How Do Royalties Work?

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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 in New Zealand.

What Are Royalties?

Royalties are payments made to the owner of certain property for the use of that property. They’re commonly associated with intellectual property, such as in the music, film, mining, and publishing industries in New Zealand.

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.

A licence agreement is an official permit to use something without owning it, allowing another party to use the work of the owner in a particular way. In return, the owner receives payment. The amount of royalties to be paid should be clearly stated 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 royalty payments must also be included in this contract.

Royalties For Music

Given that there are multiple components to a piece of music – such as production, lyrics, and recording – there are often several owners of the individual parts. Each owner may have copyright over their specific piece of work, leading to royalties being split among the different owners.

On streaming services like Spotify, artists must be linked with a distribution company, which collects and pays royalties to artists. When a user streams a song, the artist is entitled to composition royalties.

If a song is used in a TV show or played on the radio, the artist can 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 NZ, and they must make annual reports.

Royalties For Patented Technology

If you have a patent and someone wishes to use your patented invention with your permission, you can set up an agreement where the user pays you royalties.

Royalty rates are often set as a percentage of the revenue generated by the patent. They may be in the form of a lump sum or a running royalty (paid recurrently).

An example of patented technology that earns royalties could be the technology in Wi-Fi chips.

Royalties For Books

When an author has published their book through a publisher and the book is 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 outline intellectual property ownership, payment methods and amounts, confidentiality, liability limitation, scope of services, termination clauses, and the duration of the agreement.

In some cases, a lump sum may be paid to the author in advance of publication based on the expected sales before publication.

The specifics of the agreement may vary and should be thoroughly discussed between the author, their agent, and the publisher before finalising a written publishing agreement.

Royalties For Mining

In New Zealand, mineral resources are commonly owned by the Crown, and royalties are charged by the Crown for the right to extract these resources. Royalties for minerals are categorised as coal royalties, mineral (non-coal) royalties, or petroleum royalties. The New Zealand government manages these through agencies such as New Zealand Petroleum and Minerals (NZP&M).

The holder of a mining permit must lodge a royalty return and is liable to pay royalties to the Crown on minerals that are extracted under the permit.

Royalties on coal and petroleum are typically paid monthly, while royalties for other minerals are paid annually. The royalties payable on different resources are calculated based on the mining method used, making it crucial to understand which royalty scheme applies to your situation.

Are Taxes Paid On Royalties?

In New Zealand, royalties are considered part of an individual’s taxable income. If you are a business paying royalties, you may be able to claim these payments 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 crucial 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 0800 002 184 or via email at [email protected] for a free, no-obligations chat.

Jethro Fox

Jethro is a student at the University of Technology Sydney where he is studying a combined Law and Economics degree. He aims to gain experience from his time at Sprintlaw to help boost his career in legal services, with a strong interest in intellectual property, sports and media law and other aspects of commercial law.

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How Do Royalties Work?

What Are Royalties?