reference to the Copyright Act. They concluded:

“In summary, a cinematograph film in which copyright subsisted under the Copyright Act is not made until the first copy is made. There must also be some relevant territorial nexus between the film and Australia (unless the CIP Regulations apply, in which case there must be another relevant territorial nexus). Further, having regard to the definitions of “cinematograph film”, “soundtrack” and “copy” in s 10(1), as well as s 24 in the Copyright Act, it is, we consider, plain enough that the concept of embodiment relevant to “cinematograph film” means some “material embodiment”.” [at 70]

They rejected the Commissioner’s contention that the payments were for copyright in a cinematograph film under the royalties definition in the Swiss Treaty. They also rejected the Commissioner’s contention that it was for some “other like property or right”, which their Honours found referred generally to intellectual property rights.

The Full Federal Court upheld Justice Bennett’s decision and dismissed the appeal.

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