ATO Interpretative Decision

ATO ID 2005/75 (Withdrawn)

Income tax

• This ATO ID is withdrawn and replaced by ATO ID 2006/9.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is income derived by the taxpayer, a resident of the United Kingdom (UK), from the provision of services in Australia as a designer, assessable under section 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The income derived by the taxpayer from the provision of services as a designer from a fixed base in Australia is assessable income under section 6-5(3) of the ITAA 1997.

Facts

The taxpayer is a non-resident for Australian income tax purposes and carries on a design business from a home office in the UK.

The taxpayer contracted with an Australian company to provide design services within the arts and entertainment industry. The taxpayer provided services solely under that contract and to no other clients for the duration of the contract.

After initially providing the services pursuant to the contract from the home office in the United Kingdom, the taxpayer then continued doing this in Australia continuously for 111 days in the 2003 year of income at space made available to the taxpayer within a studio.

The space made available each time the taxpayer provided the services was merely an area within the studio not already in use at that particular point in time. The space made available was not a specifically defined area within the studio, such as an office or other such room, nor was it the same space on all occasions.

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 and indirectly from all Australian sources during the income year.

The International Tax Agreements Act 1953 (Agreements Act), in particular the Agreement between Australia and the UK signed on 7 December 1967 (the 1967 UK Agreement) contained in Schedule 1 of the Agreements Act prior to 1 July 2004, must be considered to determine whether Australia has a taxing right in respect of the income derived in Australia by the non-resident taxpayer. The Agreements Act gives the relevant double tax agreement the force of law in Australia. Subsection 4(1) of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 and the ITAA 1997 so that those Acts are read as one.

Article 11 of the 1967 UK Agreement provided that the income derived by a UK resident taxpayer from professional services or other independent activity of similar character may be taxed in Australia where a fixed base was regularly available to the UK resident for the purposes of performing those activities.

The provision of design services by the taxpayer is a professional service or other independent activity of a similar character within Article 11 of the 1967 UK Agreement.

In Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 21 ATR 531; 90 ATC 4717 (Thiel), the High Court accepted that the OECD Model Tax Convention on Income and on Capital (the OECD Model) and the Commentaries on the Articles of the OECD Model (the OECD Commentary) may be relevant to the interpretation of Double Tax Agreements based on the OECD Model. The High Court approved recourse to the OECD Model and the OECD Commentary under Article 32 of the Vienna Convention (see paragraph 102 of Taxation Ruling TR 2001/13). Unless specified otherwise, references to the OECD Model and Commentary are to the version published on 28 January 2003.

Article 11 of the 1967 UK Agreement was the same in substance as former Article 14 of the OECD Model published on 23 October 1997.

Paragraph 3 of the OECD Commentary published on 23 October 1997 on Article 14 stated that:

•

the provisions of Article 14 were similar to those for business profits and rested on the same principles as those of Article 7 of the OECD Model concerning the taxation of business profits

•

the provisions of Article 7 of the OECD Model and the Commentary thereon could be used as guidance for interpreting and applying Article 14 of the OECD Model.

Article 7 of the OECD Model permits the source country to tax the profits of an enterprise where that enterprise carries on business through a permanent establishment in that country.

Article 5 of the OECD Model defines permanent establishment to be '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 explains that this definition provides three conditions necessary for a permanent establishment to exist:

1.

There must be a place of business

2.

The place of business must be fixed so that there is a distinct location with a certain degree of geographical and temporal permanence

3.

The business of the enterprise must be conducted through that fixed place.

Paragraph 4 of the OECD Commentary on Article 5 of the OECD Model states that the term 'place of business' covers any premises, facilities or installations used for carrying on the business whether or not they are used exclusively for that purpose. Paragraph 4 also states that a place of business may exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented by the enterprise or are otherwise at its disposal.

Paragraph 4.1 states that the fact that an enterprise has a certain amount of space available at its disposal which is used for business activities is sufficient to constitute a place of business. The space made available to the taxpayer when providing the services under the contract falls within the meaning of paragraph 4 and 4.1 of the OECD Commentary referred to above.

Paragraph 5.4 of the OECD Commentary on Article 7 of the OECD Model states that a consultant moving from one office to another within the same branch location remains in the same place of business. Similarly, the taxpayer remained in the same place of business even though the taxpayer moved within the one studio when utilising the premises of the Australian company.

Paragraph 6 of the OECD Commentary on Article 5 of the OECD Model provides that a permanent establishment can be deemed to exist only if the place of business has a certain degree of permanency and is not of a purely temporary nature. A place of business may, however, constitute a permanent establishment even though it exists, in practice, only for a very short period of time because the nature of the business is such that it will only be carried on for that short period of time.

For the above reasons, for the time the taxpayer provided the services under the contract in Australia, the studio was a specific location with sufficient geographic permanence; a fixed place through which the taxpayer carried on business.

In relation to temporal permanence, paragraph 6 of the OECD Commentary on Article 5 of the OECD Model also provides that:

•

A permanent establishment will not normally be considered to exist in situations where a business has been carried on in a country through a place of business maintained for less than six months

•

One exception to this is where the activities constituted a business that was carried on exclusively. This is on the basis that its connection with the country is stronger because the business is wholly carried on in that country.

Although the taxpayer carried on business from space made available at the studio for a period of less than 6 months, the taxpayer's place of business has sufficient temporal permanence to be a permanent establishment for the following reasons:

•

The nature of the business is such that it would only have been carried on in Australia while the taxpayer was providing the services

•

Under the contract, the taxpayer was obliged to provided his or her services exclusively

•

The provision of designing services were undertaken solely by the taxpayer even though it may have been possible for the taxpayer to sub-contract some elements of those services

•

While the taxpayer was in Australia the activities constituting the business were undertaken exclusively within Australia.

Accordingly, while conducting business in Australia, the taxpayer had a fixed base for the purposes of Article 11 of the 1967 UK Agreement.

Article 11 of the 1967 UK Agreement also provides that, if the taxpayer has such a fixed base, income attributable to that fixed base shall be deemed to have an Australian source.

The income generated by the design services the taxpayer provided under contract will be assessable income under subsection 6-5(3) of the ITAA 1997 as the taxpayer was a non-resident deriving ordinary income directly from an Australian source during the income year.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   subsection 6-5
   subsection 6-5(3)

Case References:
Thiel v. Federal Commissioner of Taxation
   (1990) 171 CLR 338
   90 ATC 4717
   21 ATR 531

Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/13

Other References:
OECD Model Tax Convention and on Income and Capital (Published on 23 October 1997)
OECD Model Tax Convention and on Income and Capital (Published on 28 January 2003)

Keywords
Double tax agreements
Independent Personal Services
United Kingdom
Fixed base
Permanent establishment
Business profits
Non resident individuals

Business Line:  Public Groups and International

Date of publication:  11 March 2005

ISSN: 1445-2782