Edited version of private ruling

Authorisation Number: 1011663498927

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Ruling

Subject: Source of income

Question

Is the income received by the taxpayer from performing contracting services in a foreign country sourced in Australia for the purposes of section 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

No.

This ruling applies for the following period

Period ending 31 December 2010

The scheme commenced on

The scheme has commenced.

Relevant facts

The taxpayer is not an Australian resident for income tax purposes.

The taxpayer lives in a foreign country (Country X) and is a resident of Country X for tax purposes.

The taxpayer entered into a contract with an Australian based company to provide contracting services which are performed in Country X.

The contract was signed and negotiated in Australia. All payments are made to the client's overseas bank account.

The taxpayer is an independent contractor in respect of the contracting services provided to the Australian based company.

The taxpayer does not have any relationship with the company he is working for, either as a shareholder or a director. The only relationship he has is as a contractor performing contracting work.

The taxpayer performs contracting activities in Country X in accordance with the terms of a contractor agreement.

The taxpayer provided details of the work activities performed in Country X.

The taxpayer has an office in Country X which he regularly used to conduct his duties; however some of the work is performed on site.

The taxpayer is registered for Goods and Services Tax.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(3)

Reasons for decision

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a foreign resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year.

Apart from certain rules prescribed for statutory income (for example, royalties and dividends), there are no statutory guidelines in the income tax legislation for determining the source of income.

In the absence of statutory source rules, reliance is placed on the general common law source rules as they relate to income.

The source of income is determined according to the general principle set out in Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183, where the High Court held the determination of source of income is a practical, hard matter of fact.

Generally, Australian courts have held that when the question of source is in issue, the weighting of the relative importance of the various factors are relevant (Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 at 189-190 and Federal Commissioner of Taxation v. United Aircraft Corporation (1943) 68 CLR 525; (1943) 7 ATD 318; (1943) 2 AITR 458). The courts also confirmed that it is appropriate to have regard to some of the following factors in determining the source of income:

· the place where the services are performed,

· the place where the contract is made and

· the place where the payment is made.

One factor may sometimes be more important than another.

In certain circumstances, the location of the business premises, where the majority of the business activities were carried out, may be the more important factor. In Watson v. CT (WA) (1930) 44 CLR 94; 1 ATD 61, an accountant in private practice in Western Australia travelled to Victoria to meet with the taxation office on his clients behalf. It was held that the source of the income was Western Australia because that was where the taxpayer carried on his practice.

The source of remuneration for services rendered will depend on the facts of each case. However, the source is generally the place where those services are performed (see Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 11 ATD 288; (1957) 7 AITR 76) where Williams J stated at CLR 414; ATD 296; AITR 85 that:

......the locality of the source of income derived from personal exertion in the capacity of employee or in relation to any services rendered surely must be where such personal exertion took place, and the locality of the source of the proceeds of any business where the activities of the business are carried on.....

However, in the case of income from the provision of independent personal services, the place where the contract was made and where remuneration was paid can sometimes be more important than the place where the services are rendered (Federal Commissioner of Taxation v. Mitchum (1965) 113 CLR 401; 13 ATD 497).

In the present case, the taxpayer is providing contracting services. The contractor agreement for the provision of the contracting services was signed and negotiated in Australia, however all services are performed by the taxpayer in Country X. The payments in respect of the services provided are made in Australia by the Australian based company.

The role of the taxpayer under the contract entered into with the Australian based company is the carrying out of the contracting activities in Country X. It is the activities performed in Country X that give rise to the derivation of the taxpayer's income. These are considered more significant factors and outweigh the fact that the contract was signed in Australia and the payments are made in Australia.

In view of the above case law and the circumstances in the present case, it is considered that the source of income is the place of performance of the services under the contract. Accordingly, the contracting services performed in Country X is not sourced in Australia.

Further issues for you to consider

Residency status for Australian income tax purposes

Taxation Ruling No. IT 2650 provides guidelines for determining whether individuals who leave Australia temporarily to live overseas, for example, on temporary overseas work assignments or on overseas study leave, cease to be Australian residents for income tax purposes during their overseas stay.