How Do Royalty Payments Work in the Creative Industry?
Royalties are a common feature of the creative industry. It is seen through YouTubers who get royalties from content views or nightclubs paying artists to play their music. Filmmakers, musicians and writers can have people use their work in return for royalty payments also known as royalties. There is not a fixed way to approach royalties as copyright laws have not set a standard. Instead, it will depend on the royalty agreement made between the two parties and the relevant industry standards.
Royalty agreements are legal documents outlining the relationship between two parties and how royalties are going to be transferred. Some examples are record and publishing deals. Royalty agreements will be particular to each situation and the standards of drafting an agreement will differ from industry to industry. Therefore, a person getting into an agreement must undertake research in the scope of their relevant creative industry such as music or publishing to understand their entitlements and enhance the negotiation process.
Although this is not an exhaustive list, royalty agreements typically outline:
- the terms of the royalty payment,
- the creator’s intellectual property rights over the work,
- whether alternation of the work by the user is permitted by the creator,
- the amount to be payed for using an item of work,
- the agreement termination process.
It can also detail how the royalties are calculated such as by having it as a fixed fee or a percentage of the proceeds. It can also include advance royalties which is when there is a fixed amount plus a percentage of any proceeds. The fixed amount will be the advance royalties and will be paid regardless of whether the work has profited the user.
Although royalty agreements allow for work and royalties to be exchanged between the agreeing parties, collecting societies allow for a broader audience to use a person’s work. Collecting societies help creators with the process of collecting royalties by doing it for them and then distributing the proceeds to the creator. They also help creators retrieve royalties from overseas users by connecting with international collecting societies.
There are a variety of collecting societies, each with its own focus. Such as the Australian Performing Rights Association and Australasian Mechanical Copyright Owners’ Society Ltd (APRA AMCOS) which focus on helping musicians, composers and songwriters collect their royalties. The Phonographic Performance Company of Australia (PPCA) focuses on collecting royalties from broadcasters for using recorded music and music videos. Collecting societies will also help with identifying unauthorised and unlicensed use of creative work through their own processes which help creatives monitor how their work is being used.
Tax and Royalties
Royalties are considered part of a person’s taxable income and are taxed as such. A person earning royalties should declare them in their tax return. The process of claiming royalties in a tax return will vary due to several factors. It will depend on whether the party entitled to royalties is a corporation or an individual and whether the creator is a non-resident selling work in Australia. If royalties are paid by an Australian resident living to a non-resident, royalties will be subject to a 30% withholding tax unless there is a tax treaty with the non-resident’s country.
Royalties and royalty agreements vary depending on the interests of the creator and the standards of their relevant creative industry. It is important that anyone seeking to ensure they are correctly compensated for having their work used by another person either has a royalty agreement or are part of a collecting society.
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