Foreign ships visiting Australia
Foreign ships visiting Australia
Foreign-based ship operators (owners and charterers of ships) that carry passengers, live-stock, mails or goods shipped in Australia must ensure they meet our tax requirements. These are set out in sections 129 to 135A in Division 12 of the Income Tax Assessment Act 1936 (ITAA 1936). To satisfy these requirements, ship operators must lodge an Overseas ships - voyage return and pay liability we assess.
The tax payable under section 129 of the ITAA 1936, commonly referred to within the shipping industry as 'freight tax', is a liability of a ship operator who receives the freight payment for carriage of goods, live-stock, mails or passengers shipped in Australia. This entity is commonly referred to in the industry as the 'freight beneficiary'.
Division 12 of the ITAA 1936 applies to both non-residents and Australian residents whose principal place of business is outside Australia.
An Overseas ships - voyage return must be completed and lodged with us when a visiting ship derives income from voyages within Australian waters. This includes both intra-state and inter-state voyages, as well as a ship's departure voyage (that is, from its last port-of-call in Australian waters to its first destination outside our waters). This can include 'transhipment' of cargo and/or paying passengers (that is, transferred from one vessel to another).
A voyage return is required for each visiting vessel that carries passengers, live-stock, mail or goods shipped in Australia during a particular income year. In Australia, tax returns such as voyage returns are typically prepared on the basis of a year commencing 1 July and ending 30 June.
Section 129 of the ITAA 1936 applies to amounts received for the carriage of passengers who embark and live-stock, mails or goods that are shipped in Australia (that is, loaded in Australia). Section 129 states that 5% of any amount received, as payment for carriage, is deemed to be taxable income derived in Australia.
This deemed amount reflects the estimated profit on the shipping activity which is attributable to the Australian shipping activity. Therefore, the source of income is based on the location of the activity rather than where the payment is made or where the contracts are signed.
Section 129 of the ITAA 1936 does not apply to amounts received for a ship's journey to Australia (such as freight paid in respect of cargo loaded in an overseas port and transported to an Australian port).
Contractual arrangements in the shipping industry may vary. For example, a contract may specify potential payments other than the agreed fee or 'freight'. Amounts such as 'demurrage' and 'dispatch (or despatch) money' will affect the total amount received for carriage.
Operators of cruise liners or any other visiting ship that derive income from fares, for the carriage of passengers embarking in Australia, should be aware that such income is subject to the provisions of section 129 of the ITAA 1936.
In the vast majority of cases, the foreign-based entity that owns and/or operates the ship will be a company. This means that the taxable income declared in the Overseas ships - voyage return is subject to the rate of tax applied to companies in Australia, which is currently 30%. The tax liability will therefore be assessed as 30% of the taxable income. This tax liability is commonly referred to within the shipping industry as freight tax.
Example 1
A ship operator, whose principal place of business is in Vanuatu, leases (charters) the ship 'East West' from its owner and trades in carrying alumina between Australia and India. It contracts with an Australian exporter to carry a quantity of alumina to Chennai. The 'bill of lading' provides that the cargo is to be loaded at Port Gladstone and discharged at Port Chennai. The agreed freight is $50,000, with 75% to be paid on completion of loading in Gladstone and the balance on discharge of the cargo in Chennai.
In this case, the deemed taxable income of the ship operator, under section 129 of the ITAA 1936, is 5% of the whole amount of $50,000 ($2,500). Under section 129 it is irrelevant that, in this case, part of the freight is to be paid outside Australia. The key point is that the cargo was shipped in Australia.
Example 2
A similar scenario as in Example 1 applies except it is the ship owner who contracts with the Australian exporter. In addition, the bill of lading includes a clause specifying that the cargo is to be discharged in Chennai by 30 April and stipulating that demurrage or dispatch money may apply at the rate of $1,000 per day. The cargo is discharged in Chennai on 2 May, therefore incurring $2,000 demurrage.
In this case, the amount deemed to be received by the ship owner, under section 129 of the ITAA 1936, is $52,000 (the agreed freight of $50,000 plus $2,000 added to the freight cost for late discharge of the cargo). Therefore, the taxable income of the ship owner is 5% of the $52,000 ($2,600).
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You must provide all the information requested in the Overseas ships - voyage return. , Under section 131 of the ITAA 1936, we can determine the amount payable if a voyage return is not lodged or is considered unsatisfactory.
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Tax treaties can affect Australian tax requirements. Where a tax treaty or double tax agreement (DTA) exists between a freight beneficiary's country of residence and Australia, the voyage from an Australian port to another country may be exempt from tax. However, a DTA does not exempt the freight beneficiary from paying tax on income derived by that vessel engaging in coasting trade in Australian waters. This income is still subject to the provisions of Division 12 of the ITAA 1936.
In prior years, a letter of exemption for the freight beneficiary may have been obtained from us prior to the voyage, confirming the application of a DTA. However, the letter of exemption does not exempt the freight beneficiary from paying tax on income derived by that vessel engaging in coasting trade in Australian waters.
Coasting trade, also referred to as 'coastal trade', is the carriage of cargo that is both shipped and discharged at Australian ports, or passengers who both embark and disembark at Australian ports. Coasting trade includes both intra-state and inter-state voyages and includes voyages undertaken by licensed and unlicensed ships, whether with or without a voyage permit.
Freight beneficiaries are liable under section 129 of the ITAA 1936 regardless of whether one or more charter party clauses indicate otherwise.
Example 3
A container carrier, 'The Eagle' is owned and operated by 'Hallgrimsson Ltd', a company based in Denmark. A current tax treaty exists between Australia and Denmark. The company has applied for and received a letter of exemption from us in accordance with this tax treaty. Hallgrimsson Ltd contracts to carry general cargo from both Melbourne and Brisbane to Japan. The company also enters contracts to ship and discharge goods between Melbourne, Port Botany, Newcastle and Brisbane, prior to departing Australian waters for Japan.
As a current tax treaty exists between Australia and Denmark, Hallgrimsson Ltd is exempt from paying Australian tax on any payment received for the carriage of goods shipped in Melbourne and Brisbane and then discharged in Japan.
However, under the tax treaty, the company is still subject to Australian tax for any payment received, for the carriage of goods shipped and discharged between Melbourne, Port Botany, Newcastle and Brisbane. The voyages Melbourne-Botany Bay-Newcastle-Brisbane are coasting trade and any payment received is deemed to be assessable under section 129 of the ITAA 1936. Therefore, an Overseas ships - voyage return must be lodged and 5% of this amount returned as taxable income.
Exemptions under other Australian legislation do not affect tax requirements. Whilst visiting ships may be subject to, or specifically exempt from, the requirements of a range of Australian legislation, an exemption granted under a particular body of Australian legislation only applies to that body of legislation and not to Australian tax legislation.
Accordingly, an exemption from one Australian legislative requirement does not automatically mean exemption from others such as the tax requirements specified by Division 12 of the ITAA 1936.
Example 4
'Alacarte Ltd', a company based in the United Kingdom, owns and operates an ocean cruise liner, the 'Savoy at Sea'. A current tax treaty exists between Australia and the United Kingdom. Under this tax treaty, Alacarte Ltd is exempt from paying Australian tax on fares received for the carriage of passengers who embark in Australia and disembark in another country.
The Savoy at Sea visits Australia frequently, during cruises to the Asia-Pacific region, with fare-paying Australian passengers embarking in Melbourne and Sydney. Some passengers embark in Melbourne and disembark in Sydney without travelling overseas.
Under the same tax treaty, Alacarte Ltd is still subject to Australian tax for any fares received for the carriage of passengers who embark in Australia and then disembark in Australia without travelling overseas.
The voyage between Melbourne and Sydney is coastal trade and any payment received is deemed to be assessable under section 129 of the ITAA 1936. Therefore, 5% of this amount must be returned as taxable income.
As a cruise liner, operating between the Melbourne and Sydney the ship is exempt from the coastal trade requirements of the Navigation Act 1912. This means that the Savoy at Sea does not need a permit to trade between these Australian ports.
However, this coastal trade exemption, under the Navigation Act 1912, applies only to the need to obtain a permit. It does not provide Alacarte Ltd with an exemption from the provisions of section 129 of the ITAA 1936 and it must lodge an Overseas ships - voyage return.
For more on the tax treatment of foreign ships visiting Australia:
Last Modified: Wednesday, 15 May 2013
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