ATO Interpretative Decision
ATO ID 2004/42
Income Tax
Assessability of income derived by a Netherlands resident from the design and construction of a facility in AustraliaFOI status: may be released
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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the income derived by a Netherlands resident taxpayer from the design and construction of a facility in Australia assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The income derived by a Netherlands resident taxpayer from the design and construction of a facility in Australia is assessable under subsection 6- 5(3) of the ITAA 1997.
Facts
The taxpayer is a resident of the Netherlands and a non-resident of Australia for income tax purposes.
The taxpayer entered into an agreement with an Australian resident taxpayer.
Under the terms of the agreement, the taxpayer agreed to design and construct a facility in Australia.
The taxpayer used substantial equipment in Australia for a period of more than 12 months.
The taxpayer's business is carried on through a permanent establishment situated in Australia.
The taxpayer sub-contracted the work for the design and construction of the facility to an unrelated entity.
The taxpayer received a fixed sum from the Australian resident taxpayer for the performance of the terms of the agreement.
Reasons for Decision
Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year.
The income from the design and construction of the facility in Australia is ordinary income derived from Australian sources for the purposes of subsection 6-5(3) of the ITAA 1997.
In determining liability to tax on Australian sourced income received by a non resident, it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).
Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited provisions).
Schedule 10 to the Agreements Act contains the agreement between Australia and the Kingdom of the Netherlands (the Netherlands Agreement) and the Protocol to that agreement. The Netherlands Agreement and the Protocol operate to avoid the double taxation of income received by Australian and Netherlands residents.
Article 7 of the Netherlands Agreement provides that the profits of an enterprise of the Netherlands will be taxable only in the Netherlands unless the enterprise carries on business in Australia through a permanent establishment situated therein.
The term 'permanent establishment' is defined in Article 5 of the Netherlands Agreement. Article 5(1) of the Netherlands Agreement provides that the term permanent establishment means a fixed place of business in which the business of the enterprise is wholly or partly carried on.
Paragraph 2 of the OECD Commentary on Article 5 of the OECD Model Tax Convention explains that the definition of permanent establishment contains the following requirements:
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- the existence of a place of business such as premises, machinery or equipment
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- a fixed place of business which means that the place of business must be established at a distinct place with some degree of permanence, and
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- personnel to conduct the business from that place.
The profits from the design and construction of the facility in Australia are taxable in Australia under Article 7 of the Netherlands Agreement as the taxpayer carries on business in Australia through a permanent establishment situated in Australia under Article 5(1) of the Netherlands Agreement.
Accordingly, the income derived by a Netherlands resident taxpayer from the design and construction of a facility in Australia is assessable under subsection 6-5(3) of the ITAA 1997 through the operation of Article 7 and Article 5(1) of the Netherlands Agreement.
Date of decision: 5 January 2004Year of income: Year ended 31 December 2003 Year ending 31 December 2004
Legislative References:
Income Tax Assessment Act 1997
section 6-5(3)
section 4
Schedule 10
Schedule 10, Article 5
Schedule 10, Article 5(1)
Schedule 10, Article 7 Related ATO Interpretative Decisions
ATO ID 2004-41
Other References:
OECD Model Tax Convention on Income and Capital - Commentary
Keywords
Double tax agreements
Netherlands
Permanent Establishment
ISSN: 1445-2782