Edited version of your private ruling

Authorisation Number: 1012485305160

Ruling

Subject: Classification of services as ancillary activities for the purposes of Article 8 of the Convention between the Foreign country and Australia

Question 1

Do the profits arising from services provided by Foreign Airline employees in Australia to third party international airlines constitute profits from the operation of ships or aircraft in international traffic for the purposes of Article 8: 'Shipping and Air Transport' of the Foreign Country Convention such that income arising from those activities will not be included in Foreign Airline's assessable income under subsection 6-5(3) of the Income Tax Assessment Act 1997?

Answer

Yes

Question 2

Do the profits arising from support services provided by Foreign Airline employees in Australia Limited in relation to a third party airline constitute profits from the operation of ships or aircraft in international traffic for the purposes of Article 8: Shipping and Air Transport of the Foreign Country Convention such that income arising from those activities will not be included in Foreign Airline's assessable income under subsection 6-5(3) of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following periods:

Income years ended 30 June 2008 - 2013 (or substituted accounting period in lieu thereof)

The scheme commences on:

The aircraft operations carried on each year constitutes a separate scheme for the purposes of this Ruling.

Relevant facts and circumstances

General background

The taxpayer corporation is a Foreign Airline which currently operates both domestic flights within the Foreign Country and flights between the Foreign Country and a number of international destinations including Australia.

The taxpayer is not a resident of Australia for tax purposes.

The taxpayer is a resident of the Foreign Country for purposes of the Convention between the Government of the Foreign Country and the Government of Australia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital gains (the Foreign Country Convention)

The taxpayer's current fleet consists of more than [number] aircraft consisting of a range of [makes] aircraft.

The taxpayer's consolidated gross revenue from passenger ticket sales, cargo and other goods and services in respect of flights was approximately [xx] million in the year 2013.

The taxpayer's consolidated net income (loss) on ordinary activities before tax was approximately [xx] in the year 2013.

Australian operations

The taxpayer has been operating international flights to and from Australia since year xxxx.

The taxpayer operates [a number of] return flights between [Australian airport] and [Foreign Country airport] [via another international city] each day.

The taxpayer uses [certain make] aircraft on the Australian route.

The taxpayer maintains a corporate office in [Australian city] and employs staff in Australia.

Staff employed by The taxpayer in Australia undertake various activities in relation to the daily return flights including:

· Taking and processing passenger bookings;

· Taking and processing cargo bookings;

· Marketing activities for The taxpayer in Australia;

· Managing relevant supplier contracts; and

· Performing services in respect of the aircraft operated by The taxpayer.

In addition to these activities, staff employed by The taxpayer in Australia undertake the following activities:

· Certain services provided to third party airlines; and

· Support services provided to [x] in relation to third party airlines.

A table summarising The taxpayer's Australian employees in earlier periods was submitted.

The taxpayer generated approximately [xxx] million in revenue in Australia during the year 2013.

A breakdown of the revenue generated by The taxpayer in Australia in prior income years was submitted.

Activities

Services provided to third party airline

Limited services are provided to the unrelated international airlines..

The taxpayer is compensated for the provision of services in accordance with agreements entered into with each individual airline.

Support activities

Staff employed by The taxpayer in Australia undertake various activities to support the aircraft operated by The taxpayer.

Services provided third party airline

In return for providing services in its capacity as a disclosed agent for [x], The taxpayer receives a commission from [x]

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 6-10(5),

International Tax Agreements Act 1953 section 4,

Convention between the Government of Australia and the Government of the [Foreign Country] for the Avoidance of Double Taxation and the prevention of Fiscal Evasion with respect to Taxes on Income

Reasons for decision

Questions 1 & 2

Summary

The profits arising from services provided by The taxpayer employees in Australia to third party international airlines, and the profits arising from support services provided by The taxpayer employees in Australia to [ ] Limited, in relation to a third party airline, constitute profits that are ancillary to the operation of ships or aircraft in international traffic by The taxpayer for the purposes of Article 8: 'Shipping and Air Transport' of the Convention. Income arising from those activities will not be included in The taxpayer's assessable income under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Subsections 6-5(3) and 6-10(5) of the ITAA 1997 provide 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 includes the statutory income from all Australian sources.

However, in determining liability to tax in Australia by a non-resident, it is necessary to consider not only the ITAA 1997 but also any relevant double tax agreement that Australia may have with a particular country and which is given effect to by the International Tax Agreements Act 1953 (the Agreements Act). This is because section 4 of the Agreements Act incorporates the ITAA 1997 with the Agreements Act so that those Acts shall be read as one. In addition, section 4 provides that the Agreements Act, and thus the terms of a relevant double tax agreement, override subsections 6-5(3) and 6-10(5) to the extent of any inconsistencies. However, section 4 does not have the effect of overriding the operation of the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936.

Relevant to The taxpayer as a resident of the [Foreign country] for the income years in question, there was in force, and still is in force, a Convention between the Government of Australia and the Government of the [Foreign country] for the Avoidance of Double Taxation and the prevention of Fiscal Evasion with respect to Taxes on Income(the Convention).

The Convention may specify particular items of income or profits of a resident to be subject to tax only in Australia or subject to tax only in the foreign country or that may be subject to tax in both countries but with provision for the allowance of tax credits to reduce or eliminate double taxation subject to the laws of the particular country relating to the allowance of such tax credits.

Income or profits derived by a resident of the foreign country, which under certain Articles may be taxed in Australia, are deemed to have an Australian source pursuant to Article xx of the Convention. This includes profits of a foreign resident that are attributable to a permanent establishment in Australia dealt with under Article 7 of the Convention.

However, Article 7 is subject to paragraph 6 of Article 7, so that if another Article (such as Article 8) also deals with the same income or profits that are attributable to a permanent establishment in Australia for the purposes of Article 7, then those income or profits will be dealt by that other Article instead of Article 7.

Whether or not the income or profits of The taxpxayer from the activities and the support activities provided to third party airlines are sourced from Australia under ordinary source rules, or are attributable to a permanent establishment of The taxpayer in Australia and thus deemed to be sourced from Australia, are issues that do not need to be determined in light of the application to those income or profits of Article 8 of the Convention.

In the circumstances of The taxpayer, Article 8 applies such that the income or profits of The taxpayer from the activities and the support activities provided to third party airlines are considered to be ancillary to its operation of aircraft in international traffic pursuant to paragraph 1 of Article 8. As paragraph 1 of Article 8 applies, Article 7 and sections 6-5 or 6-10 do not apply to the income or profits of The taxpayer from the activities and the support activities provided to third party airlines and thus are not assessable income of The taxpayer for Australian tax purposes. The exception at paragraph 2 of Article 8 does not apply as those profits are not considered to be derived by The taxpayer from aircraft operations confined solely to places in Australia.

Article 8 of the Convention deals with the allocation of taxing rights with respect to profits derived from the operation of ships or aircraft.

Under paragraph 1 of Article 8 of the Convention, the profits from the operation of ships or aircraft in international traffic derived by a resident of the [foreign country] are not taxable in Australia. The term "international traffic" is defined in Article 3 to mean any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely from a place or between places in the other Contracting State.

Paragraph 2 of Article 8 provides that the profits may be taxed in Australia if they are profits from the operation of ships or aircraft confined solely to places in Australia.

Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements states that regard may be had to the OECD Commentary on the Model Tax Convention (and subsequent revisions to that Commentary) to assist in the interpretation of double tax agreements.

In relation to paragraph 1 of Article 8, Paragraph 4 of the OECD Commentary on Article 8 (OECD Model Tax Convention on Income and on Capital: Condensed Version 2010) states that:

The paragraph also covers profits from activities directly connected with such operations as well as profits from activities which are not directly connected with the operation of the enterprise's ships or aircraft in international traffic as long as they are ancillary to such operation.

Paragraph 4.2 describes ancillary activities as:

Activities that the enterprise does not need to carry on for the purposes of its own operation of ships or aircraft in international traffic but which make a minor contribution relative to such operation and are so closely related to such operation that they should not be regarded as a separate business or source of income of the enterprise should be considered to be ancillary to the operation of ships and aircraft in international traffic.

Support services

The OECD Commentary relevantly states at paragraph 10 that:

An enterprise that has assets or personnel in a foreign country for purposes of operating its ships or aircraft in international traffic may derive income from providing goods or services in that country to other transport enterprises. This would include (for example) the provision of goods and services by engineers, ground and equipment-maintenance staff, cargo handlers, catering staff and customer services personnel. Where the enterprise provides such goods to, or performs services for, other enterprises and such activities are directly connected or ancillary to the enterprise's operation of ships or aircraft in international traffic, the profits from the provision of such goods or services to other enterprises will fall under the paragraph.

In line with the OECD Commentary, Taxation Ruling TR 2008/8 Income tax: the taxation treatment of ship and aircraft leasing profits under the ships and aircraft articles of Australia's tax treaties supports the view that activities which are so minor and so closely related to the 'operation of ships or aircraft' that they should not be treated as a separate business or as a separate source of income should be treated as being ancillary to the 'operation of ships or aircraft' even though the activity does not need to be carried on for the purposes of its own operation of ships or aircraft in international traffic.

Paragraph 145 of TR 2008/8 lists certain factors the Commissioner considers relevant to whether or not certain activities are ancillary for the purposes of Article 8, including;

· A comparison between the activity and the enterprise's overall operations

· The duration of the activity

· The frequency of the activity

· Any other relevant facts or circumstances.

On this basis, the services provided by The taxpayer to the third party airlines is considered to be ancillary to its operation of aircraft in Australia. As an ancillary activity, the provision of services is covered by paragraph 1 of Article 8 of the Convention and therefore any profits derived from this activity are not taxable in Australia.

Paragraph 2 of Article 8 does not apply as The taxpayer does not have aircraft operations confined solely to places in Australia.

Support Activities

The OECD Commentary relevantly states at paragraph 8 that:

An enterprise will frequently sell tickets on behalf of other transport enterprises at a location that it maintains primarily for purposes of selling tickets for transportation on ships or aircraft that it operates in international traffic. Such sales of tickets on behalf of other enterprises will either be directly connected with voyages aboard ships or aircraft that the enterprise operates (e.g. sale of a ticket issued by another enterprise for the domestic leg of an international voyage offered by the enterprise) or will be ancillary to its own sales. Profits derived by the first enterprise from selling such tickets are therefore covered by the paragraph.

The support services provided by The taxpayer in relation to the third party airline is considered to be ancillary to its operation of aircraft in Australia. As an ancillary activity, the provision of the support services is covered by paragraph 1 of Article 8 of the Convention and therefore any profits derived from this activity are not taxable in Australia.

Paragraph 2 of Article 8 does not apply as The taxpayer does not have aircraft operations confined solely to places in Australia.

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