ATO Interpretative Decision

ATO ID 2003/382

Income Tax

Assessability of business income derived by an Australian resident attributable to a New Zealand permanent establishment
FOI status: may be released

This ATO ID was amended by replacing the reference to paragraph (2) of Article 24 to the tax treaty between Australian and New Zealand with paragraph (1) of Article 23 contained in the new tax treaty which took effect from 19 March 2010.
This ATOID has been amended to remove references in the Reasons for Decision to repealed legislation dealing with foreign tax credit rules. With effect from 1 July 2008 the foreign tax credit system will be replaced by the foreign tax offset system.
This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Does the farming income that is attributable to the carrying on of a business through a permanent establishment situated in New Zealand form part of an Australian resident taxpayer's assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The farming income that is attributable to the carrying on of a business through a permanent establishment situated in New Zealand forms part of an Australian resident taxpayer's assessable income under subsection 6-5(2) of the ITAA 1997.

Facts

The taxpayer is an Australian resident for income tax purposes.

The taxpayer carried on a business of farming on an agricultural property located in New Zealand.

The taxpayer derived income from the business.

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.

As the taxpayer is a resident of Australia, the business income forms part of their assessable income under subsection 6-5(2) of the ITAA 1997.

In determining liability to Australian tax on foreign sourced income, 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 those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 4 to the Agreements Act contains the double tax convention between Australia and New Zealand (the NZ Convention). The NZ Convention operates to avoid the double taxation of income received by Australian and New Zealand residents.

Paragraph (1) of Article 7 of the NZ Convention provides that the profits of an Australian enterprise shall be taxable only in Australia unless the enterprise carries on business in New Zealand through a permanent establishment situated in New Zealand. If the enterprise carries on business in New Zealand through a permanent establishment situated in New Zealand, the profits of the enterprise may be taxed in New Zealand but only so much of it as is attributable to that permanent establishment.

Paragraph (1) of Article 5 of the NZ Convention defines a permanent establishment as a fixed place of business through which the business of an enterprise is wholly or partly carried on. Subparagraph (2)(g) of Article 5 of the NZ Convention specifically includes an agricultural, pastoral or forestry property in the definition of a permanent establishment.

As the farming business was carried on through an agricultural property located in New Zealand, the business satisfies the requirements of a permanent establishment under subparagraph (2)(g) of Article 5 of the NZ Convention. Therefore, the profits of the business attributable to the permanent establishment situated in New Zealand may be taxed in New Zealand under paragraph (1) of Article 7 of the NZ Agreement.

Paragraph (1) of Article 23 of the New Zealand Convention provides that, subject to the provisions of the law of Australia, a credit for any tax paid in New Zealand will be allowed against Australian tax payable on income from New Zealand sources.

As the taxpayer is a resident of Australia for income tax purposes, the taxpayer's assessable income includes the farming income derived from the permanent establishment in New Zealand under subsection 6-5(2) of the ITAA 1997. The taxpayer will be entitled to a foreign tax credit for New Zealand tax paid on that income.

Date of decision: 7 May 2003

Year of income: Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
subsection 6-5(2)

International Tax Agreements Act 1953
   section 4
   Schedule 4
   Schedule 4, Article 5, paragraph (1)
   Schedule 4, Article 5, subparagraph (2)(g)
   Schedule 4, Article 7, paragraph (1)
   Schedule 4, Article 23, paragraph (1)

Keywords
Double tax agreements
Foreign tax credits
Foreign income
Business income
New Zealand

Siebel/TDMS Reference Number: 3529222

Business Line: Public Groups and International

Date of publication: 23 May 2003

ISSN: 1445-2782

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