Royalties are an important way of commercialising and making money from your intellectual property or other assets. Royalties ensure that you are compensated when others use your intellectual property or other assets.
It is important that you hire an author lawyer if you are looking to enter into an agreement whereby you will pay or receive royalties. This article explains what royalties are, the types of royalties and things to look out for.
Author: Farrah Motley, a commercial lawyer with experience in writing international supply agreements and helping Australian businesses to reduce legal risks
Meaning of royalty
A royalty is a payment that is legally binding and made to a person, or company, for the use of their assets indefinitely or for a period of time. Assets can include things such as any natural resource, franchise, or any work that has been copyrighted.
For instance, a royalty would be the payment made to musicians whenever their original songs are played in bars or restaurants, used in movies, played over the radio or television and performed at concerts.
Usually, royalties are considered as revenue generators that are designed to reimburse the copyright or property owners for the use of their assets. In return for the payment of royalties, the owner licenses out the use of their assets. Generally, royalty agreements should be prepared by a commercial contract lawyer.
In Stanton v FC of T(1955) 92 CLR 630; 11 ATD 1 the Full Court of the High Court of Australia described how Australian law defines a royalty:
“In the case of monopolies and the like the essential idea seems to be payment for each thing produced or sold or each performance or exhibition in pursuance of the licence. In the same way in the case of things taken from the land the essential notion seems to be that the payment is made in respect of the taking of something which otherwise might be considered to belong to the owner of the land in virtue of his ownership. In other words it is inherent in the conception expressed by the word that the payments should be made in respect of the particular exercise of the right to take the substance and therefore should be calculated either in respect of the quantity or value taken on the occasions upon which the right is exercised.”
Types of royalties
Several types of properties are covered under royalty payments. The most common ones are performance royalties, patent royalties, mineral royalties, book royalties, and franchise royalties.
Under this, the copyrighted music owner receives an amount every time his music or song is played in a movie or on a radio station or by a third party. To collect the royalties, sometimes musicians depend on a private performing rights organization, like BMI or ASCAP, to get the royalties collected for them.
When a person creates or innovates a product, they patent it. Thus, when a third party intends to use the same product, they need to sign an agreement accepting to pay the royalty to the patented product owner. Thus, the inventor’s intellectual property is reserved forever and the inventor gets compensated as well.
These royalties are paid by the companies that want to extract minerals from a property to the property owner. Companies or parties that want to extract minerals from land or property usually pay an amount according to the revenue or units to the land or property owner.
These royalties are paid by publishers to authors. Whenever a book is sold, an amount is already decided and paid to the author.
If you are in a position where you will either be paying book royalties or receiving book royalties, it is important to seek advice from a book contract lawyer.
A business owner, in this case, called a franchisee, will have to pay a royalty amount to the franchisor to open a branch under the franchisor’s company name.
Let’s take the example of opening a McDonald’s branch. A McDonald’s franchise costs from $1,000,000 to $2,250,000. It also includes a franchise fee of $45,000 that should necessarily be paid to the McDonald’s Corporation.
Examples of the use of royalties
Under book franchises, an author may receive royalty according to the sales of their book. For example, the author may receive around 15% on net sales of hardbacks as the royalty and around 7.5% on paperbacks’ net sales.
A person willing to open a restaurant franchise like McDonald’s or KFC will also need to pay a royalty for the same. To open a franchisee of McDonald’s Corporation, one needs to invest around one to two million dollars initially including the franchise fees of $45,000 in McDonald’s.
An example of a wider royalty system would be the royalty paid by satellite TV services, like cable television or Direct TV, to networks or superstations to broadcast their channels on cable television systems.
If you have any questions regarding royalty payments for authors, contact an author lawyer.
The terms and conditions of your royalty payments are declared in a royalty agreement. It also includes how and when you will receive it. However, it is always recommended to read and understand all the terms and clauses carefully.
Most importantly, some main points should be noted like the contract duration, the rights that you and the other party retains, and many any other. Another important thing that must be noted is that you would like to make sure if, without your permission, the other party can modify your work or not.
Inclusions of royalty agreement:
- live performance agreements
- music record deals
- photo licensing agreements
- publishing deals
You must have good knowledge about the standards of royalty payments in your field. This is because of the reason, that when you have sound knowledge about the royalty standards you can easily identify if the other party is doing an unfair deal or not and can also negotiate for your royalties.
These societies help in the collection of royalties. When you want to make it easier to let others use your work, you must have one of these societies with you, in addition to the royalty agreement.
In Australia and internationally as well, collecting societies work with third parties to help you in receiving the royalty when others use your work.
According to the industry you are in, several collecting societies are there with whom you can collaborate to get the royalty payments easily.
For instance, Australasian Mechanical Copyright Owners’ Society Ltd (also known as AMCOS) and Australasian Performing Right Association (also known as APRA) help songwriters, music publishers, and composers with collecting and distributing their particular royalties. CAL or Copyright Agency Limited helps authors with the collection and distribution of the literature royalties.
Collecting societies also assist people with any type of copyright queries and determining any unlicensed usage of your work. For instance, APRA AMCOS work via an internet portal using music recognition technology. This technology lets you identify the times your song has been played on all licensed venues and places. Once identified, the collecting societies will collect the fee from them and pay your royalties.
Taxable royalty payments
Royalties are treated differently from other forms of income under the Income Tax Assessment Act 1997 (Cth). For this reason, it is important to seek tax advice regarding the receipt or payment of royalties.
Royalty payments are a form of income and must be declared on your tax returns. According to your work (if your work is sold overseas or not), it is decided if your royalties will be a part of your Australian income or foreign income.
Similarly, when you pay a royalty to another party to use their work, those payments may also form part of your business expenses to be included in your tax return. The name, address, and the amount paid to the other party must be declared. Additionally, if a resident is paying royalty to a non-resident, it is important to know whether the tax is paid or withheld.
However, in the case of residents paying royalty to non-residents, a tax treaty or a double tax agreement with the other party’s country, 30% of tax is withheld.
Royalties can be a great way to monetise intellectual property and other assets. The payment of royalties ensures that you are compensated for your innovation or if you are the user, that you can receive the benefit of someone else’s assets at a substantially lower cost.
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Farrah Motley | Director
M: 1300 003 077
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