Ece Demir - 23 Jun, 2020

Spotify Australia revenue drop raises eyebrows at ATO

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Swedish music streaming giant, Spotify, could potentially gain the attention of the Australian Taxation Office (ATO) after reporting that Spotify has drastically reduced the revenue from subscriptions to its music streaming service in Australia.

In 2016, Spotify’s Australian subsidiary reported $129 million of “premium revenue” from local subscribers to the paid tier of its service.

According to the Australia Financial Review revenue dropped over the next four years, Spotify reported just $416,000 in 2019 accounts, despite a boom in its usage over the same period. According to survey company Roy Morgan, around 8 million Australians harnessed the service in March.

Over the same period, usage of Spotify has boomed, and the Swedish company does not break down where their 130 million paying subscribers worldwide are from. However, since 2016, subscriptions were up 3.6 million in March 2017 and well ahead of the 5.5 million users for the second most popular service, YouTube Music.

Revenue reported by Spotify Australia fell nearly 60% in 2017, however, the music streamer said the discrepancy was due to new accounting standards, as it delivered a slight increase in pre-tax profit for its loss-making Swedish parent.

Spotify’s Sydney office generated $24.3 million selling ads between the songs on its free tier in calendar 2017, up from $14.2 million in 2016, but accounts lodged with the Australian Securities and Investments Commission last month show revenue from premium subscribers plummeted to $37.1 million from $128.5 million.

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An explanation to Spotify Australia’s 2017 accounts reveal the company had adopted the new standard, known as AASB 15, a year before it became compulsory for every Australian business on January 1 this year.

The new rules appear to have forced Spotify Australia to delay the allocation of transaction prices and recognition of some revenue arising from its contracts with subscribers, who pay by the month and can cancel at any time.

However, those aren’t the only rules that the company needed to abide by, in 2016, the Australian Taxation Office launched multinational anti-avoidance laws (MAAL). According to the Taxation Office, these aim to stop multinationals “using contrived arrangements to avoid the attribution of profits to a permanent establishment in Australia”.

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It is being said, that the counter-intuitive fall in Spotify Australia’s reported revenue from subscribers coincided with the introduction of the new Australian Taxation Office new multinational anti-avoidance laws.

According to Peter Wells, a professor in the accounting discipline group at University of Technology Sydney who spoke to the Australian Financial Review, the swift evaporation of subscriber revenue from Spotify’s Australian accounts “appeared” to be an attempt to avoid the Australian Taxation Office multinational anti-avoidance law.

“Spotify seem to be arguing that when people sign up, the transaction is not with Spotify Australia but with the Luxembourg parent, and that customers are agreeing to import this service into Australia,” he said.

A Spotify spokesman confirmed that the company had adjusted its accounting policy at the end of 2016, when the laws had coincided, so it could be “in line with how our business works”, but said the change was worldwide and not related to Australia in particular.

The spokesman said individual subscriber revenue was no longer recognised in Australia (the $416,000 is residual revenue from a partnership with an Australian telco) because the platform to which they subscribe is developed in Sweden.

But advertising sales generated by Spotify’s team in Australia would continue to be booked here, with $21 million reported in 2019.

According to Mr Wells, Spotify has appeared to have decided it did not need to institute ‘reseller’ arrangements for its music streaming service, as Google and Facebook has done in Australia to mitigate the impact of the new multinational anti-avoidance laws on their tax bills.

Words by Ece Demir

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