ATO Interpretative Decision
ATO ID 2006/140
Income Tax
Assessability of contract income earned by a resident taxpayer from an organisation based in IndonesiaFOI 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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 income derived by a resident Australian taxpayer, contracted to provide consultancy services to an organisation in Indonesia, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The income received by a resident Australian taxpayer, contracted to provide consultancy services to an organisation in Indonesia, is assessable under subsection 6-5(2) of the ITAA 1997.
Facts
The taxpayer is an Australian resident for tax purposes.
The taxpayer has been contracted by an organisation in Indonesia to provide consultancy services as a technical expert for a period of six months.
The taxpayer is a fixed term contractor and not an employee of the Indonesian organisation.
The taxpayer will be undertaking work from their base in Australia and travel to Indonesia and South East Asia when required.
The taxpayer will not be required to relocate in view of the short term nature of their engagement and will not take any breaks during the period of the contract.
Reasons for Decision
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
However, in determining any liability to Australian tax it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act) that exists between Australia and Indonesia
Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (except in some limited situations).
Schedule 37 to the Agreements Act contains the tax treaty between Australia and Indonesia (the Indonesian Agreement). The Indonesian Agreement operates to avoid the double taxation of income received by Australian and Indonesian residents.
Article 14 of the Indonesian Agreement provides that income derived by an individual who is a resident of Australia in respect of professional services, or other independent activities of a similar character, shall be taxable only in Australia unless the taxpayer
Has a fixed base regularly available to them in Indonesia for the purpose of performing their activities. If the taxpayer has such a fixed base, the income may be taxed in Indonesia but only so much of it as is attributable to that fixed base.
The individual is present in Indonesia for a period or periods exceeding 120 days in any period of 12 months, in that case, so much of the income as is derived from the individuals activities in Indonesia also may be taxed in Indonesia.
To assist in the interpretation of the Indonesian Agreement, reference is made to Taxation Ruling TR 2001/13 - Income tax: Interpreting Australia's Double Tax Agreements.
Under this ruling, regard may be had to 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) including any subsequent revisions to that OECD Commentary to assist in the interpretation of double tax agreements. This approach was also accepted by the High Court in Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4717; (1990) 21 ATR 531, the High Court accepted that the OECD Model and the Commentaries on the Articles of the OECD Model (the OECD Commentary) may be relevant to the interpretation of tax treaties 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 15 July 2005.
Article 14 of the Indonesian Agreement is the same in substance as the former Article 14 of the OECD Model published on 23 October 1997.
Paragraph 2 of 'Commentary on Article 14' in the OECD Model defines the concept of professional services to include professional activities of an 'independent' nature. Thus the provision of consulting services by the taxpayer is considered independent personal services for the purposes of Article 14 of the Indonesian Agreement.
Paragraph 4 of 'Commentary on Article 14' in the OECD Model suggests that a fixed base is a centre of activity of a fixed or a permanent nature, and would include a physician's consulting room or the office of an architect or lawyer.
The taxpayer will not have an office or any other business premises in Indonesia.
The taxpayer will derive income from their consultancy. As the taxpayer is a resident of Australia for tax purposes, and does not have a fixed base (such as an office) in Indonesia, Article 14 of the Indonesian Agreement provides that this income will be assessable in Australia, and as a consequence, the consultancy income will not be taxed in Indonesia.
Therefore, the income the taxpayer receives from consulting in Australia will be assessable under subsection 6-5(2) of the ITAA 1997.
Date of decision: 23 May 2006Year of income: Year ended 30 June 2006 Year ended 30 June 2007
Legislative References:
Income Tax Assessment Act 1997
subsection 6-5(2)
section 4
Schedule 37
Schedule 37, Article 14
Case References:
Thiel v. Federal Commissioner of Taxation
(1990) 171 CLR 338
90 ATC 4717
(1990) 21 ATR 531
Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/13
ATO ID 2005/230
Other References:
OECD Model Tax Convention on Income and on Capital (Published on 15 July 2005)
Keywords
Double tax agreements
Foreign income
Indonesia
International law
International tax
Treaties
ISSN: 1445-2782