ATO Interpretative Decision

ATO ID 2005/360

Income tax

• This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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.

Issue

Is the income received by a New Zealand resident company, from services provided in Australia, assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The income received by a New Zealand resident company, from services provided in Australia is not assessable under subsection 6-5(3) of the ITAA 1997.

Facts

The taxpayer company is a resident of New Zealand and is not a resident of Australia for income tax purposes.

The taxpayer company is engaged by an Australian resident company, acting as an independent agent, to provide services to various entities in Australia.

The taxpayer company derives income from performing design and drafting services in Australia.

The co-director and shareholder is present in Australia for less than 183 days to perform the service.

The taxpayer company does not have any other employees, an office, a factory nor a workshop in Australia.

Reasons for Decision

Section 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.

The income derived by the taxpayer company from the design and drafting service provided in Australian is ordinary income under subsection 6-5(3) of the ITAA 1997.

In determining liability to Australian tax on Australian sourced income received by a non-resident, it is necessary to consider not only the income tax laws but also any applicable tax treaties 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 both Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except in some limited situations).

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.

Article 7 of the New Zealand Agreement governs the taxation of business profits derived from Australia by a resident of New Zealand. Under Article 7, the business profits of an enterprise of New Zealand shall be taxable only in New Zealand unless the enterprise carries on business in Australia through a permanent establishment (PE) situated in Australia.

The question of whether a non-resident enterprise has a permanent establishment in Australia is a question of fact, which must be determined by reference to the individual circumstances of each case.

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.

Article 5(2) of the New Zealand Agreement contains a list of examples each of which can be regarded as constituting a PE such as a place of management. The taxpayer does not carry on business through a fixed place as described in Article 5 (2).

However, if a non-resident enterprise does not conduct activities itself through a fixed place of business in Australia, it may still, in some circumstances, be 'deemed' to carry on business through a permanent establishment, either under the provisions in the domestic law or under specific articles of the relevant tax treaty (See Unisys Corp v. FC of T (2002) 2002 ATC 5146; (2002) 51 ATR 386 ( Unisys Corp) and Case 23/93 93 ATC 288; AAT Case 8775 (1993) 26 ATR 1056).

Article 5(7) of the New Zealand Agreement provides that a PE will be deemed to exist if a New Zealand enterprise carries on business in Australia through a person (other than an independent agent) who has authority to conclude contracts on behalf of the enterprise and habitually exercises that authority in Australia.

Therefore, for a non-resident enterprise to be deemed to have a permanent establishment in Australia, not only must the non-resident enterprise have a person acting for them in Australia, that person must have the authority to conclude contracts in a manner that is binding on the non-resident enterprise. Further, the mere possession of the requisite authority is not enough; it must also be exercised regularly or habitually (see Unisys Corp).

Consequently the non-resident company does not have a permanent establishment in Australia because:

•

it does not occupy its own premises to carry on activities in Australia in connection with its business.

•

the contracts in Australia are concluded by a resident company acting as an independent agent.

Therefore, the non resident company does not have a permanent establishment within Australia for the purposes of the New Zealand Agreement.

Australia does not generally tax the profits of an enterprise resident in a country with which it has a tax treaty unless the enterprise carries on business through a permanent establishment in Australia.

Accordingly, the income received by the taxpayer company from the design and drafting services provided in Australia is not assessable, under subsection 6-5(3) of the ITAA 1997 by virtue of the overriding effect of Article 7 of the New Zealand Agreement.

Year of income:  Year ended 30 June 2006

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

Case References:
Unisys Corp v. FC of T
   (2002) 2002 ATC 5146
   (2002) 51 ATR 386

Keywords
Company directors
Double tax agreements
Exempt income
Income
Non resident companies
Permanent establishment
Shareholders

Siebel/TDMS Reference Number:  4743480

Business Line:  Public Groups and International

Date of publication:  23 December 2005

ISSN: 1445-2782