Are the payments made by Entity A to Entity B under the Royalty Deed deductible under section 8-1 of the ITAA 1997?
Yes. This ruling applies for the following period : The applicable ruling period The scheme commences on: The applicable date
Entity A is a resident company for Australian income tax purposes. Under a Royalty Agreement, there is a Net Profit Royalty payment which is based on the level of the mineral produced from certain mining tenements less all the costs of producing that mineral. The payment for the net profit royalty has been assigned a number of times and is now being paid by Entity A to Entity B. Entity A assumed the obligation to make these Net Profit Royalty payments when it acquired its interest in these mining tenements.
A deduction is allowed under section 8-1 of the ITAA 1997 for losses or outgoings to the extent that the loss or outgoing is incurred in gaining or producing assessable income, or is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, a deduction is not allowed under the section where the loss or outgoing is of a capital, private or domestic nature, or is incurred in producing exempt income, or where another provision prevents a deduction. The payment of the Net Profit Royalty to Entity B is necessarily incurred in gaining or producing assessable income, as there is a sufficient nexus between the outgoing and the business carried on for the purpose of producing assessable income ( Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47).
The Net Profit Royalty payments do not secure an enduring benefit for Entity A or add to the profit yielding structure of Entity's business in any way. As such the payments will not be capital in nature. The Net Profit Royalty is also not of a private or domestic nature and is not incurred in producing exempt income and no other provision prevents a deduction. Conclusion Therefore, a deduction is available to Entity A under section 8-1 of the ITAA 1997 for amounts paid to Entity B as Net Profits Royalty.