If you have created something you can make money off, congratulations! You could be an artist, an inventor or the owner of a tangible asset. You might also be interested in leasing intellectual property or physical property.
In this article, we’ll walk you through some common types of royalties, and explain how it all works.
What Are Royalties?
Royalties are paid to the owner of particular property for the use of that property. They’re commonly used in regard to intellectual property, particularly in the music, film, mining and publishing industries.
So, assuming you have a licence agreement in place, every time someone buys or plays your music or uses your photographs, you will be entitled to receive a payment.
How Do Royalties Work?
A licence agreement, which is an official permit to use something without owning it, will allow another party to use the work of the owner in a particular way. In return, the owner will receive payment. The amount of royalties that must be paid should be made clear in the licence agreement.
For example, if you wish to sell the right to use some of your photographs to a company, you must include a detailed description of the images, and the contract should outline the scope of the use of the images. The specifics of the payments of the royalty must also be included in this contract.
Royalties For Music
Given the fact that there are multiple parts of a piece of music – production, lyrics, recording, etc – commonly, there are numerous owners of the individual parts of the music. As such, each individual owner may have copyright over their specific piece of work. Therefore, it’s common that royalties will be split between the different owners of the music.
On streaming services such as Spotify, artists must be linked with a distribution company, who will be in charge of collecting and paying royalties to artists. So, when a user streams a song through a streaming service, the artist will be entitled to composition royalties.
If a song is used in a TV show or played on the radio, the artist will be able to collect performance royalties. Artists also receive royalties every time they perform their song live.
To receive these royalties, an artist’s song must be registered with a collection agency, such as APRA AMCOS, and they must make annual reports.
Royalties For Patented Technology
If you have a patent and someone wishes to use your patentable invention with your permission, you have the right to set up an agreement where the user will pay you royalties.
Royalty rates are commonly set as a percentage of revenue generated by the patent. They may come in the form of a lump sum or a running royalty (which will be paid recurrently).
An example of a patented invention that receives royalties is the technology in Wi-Fi chips.
Royalties For Books
When an author has published their book through a publisher and the book gets distributed worldwide, it is common for the author to be paid royalties based on the number of books sold.
A well drafted Publishing Agreement should set out intellectual property ownership, how payment is made and what payment is, confidentiality, liability limitation, scope of the services, how the agreement can be terminated and how long it will go for.
In some cases, a lump sum may be paid to the author in advance of publication based upon the expected amount they believe will sell before publication.
The specifics of the agreement may differ, and should be discussed thoroughly between the author, their agent and the publisher before a publishing agreement is made in writing.
Royalties For Mining
Mineral resources are commonly owned by the Crown, and as such, royalties will be charged by the Crown for the transfer of the right to extract mineral resources. Royalties for minerals are categorised as: coal royalties, mineral (non-coal) royalties or petroleum royalties. In NSW, mineral royalties are managed by Revenue NSW.
The holder of the mining lease/sub-lease must lodge a royalty return, and is liable to pay royalties to the Crown on minerals that are recovered pursuant to the lease agreement.
Royalties on coal and petroleum must be paid monthly, while royalties for minerals other than coal are paid on an annual basis.
The royalties payable on the different resources are calculated and determined by the mining method that the lease holder undertakes. This means it’s important that you conduct thorough research and understand which royalty scheme applies to you.
Are Taxes Paid On Royalties?
Royalties are considered part of an individual’s taxable income. If you are a business paying an individual royalties, you may be able to offset this as a business expense.
How We Can Help
It’s important to set up your royalties correctly from the start. You don’t want to miss out on profiting from your invention, and it’s important to understand your rights as the owner or licensor of intellectual property.
Here at Sprintlaw, we are highly experienced in drafting licence agreements for creatives and helping clients protect their intellectual property. Feel free to contact the team at Sprintlaw on 1800 730 617 or via email at firstname.lastname@example.org for a free, no-obligations chat.
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