ATO Interpretative Decision
ATO ID 2005/289
Income taxAssessability of income derived by a New Zealand resident company
FOI status: may be released
This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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.
Status of this decision: Decision Current
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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.
Is the income derived by a New Zealand resident company, from the sale of company products in Australia, assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA1997)?
Yes. The income derived by a New Zealand resident company from the sale of company products in Australia attributable to the permanent establishment is assessable under subsection 6-5(3) of the ITAA 1997 as the taxpayer is carrying on the business through a permanent establishment situated in Australia.
The taxpayer company is a resident of New Zealand and is not a resident of Australia for income tax purposes.
The taxpayer sells the company products to unrelated parties in Australia.
The sales orders are taken by two sales employees who email the orders to New Zealand for approval. The employees receive bonus payments per quarter based on average sales over the period.
The employees act as the contact person for the company in Australia in their respective locations and have undertaken this for a number of years.
The employees are provided with a vehicle, computer, telephone and a fax machine. The employees communicate with the company head office through phone, email or by fax.
The company does not own or rent any premises in Australia. However, the employees use a room of their house as an office to deal with the company business.
The company has an Australian bank account.
The products are despatched directly to the customers from New Zealand, or through a warehouse in Australia managed by a third party.
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, and other ordinary income that a provision includes as assessable income on some basis other than having an Australian source.
The income derived from sale of company products is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.
In determining liability to tax on Australian sourced income, 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 (the Agreements Act).
Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one.
Schedule 4 to the Agreements Act contains the tax treaty between Australia and New Zealand (the New Zealand Agreement). The New Zealand Agreement operates to avoid the double taxation of income received by Australian and New Zealand residents.
Under Article 7 of the New Zealand Agreement, the business profits of an enterprise of New Zealand shall be only taxable in the New Zealand 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 New Zealand Agreement as a fixed place of business through which the business of an enterprise is wholly or partly carried on.
The United States Tax Court held that a well-known author's home office was their fixed place of business through which the business of an enterprise was carried on and that office therefore was a permanent establishment (Georeges Simenon v. Commissioner of Internal Revenue (1965) 44 TC 820).
The taxpayer's business has a permanent establishment in Australia under Article 5(1) of the New Zealand Agreement, as the taxpayer is carrying on a business in Australia through a fixed place, being the home of the employees, and as the employees have been operating from their homes for a number of years, the required degree of temporal permanence is met.
As it has been established that the taxpayer is carrying on the business through a permanent establishment situated in Australia under Article 5(1), the deeming provision within Article 5(7) of the New Zealand Agreement does not need to be considered.
Article 5(6)(a) of the New Zealand Agreement provides that an enterprise shall not be deemed to have a permanent establishment merely by reason of the use of facilities solely for the purpose of storage, display or delivery of goods belonging to the enterprise. Even though that taxpayer's business uses a warehouse for the purpose of storage, Article 5(6)(a) of the New Zealand Agreement has no application as the taxpayer's business is operated from the employees' home.
Consequently, Article 7 of the New Zealand Agreement applies, and the profit of the business, so much of them as is attributable to that permanent establishment, is taxable in Australia. The income from the sale of the company products attributable to the permanent establishment is therefore assessable under subsection 6-5(3) of the ITAA 1997.
Year of income: Year ended 30 June 2005 Year ending 30 June 2006 Year ending 30 June 2007 Year ending 30 June 2008
Income Tax Assessment Act 1997
Schedule 4, Article 5(1)
Schedule 4, Article 5(2)
Schedule 4, Article 5(6)(a)
Schedule 4, Article 5(7)(a)
Schedule 4, Article 7
Georges Simenon v. Commissioner of Internal Revenue
(1965) 44 TC 820
Double tax agreements