In this Alert, Partner Hayden Delaney, Associate Michele Davis and Solicitor Rachael Nyst present a case update on the recent decision concerning copyright and withholding tax.  Earlier this month, the Commissioner of Taxation filed its appeal to the Full Federal Court against this decision. 

Case Update and Commentary

On 22 December 2014, Justice Bennett of the Federal Court of Australia delivered her judgment in Seven Network Limited v Commissioner of Taxation [2014] FCA 1411. 

The proceeding was commenced by Seven Network Ltd (Seven) after the Commissioner of Taxation (Commissioner) disallowed Seven’s objection to three penalty notices issued by the Commissioner after its notice of private ruling had been given.  Seven was seeking declarations that it did not have to withhold tax in relation to certain payments it made to the International Olympic Committee (IOC) in relation to the use of a signal (being the ITVR Signal), which was used by Seven in its live television broadcasts in Australia of the Olympic Games. 

One of the issues raised in the private ruling was in relation to the payment of withholding tax by Seven for “royalties”.  Seven contended that the payments made to the IOC were not “royalties” within the terms of Article 12(3) of theAgreement between Australia and Switzerland for the avoidance of Double Taxation with respect to Taxes on Income(Swiss Treaty), and Seven was not liable to withhold any amount of royalty withholding tax in respect of the payments.  The Commissioner argued that the payments for the ITVR Signal were royalties – this is because the payments were made in consideration of the right to use “copyright or other like property or right”. 

Transmission of the ITVR Signal

In order to determine whether the ITVR Signal was a work capable of being considered a “copyright or other like property or right”, Bennett J had to consider the technical aspects of the ITVR Signal; the manner in which it was transmitted and received by Seven and other authorised Olympic broadcasters.  The key technical considerations can be summarised as follows:

  • the signal is transmitted via a linkage of copper atoms, via a copper cable;
  • the data which is transmitted via the copper cable is binary numbers which is then converted by a receiving device into television coverage (that is, images and sounds);
  • there is no picture, image or sound recorded or permanently stored in the copper coaxial cable.  If the cable is disconnected from its signal source, such as a camera, microphone or other device, there will be no signal left in the cable;
  • visual images and sounds cannot be reproduced from an ITVR Signal, although they can be produced from an ITVR Signal with the use of a receiving device; and
  • the ITVR Signal was not suitable for broadcast in its “raw” form.  Seven could use or alter the ITVR Signal and add commentary and commercials to create the broadcast which was ultimately aired by Seven. 

Is there Copyright in the ITVR Signal?

Both parties agreed that the question of whether copyright exists in the ITVR Signal is to be decided under Australian law, having regard to the provisions of the Copyright Act 1968 (Cth) (the Act). 

The Act recognises categories of subject matter that may be subject to copyright.  In respect of television broadcasts, being “subject-matter other than works”, a broadcast is likely to be made up of a sound recording and a cinematograph film (i.e. the image).  Additional considerations are to be had to broadcasting, and making a copy of, the sound recording and cinematograph film. 

Bennett J considered whether (as required by s24 of the Act) the “sounds or visual images” were embodied in an article or thing so that those sounds or images are capable of being reproduced from the article or thing.  Having regard to the expert submissions that were presented by Seven and the Commissioner, Bennett J held that:

  • what is transmitted by the ITVR Signal is data and not itself visual images or things until converted into visual images or things in the receiver;
  • the visual images or things are therefore not embodied in the ITVR Signal;
  • the ITVR Signal is not embodied in any article or thing;
  • the use of the data may result, via the receiver, in an aggregate of visual images capable of being shown as a moving picture, or of being embodied in another article or thing (as set out in the definition of cinematograph film in s10(1)(b) of the Act);
  • to be a cinematograph film, the aggregate of the visual images must first be embodied in the article or thing and that does not occur in the signal the subject of payment but after the data stream is converted by the receiving device, such as a television receiver in Australia. 

Because the data (which is the ITVR Signal) “passes through” the copper coaxial cable and is not “embodied” in the cable itself, it was held that the ITVR Signal did not meet the requirements of reproduction in s24 of the Act as the sounds and visual images are not capable of being reproduced (either in a material form, or at all) from the ITVR Signal.  The receiver itself produces the sounds and visual images; the ITVR Signal does not have any capacity for reproduction and the recording of the ITVR Signal was not used for distribution to Seven (or any other Olympic broadcasters). 

Furthermore, when considering whether the data stream is “other like property or right”, Bennett J held that these additional words in Article 12(3) of the Swiss Treaty were not intended to give a broader meaning, but were there to capture those instances where different legal systems dealt with intellectual property rights somewhat differently; consideration would be required when looking at comparable intellectual property rights.  In this instance, copyright was recognised in Australia as a statutory right and it would not be necessary to consider other comparable rights. 

Accordingly, Bennett J held that the subject matter (being the ITVR Signal) was not a cinematograph film, and is not a “copyright or other like property right”.  Accordingly, the amount payable under the agreement between Seven and the IOC would not be considered a “royalty” within the terms of Article 12(3) of the Swiss Treaty and Seven would not be required to withhold any tax from the payment that was due to the IOC. 

Conclusion

Given the decision of Bennett J, it would appear that the rapid changes in broadcast technology has resulted in a lacuna, where the transmission of data (being a set of binary numbers) that contains a digital feed of images and sounds (without the images and sounds existing prior to the transmission of the data feed, nor being embodied in the data itself, or existing at the other end of the data transmission) is not considered a “visual image or sound” or a subject matter of copyright law. 

Although the decision was favourable for Seven, as they were not required to withhold tax (and it was not contested that Seven (or the IOC, depending on the broadcast) owned the copyright in the resulting broadcast that aired), it begs the question whether the decision could potentially have negative ramifications for those trying to claim ownership of copyright, for example, in instances of infringement. 

Given the ease at which data can be transmitted and intercepted over the Internet, one can foresee a possible situation where live-streamed content transmitted in a binary format may be able to be technologically repeated or rebroadcast without it being embodied in an article or thing, such as a receiving device (which converts the raw binary data into sounds and images). Based on this decision, it is arguable that one would be able to distribute the binary data during re-transmission without infringing copyright. This is because, based on this decision, no copyright would have existed at the point of interception. 

We will await the outcome of the appeal.