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Edited version of your written advice
Authorisation Number: 1051311835438
Date of advice: 23 November 2017
Ruling
Subject: Business residency for Australian tax purposes and definition of permanent establishment
Questions and Answers
Is any part of the income from the overseas internet business assessable in Australia?
No
This ruling applies for the following periods:
Year ended 30 June 2017
Year ended 30 June 2018
Year ended 30 June 2019
Year ended 30 June 2020
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You are a non-resident of Australia.
You live in a country other than Australia.
The business is operated as a sole trader.
The business conducts transactions over the internet globally.
The business has no employees.
The business enters into arrangements with certain producers globally then establishes transaction accounts to market and to sell their products.
The business completes the sales transactions and receives a percentage commission on each sale.
You incur costs for maintaining your business and derive a net income for each reporting period.
The business operates under a number of different names and seller identifications.
The stock is owned by the supplier in another country not the business. The business acts as a sales agent for the supplier selling products on third party websites.
Customers place orders on third party websites the business takes the orders and email them daily to the supplier who distributes direct to the customer. The business processes the invoices.
Customer payments and refunds are done on a third party websites.
The website host company is located in the in a third country
Operating bank accounts are foreign.
The business is sole trader operated and decisions are made overseas.
Some of the customers are from Australia.
The business has and Australian Business Number (ABN)
The business is registered for Goods and Services Tax (GST) in Australia.
The business lodges activity statements in Australia to comply with Australian GST requirements.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5 (3)
Tax Agreements Act 1953
Reasons for decision
Summary
The business is not a resident of Australia the income derived from operating as a sole trader does not have an Australian source therefore the income derive from the overseas internet business is not assessable in Australia.
Detailed reasoning
Subsection 6-5 (3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year.
You are a non-resident of Australia and you operate an internet business overseas.
Business income is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.
To determine the tax treatment of income from international transactions involving Australia, non-residents it must first be determined whether the income has an Australian or foreign source.
Source of income
Apart from certain rules prescribed for statutory income (for example, interest, royalties and dividends), there is 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 Common Law rules that relate to income source.
Australian courts have held various factors are relevant to determining source as confirmed in the following cases, 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 the following factors are relevant to determining the source of income:
● the place of making the agreement
● the place of payment of fees arising from the agreement; and
● the place of performance of services under the terms of the agreement.
What is most relevant when determining source are the facts according to the circumstances of the case. For example the location of the business premises, where the majority of the business activities is carried out, may be the most relevant factor. An example of this is the case of Watson v CT (WA) (1930) 44 CLR 94; 1 ATD 61, where an accountant with a Western Australia practice travelled to Victoria on his client’s behalf. The court determined the source of the income was Western Australia where the tax agents practice was located.
Trading profits
Ascertaining the source of income in the case of trading profits is usually a matter of defining where the business is conducted from and whether the business has a permanent establishment.
A permanent establishment is a fixed place of business through which the business enterprise is wholly or partly carried on. It may include a sales outlet, a branch, factory, workshop, office or a dependent agent (who has authority to enter into contracts on behalf of the enterprise and habitually exercises that authority). If the business has a permanent establishment in Australia, the business profits will be subject to income tax in Australia.
The double tax agreement between Australian and the other country (the agreement) acts to prevent double taxation. The internet business, sells goods online from a website hosted outside of Australia. Part of the agreement, provides that business profits are only taxable in the contracting State where the business has a permanent establishment.
The facts show the business does not have a permanent establishment in Australia. The business only conducts the following activities outside of Australia:
● hosting of the business website
● marketing and selling of goods
● processing of sales invoices and orders
● processing of payments and receipts
● business operations and decisions
● banking
Some of the businesses customers are Australian however the source of the business income is from outside Australia therefore there is no business being carried on in Australia. Income from the overseas internet business is not assessable in Australia.
The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.
ATO view documents
Taxation Ruling TR 2002/5
Other references (non ATO view)
Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 at 189-190
Federal Commissioner of Taxation v. United Aircraft Corporation (1943) 68 CLR 525; (1943) 7 ATD 318; (1943) 2 AITR 458
Watson v CT (WA) (1930) 44 CLR 94; 1 ATD 61