ATO Interpretative Decision

ATO ID 2005/301

Income tax

Activities from the 'operation of ships' in Australia by a Singapore 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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Do the activities of a Singapore resident company in Australia constitute the 'operation of ships' under Article 7(1) of Schedule 5 to the International Agreements Act 1953 (Agreements Act)?

Decision

Yes. The activities by the Australian office of the Singapore Company will constitute the 'operation of ships' pursuant to Article 7(1) of Schedule 5 of the Agreements Act.

Facts

The company is a resident of Singapore for the purposes of the Singapore Double Tax Agreement (Singapore Agreement) as set out in Schedule 5 of the Agreements Act. The company also has an office located in Australia.

The company's core business consists of the provision of international shipping services.

The Australian office of the company effectively acts as an 'intermediary' whereby it will source cargo from parties who are typically commodity owners or shippers themselves, who need transportation. The cargo is transported on ships chartered by the company. The cargo is exported directly from Australia to a foreign country and no goods are transported from Australia to another port in Australia.

The Australian office of the company also sources vessels for charter and identifies potential vessels to charter.

The Australian office of the company will increase the scope of its existing services and will be involved in providing the following services:

1.: The calculation of income, including invoicing customers for the collection of freight, charter hire, despatching, dead freight and demurrage and the transfer of the income into an account nominated by the company.
2.: The arranging of bunker fuel contracts for the respective vessels.
3.: The organisation of loading of cargo in Australia, discharging at the foreign port and other similar services required in connection with the trading of the vessels.
4.: The monitoring of each vessel's performance against contractual obligations and if necessary, to arrange for ocean route services.
5.: The administration, at the company's expense, to send cargo superintendent(s) to loading or discharging port(s), if necessary in order to expedite the loading or discharging operations.
6.: To arrange some, or all, of the vessel insurances and/or such other insurances that may be required.
7.: To organise for on-hire and off-hire surveys.
8.: The employment on behalf of the company any such agents as they may deem fit to represent the company at the port and ensure the safe transportation of goods.

Reasons for Decision

Schedule 5 of the Agreements Act contains the Singapore Agreement. The Singapore Agreement operates to avoid double taxation of income received by Australian and Singaporean residents.

Article 7 of the Singapore Agreement deals with the taxation treatment of profits derived from shipping and air transport. The effect of this Article is that the right to tax profits from the operation of ships or aircraft is generally reserved to the country of residence of the operator. In this case the country of residence of the operator is Singapore.

Where Article 7 applies to the company, Australia will not have taxing rights over profits covered by this Article. That means that Australia will not require the Singaporean company to include an amount in assessable income under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997).

Of particular relevance is Article 7(1) which provides that:

profits from the operation of ships... derived by a resident of one of the Contracting States shall be taxable only in that State.

To determine whether the activities of the Australian office of the company constitute 'profits from the operation of ships' 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 and the OECD Commentary on the Model Tax Convention (and subsequent revisions to that Commentary) to assist in the interpretation of double tax agreements. The OECD Commentary was also considered by the Full Federal Court in McDermott Industries (Aust.) Pty Ltd v. Federal Commissioner of Taxation [2005] FCAFC 67; 2005 ATC 4398; 59 ATR 358 which examined the Singapore Agreement.

The present OECD Commentary on the taxation of profits from shipping notes that:

profits obtained purely from the carriage of passengers or cargo... would be unduly restrictive when interpreting the Article, in view of the development of shipping and for practical considerations as well (see C(8)-2 of the OECD Model Commentary).

On that basis the OECDs current view is that this Article:

covers other classes of profits as well ie. those which by reason of their nature or their close relationship with the profits directly obtained from the transport may all be placed in a single category' (see C(8)-2 of the OECD Model Commentary).

Having regard to TR 2001/13 and the OECD commentary, the proposed expanded services by the company in its Australian office will constitute the 'operation of ships' for the purposes of Article 7(1) of the Singapore Agreement.

Accordingly, any profits that arise from the proposed services shall only be taxable in Singapore. Therefore, these profits will not be included in assessable income under subsection 6-5(3) of the ITAA 1997.

Date of decision: 19 August 2005

Year of income: Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007

Legislative References:
International Tax Agreements Act 1953
Schedule 5 Article 7

Income Tax Assessment Act 1997
section 6-5
subsection 6-5(3)

Case References:
McDermott Industries (Aust.) Pty Ltd v. Federal Commissioner of Taxation
   [2005] FCAFC 67
   2005 ATC 4398
   59 ATR 358

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

Related ATO Interpretative Decisions
ATO ID 2004/41
ATO ID 2004/111
ATO ID 2004/314

Other References:
OECD Commentary on the Model Tax Convention on Income and Capital

Keywords
Double tax agreements
Income
Shipping
Shipping income
Singapore

Siebel/TDMS Reference Number: 4668259

Business Line: Public Groups and International

Date of publication: 28 October 2005

ISSN: 1445-2782

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