Exclusions from tainted services income



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General exclusions

Tainted services income does not include:

  • royalties
  • any income in respect of a lease of land
  • any income from trading in assets, or
  • gains from currency exchange rate fluctuations, commodity investments and assets.

Manufacturing exclusion

There is an exclusion from tainted services income where the service relates to goods manufactured by a CFC - for example, payments for after sales service or income derived under a service contract for equipment manufactured by a CFC.

Hospitality exclusion

Also not included in tainted services income are services that, broadly, arise from the tourism and hospitality industry. These amounts are services provided in connection with a hotel, motel, guesthouse, restaurant, bar or other place of entertainment or recreation.

Passive and tainted services income exclusion

Tainted services income does not include passive income or tainted sales income. This prevents double counting.

Indirect services rule

Income from services provided to an Australian resident or Australian permanent establishment of a non-resident is tainted services income. To prevent avoidance of attribution, income from services provided indirectly to certain Australian residents or Australian permanent establishments will also be tainted services where the following conditions are met:

  • services provided by the company to an associated entity are received by another entity that is an Australian resident
  • the services are provided under a scheme (as defined in section 995-1 of the Income Tax Assessment Act1997), and
  • the income from the services would have been tainted income if they had been provided directly by the company to the ultimate recipient.

The services originally provided by the company have to be the same services that are provided to the ultimate recipient.

Example 15

Architect Co and Plans Co are both members of the same corporate group, and both are controlled foreign companies of AustCo, an Australian resident company. Architect Co provides architectural services (house designs) to Australian customers. Plans Co also develops building and house plans.

Plans Co provides Architect Co (an entity that is an associate) with a suite of highly specified house designs. Architect Co markets these into the Australian market, assisting customers in choosing the most appropriate design, but otherwise making no changes. In this case, Plans Co has indirectly provided services to Australian customers, with the house designs received by those customers the same as those originally provided by Plans Co to Architect Co.

Therefore, the application of the indirect services rule means that AustCo may have to include an amount in its assessable income that is tainted services income in relation to the services provided by Plan Co to Architect Co.

Last modified: 05 Dec 2006QC 18000