Licensing

So you've created something unique or 'novel' that is protected by a copyright design or patent?
How is income earned from that?

The process of giving the right for someone else to use your 'Intellectual Property' (IP) and pay you a part of what they have earned is called licensing.
Income payed by a 'Licensee' to you is called 'royalties'.

Licensing can be done in many different ways :

The last three on the above list may sound like 'giving it away' however many successful (and profitable) businesses have been built
using them by giving away IP for free and then charging for support for the product.


Royalties

Depending of the terms of licensing, any royalties are paid either immediately on licensing or at set times of the year.
The amount of royalties earned depends on the type of IP being licensed. Generally, the bigger the market the smaller the percentage of total income is paid.

This is because mass produced IP (media / products) have a very low manufacturing cost with most of the larger cost being for 'brand' and promotion which
smaller IP developers can't really have any claim to. Your IP could be the greatest thing in the world, but it will sell a lot more with 'Coca Cola' or 'Nike' slapped on it's side rather than 'Miracle from Freda's Kitchen Table'!


Tax considerations

Services supplied to non-australian residents are provided GST free.
However it should be noted that royalties paid by an Australian manufacturer to an overseas IP owner may have 30% of license fees and royalties withheld
to a country that does not have a 'double tax' treaty with Australia. With these countries the amounts withhheld may be reduced to 15% or 0% where a free trade treaty exists.
Due to this imbalance Australian businesses will be charged a premium on non-Australian listed IP to 'gross up' the monthly base licensing fee guaranteeing payment to the IP owner at the set monthly rates.

Australian Goods and Services Tax (GST):

In Australia, it is necessary for a licensing IP owner to have an Ausntralian Business number (ABN).
An ABN is necessary otherwise royalty payments and licensing fees will be subject to the highest level of withholding tax (45% as of Feb 2009).
Any fees and royalties withheld can only be claimed back at the end of the next financial year.
Earning royalties from IP is classified as 'carrying on an enterprise' and the IP owner is classified as 'a business'.
If an IP owner would like fees and royalties to be paid to a third party (say a company or a trust) then that party must also supply an ABN number or suffer the same withholding tax.

In addition to the above, if the total monthly turnover from licensing is more than $75,000 per year then you or your business must be registered for GST in addition to having an ABN.
The IP owner is then expected to invoice ACPU for GST on each monthly fee and this GST can then be claimed back as an 'input credit' when submitting a business activity statement.
ACPU's monthly licensing fees all include a GST component that the IP owner may then claim back.