ATO Interpretative Decision
ATO ID 2004/384
Income Tax
Assessability of income received by a US resident company where the sole director and shareholder is present 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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 a taxpayer company, a resident of 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) if the sole director and shareholder of the taxpayer company is present in Australia at the time of the sale of the merchandise?
Decision
No. The income received by a taxpayer company, a resident of the US, from the sale of merchandise at performance venues in Australia is not assessable under subsection 6-5(3) of the ITAA 1997 where the sole director and shareholder of the taxpayer company is present in Australia at the time of the sale of the merchandise.
Facts
The taxpayer company is a resident of the US and is not a resident of Australia for income tax purposes.
The main income earning activity of the taxpayer is producing entertainment.
The taxpayer also earns income in Australia from the sale of merchandise during and after the performance depicting characters from the performance.
The performances are conducted at different locations in Australia for a limited period.
The merchandise depicting characters from the performance is sold at stands set up at the performance venues by the venue staff.
The taxpayer's sole director and shareholder is present in Australia to conduct the performance during the time of sale of the merchandise.
The taxpayer does not have any employees, an office, a factory or a workshop in Australia.
Reasons for Decision
Section 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 derived by the taxpayer from the sale of merchandise to Australian consumers is ordinary income under subsection 6-5(3) of the ITAA 1997.
In determining liability to Australian tax on Australian sourced income received by a non-resident, it is necessary to consider not only the 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 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 convention 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 from Australia by a resident of the US. Under Article 7, 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. Article 5(2) of the US Convention contains a list of examples each of which can be regarded as constituting a permanent establishment such as a place of management.
In discussing the operation of Article 5 of the US Convention, paragraph 4 of Taxation Ruling IT 2324 refers to the earlier US Convention where the term 'permanent establishment' was defined to include 'a management'. Based on that definition, where the principal performer who was also a majority shareholder and director of the company was present in Australia, the approach was taken that the company had a management present in Australia and therefore a permanent establishment in Australia. Paragraph 5 of IT 2324 states that this approach is no longer applicable under Article 5(1) of the revised US Convention. The revised US Convention states that a permanent establishment means a 'fixed place of business through which the business of an enterprise is wholly or partly carried on'. IT 2324 states that two things follow from the revised US Convention:
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- existence of a place of business such as a premises or other facilities, and
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- the place of business must be fixed i.e., it must have a degree of permanence.
The taxpayer's business does not have a permanent establishment in Australia as there is no fixed place of business through which the business of the enterprise is wholly or partly carried on for the purposes of Article 5(1) of the US Convention. The presence of the sole director and shareholder in Australia during the time of sale of merchandise will not itself constitute a 'place of management' under Article 5(2) of the US Convention.
As the taxpayer's business does not have a permanent establishment in Australia, the income will not be assessable under subsection 6-5(3) if the ITAA 1997 through 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(2)
Schedule 2, Article 7
Related Public Rulings (including Determinations)
Taxation Ruling IT 2324
2004/382
2004/383
Keywords
Company directors
Double tax agreements
Non resident companies
Permanent establishment
Shareholders
United States
ISSN: 1445-2782