Edited version of private ruling

Authorisation Number: 1011530306183

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Ruling

Subject: Foreign income

1. Is the income derived by you as a self employed professional in Country A assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

2. Is the income derived by you in the form of fees in Country A assessable under subsection 6-5(2) of the ITAA 1997?

Yes.

This ruling applies for the following periods

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

1 July 2006

Relevant facts and circumstances

You became an Australian resident for tax purposes from 1 July 2006.

You have business interests in Country A which require you to return there several times each year.

During your visits you earn income from professional services and fees from associated companies - Company X and Company Y.

Your professional duties are carried on through a permanent establishment in Country A which is owned by Company Y.

You are self employed and derive income from your professional services in Country A.

Payments you receive from your professional services are based on direct billing for services rendered.

Company Z or the client remunerates you for your professional services performed in Country A.

You receive fees in Country A in the capacity of a contractor.

Payments you receive from your fees are for service.

Company Y remunerates you for your services.

You are liable to tax in Country A as a non resident of Country A on the income you earn there.

Relevant legislative provisions

Income Tax Assessment Act 1936

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

International Tax Agreements Act 1953

Reasons for decision

Summary

The income derived by you as a self employed professional and the income derived by you in the form of fees in Country A is assessable under subsection 6-5(2) of the ITAA 1997.

Detailed reasoning

Subsection 6-5(2) of the ITAA 1997 provides that assessable income of an Australian resident includes ordinary income derived from all sources, whether in or out of Australia, during the income year.

Income from professional services is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

In determining the liability to Australian tax on foreign sourced income received by a resident, it is necessary to consider not only the income tax law 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 Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997, so 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).

The Agreements Act contains the tax treaty between Australia and Country A (the Country A Agreement). The Country A Agreement operates to avoid the double taxation of income received by residents of Australia and Country A.

An article in the Country A 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 a fixed base is regularly available to the individual in Country A for the purposes of performing the individual's activities. If such a fixed base is available to the individual, the income may be taxed in Country A but only so much of it as is attributable to the activities exercised from that fixed base.

It is considered that the income derived from Company Z or the client constitutes income from 'professional services' as defined under an article of the Country A Agreement.

It is considered that the income derived in the form of management consulting fees constitutes income from 'professional services' as defined under an article of the Country A Agreement.

As you are a resident of Australia for income tax, professional services income derived by you in Country A shall be taxable in Australia pursuant to an article in the Country A Agreement.

Accordingly, the income derived by you as a self employed professional and the income derived by you in the form of fees in Country A is assessable under subsection 6-5(2) of the ITAA 1997.

Note

In circumstances where tax is paid in Country A, then a foreign tax credit may be available in Australia for the income years ended 30 June 2007 and 30 June 2008.

From 1 July 2008 the foreign tax credit system is replaced by the foreign income tax offset system (FITO).

A FITO is a non refundable tax offset, and will reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax by an amount equal to the foreign income tax paid.

An article in the Country A Agreement provides that, subject to the provisions of the law of Australia, a credit for tax paid in Country A will be allowed against Australian tax payable on income from Country A sources.

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