ATO Interpretative Decision
ATO ID 2004/383
Income Tax
Assessability of income received by a non-resident from sales of merchandise at performance venues 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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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.
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 received by the taxpayer, a resident in the United States of America (US), from the sale of merchandise at performance venues in Australia assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. Even though the income received by the US resident taxpayer from the sales of merchandise at performance venues in Australia is assessable under subsection 6-5(3) of the ITAA 1997, Article 7 of Schedule 2 of the International Tax Agreements Act 1953 (the Agreements Act) applies and the income is not assessable in Australia.
Facts
The taxpayer company is a resident of the US and is not a resident of Australia for income tax purposes.
The main business of the taxpayer is in providing entertainment at various venues.
The taxpayer also earns income in Australia from the sale of merchandise during and after the performance depicting characters featured in the performance.
The performances are conducted over a period of six weeks at different locations in Australia. The performances undertaken at each location last only for a few days.
The merchandise sold at the performance venues is manufactured by an unrelated Australian resident entity under the terms of a Licence and Distribution Agreement with the taxpayer.
Under the terms of the Licence and Distribution Agreement, the taxpayer has appointed the Australian manufacturer as its exclusive agent for the development, manufacture, distribution and sale of the merchandise within the territory which includes Australia. It was also agreed that the Australian manufacturer will at all times act as an independent contractor and will not represent in any manner whatsoever as an agent for the taxpayer.
The merchandise for sale at the performance venues is purchased by the taxpayer from the Australian manufacturer.
The merchandise is sold at the performance venues by venue personnel who are not employed by the taxpayer.
The taxpayer does not have any employees, office, factory or a workshop in Australia.
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.
The income received by the taxpayer from the sale of merchandise at performance venues in Australia is ordinary income under subsection 6-5(3) of the ITAA 1997.
In determining the liability to Australian tax on Australian sourced income received by a non resident, it is necessary to consider not only the Australian income tax laws but also any applicable double tax agreement contained in the Agreements Act.
Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that both Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except in some limited situations).
Schedule 2 to the Agreements Act contains the double tax agreement between Australia and the US (the US Convention). Schedule 2A to the Agreements Act contains the protocol amending the US Convention (the US Protocol). The US Convention and the US Protocol operate to avoid the double taxation of income received by Australian and US residents.
Article 7 of the US Convention governs the taxation of business profits derived by a resident of the US from sources in Australia. Under Article 7 of the US Convention, the business profits of an enterprise of the US shall be taxable only in the US unless the enterprise carries on business in Australia through a permanent establishment situated in Australia.
The term 'permanent establishment' is defined in Article 5(1) of the US Convention as a fixed place of business through which the business of an enterprise is wholly or partly carried on.
Paragraph 2 of the OECD Commentary on Article 5 of the OECD Model Tax Convention on Income and on Capital explains that the definition of permanent establishment contains the following requirements:
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- the existence of a place of business such as premise, machinery or equipment
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- fixed place of business which means that the place of business must be established at a distinct place with some degree of permanence even though it may have existed for only a very short time, and
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- personnel to conduct the business from that place.
The taxpayer's business does not have any permanent establishment in Australia for the purposes of Article 5(1) of the US Convention as the taxpayer has no premises, distinct place of business or employees in Australia.
Article 5(4)(a) of the US Convention states that an enterprise will be deemed to have a permanent establishment in Australia if an enterprise carries on business through a person who has the authority to conclude contracts in Australia on behalf of the enterprise, and habitually exercises that authority, unless the activities are limited to those mentioned in Article 5(3) of the US Convention.
Article 5(5) states that an enterprise shall not be deemed to have a permanent establishment merely because that enterprise carries on business in the other State through an agent of independent status where that agent is acting in the ordinary course of his business as an agent of independent status.
Article 5(4) of the US Convention will not apply as the Australian resident entity that manufactures and distributes the merchandise has no authority to conclude contracts in Australia on behalf of the taxpayer's business and does not habitually exercise any such authority.
The income received by the taxpayer from the sale of merchandise to Australian customers at various performance venues in Australia is not assessable as the taxpayer's business does not have a permanent establishment in Australia. The income is consequently not taxable under subsection 6-5(3) of the ITAA 1997 by virtue of the overriding effect of Article 7 of the US Convention.
Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
subsection 6-5(3)
section 4
Schedule 2
Schedule 2A
Schedule 2, Article 5
Schedule 2, Article 5(1)
Schedule 2, Article 5(3)
Schedule 2, Article 5(4)(a)
Schedule 2, Article 5(5)
Schedule 2, Article 7 Related ATO Interpretative Decisions
ATO ID 2004/382
ATO ID 2004/384
Other References:
OECD Model Tax Convention on Income and on Capital
Keywords
Double tax agreements
Income
International tax
Non resident companies
Permanent establishment
Profits
United States
ISSN: 1445-2782