Edited version of your written advice

Authorisation Number: 1051336087890

Date of advice: 22 March 2018

Ruling

Subject: Assessability of fishing rights leasing fees.

Question 1

Are leasing fees paid by a resident trust to Company X for the use of fishing rights held by Company X assessable income of Company X under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

If the answer to the first question is yes, are the leasing fees derived by Company X covered under Article 7 (Business Profits) of the Convention between Australia and Country X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the Convention)?

Answer

No.

This ruling applies for the following period:

Income year ending 30 June 20XX

Company X

Company X is a commercial fishing and marine products procurement corporation.

Summary of financial statements for fiscal year ended 20XX shows that Company X operates in the following business segments:

● Marine products

● Food products

● Fine chemicals

● General distributions

● Others

Company X’s business activities comprise of:

● Catching fish

● Selling fish

● Manufacturing food

● Marine engineering and

● Breeding fish

Article XX of Company X’s Articles of Incorporation includes general lease business.

Fishing rights - Australia

Under the Fisheries Management Act 1991, Company X was granted XX% of Statutory Fishing Rights (SFR) to fish within the Australian fishing zone.

Lease of fishing rights

On XX XX 20XX, a Deed was made between Company X, the resident trust and a third party.

Under the terms of the Deed, Company X agreed to:

● lease, licence or otherwise make available to the trust the SFRs

Any quota leased to the trust is leased annually from 1 XX to 30 XX for an annual fee as specified in the Deed.

Leasing arrangements outside Australia

Company Y, a subsidiary of Company X, holds fishing rights outside out Australia.

Company Y leases out these fishing rights to an unrelated party.

Company Z, another subsidiary of Company X which operates salmon farming and processing outside of Australia, holds rights to use fresh water from rivers and sea surface for the purpose of its inland farming activities and at the sea.

Company Z leases out its rights for the use of water and the use of sea surface to third parties.

Relevant legislative provisions

International Tax Agreements Act 1953 section 4

International Tax Agreements Act 1953 section 5

Income Tax Assessment Act section 6-5

Income Tax Assessment Act section 995-1

Reasons for decision

All references refer to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Question 1

Summary

Fishing rights leasing fees payments made by the resident trust to Company X are ordinary income from an Australian source and are therefore included in Company X’s assessable income under subsection 6-5(3).

Detailed reasoning

Subsection 6-5(3) provides that assessable income of foreign residents includes the ordinary income derived directly or indirectly from all Australian sources.

As a foreign resident, Company X will need to include in its assessable income the fees it derives from leasing out SFRs if the fees are “sourced” in Australia.

Source of Income

As the term ‘source’ is not defined in the ITAA 1997, it will take its ordinary meaning and the common law source rules will apply.

Taxation Determination TD 2011/24 Income tax: is an 'Australian source' in subsection 6-5(3) of the Income Tax Assessment Act 1997 dependent solely on where purchase and sale contracts are executed in respect of the sale of shares in an Australian corporate group acquired in a leveraged buyout by a private equity fund states that:

19. Determining the source of an item of income is a matter of fact to be determined having regard to the facts and circumstances of each case. This was originally stated by Isaacs J in Nathan v. FC of T.

The Legislature in using the word ‘source’ meant, not a legal concept, but something which a practical man would regard as a real source of income. Legal concepts must, of course, enter into the question when we have to consider to whom a given source belongs. But the ascertainment of the actual source of a given income is a practical, hard matter of fact.

20. In Tariff Reinsurances Ltd v. Commissioner of Taxes (Vic) (Tariff), Rich J said that both the form and substance of a transaction are relevant to the question of source:

We are frequently told, on the authority of judgments of this court, that such a question is ‘a hard practical matter of fact’. This means, I suppose, that every case must be decided on its own circumstances, and that screens, pretexts, devices and other unrealities, however fair may be the legal appearance which on first sight they bear, are not to stand in the way of the court charged with the duty of deciding these questions. But it does not mean that the question is one for a jury or that it is one for economists set free to disregard every legal relation and penetrate into the recesses of the causation of financial results, nor does it mean that the Court is to treat contracts, agreements and other acts, matters and things existing in the law as having no significance.

21. In Spotless Services Limited & Anor v. FC of T (Spotless), Lockhart J said:

The cases demonstrate that there is no universal or absolute rule which can be applied to determine the source of income. It is a matter of judgment and relative weight in each case to determine the various factors to be taken into account in reaching the conclusion as to source of income.

22. On appeal to the Full Federal Court, Beaumont J agreed with Lockhart J’s views and said:

As has been noted, Lockhart J stated, correctly in my view, that the test to be applied in determining the source of income is to 'search for the 'real source' and to judge the question in a practical way'. As his Honour went on to say (at ATC 4409-10), it is a matter of 'judgment' and 'relative weight' in each case to determine the various factors to be taken into account in reaching this conclusion. I also, with respect, agree with his Honour's statement (at ATC 4410 - cited above) as to the relative importance, for present purposes, of the place or places where the contract was made and the money lent.

23. Thus, to summarise, as Bowen CJ said in FC of T v. Efstathakis:

...the answer is not to be found in the cases, but in the weighing of the relative importance of the various factors which the cases have shown to be relevant.

24. …as the case law quoted above shows, the question of the source of income is always one of fact. Given this, the suggestion that the place of execution of a contract will always determine source is not sustainable.

25. As Rich J said in FC of T v. United Aircraft Corporation:

As the question to be determined in this case is a question of fact a decision on one set of facts is not binding and is often of little help on another set of facts. In Premier Automatic Ticket Issuers Ltd. v Federal Commissioner of Taxation... and Tariff Reinsurances Ltd. v Commissioner of Taxes (Vic.)... – cases which may, perhaps, be regarded as borderline cases – the Court considered that, on the facts in each case, the contract should be regarded as the sole source of income and that therefore the locus of the contract was the locus of the source. But it does not follow that, in every case where a contract is one of the sources, the contract should be regarded as the sole source.

The process of identification of the locality of a source of income may differ depending upon the nature of the income in question; per Stephen J in Esquire Nominees Limited as Trustee of Manolas Trust v. Federal Commissioner of Taxation 73 ATC 4114. In Resource Capital Fund IV LP v. FC of T (2018) ATC 20-647; [2018] FCA 41, Pagone J observed that:

51. …The factors that will be relevant to the ascertainment of the source of income will vary from case to case, and will vary as between different kinds of income. …The location of the property will be significant when the income is derived from property (see Federal Commissioner of Taxation v. United Aircraft Corporation (1943) 68 CLR 525, 536), and the place where a taxpayer has performed income earning operations will be significant where the income is derived from a service of operations (see Commissioner of Inland Revenue v. HK-TVB International Ltd [1992] 2 AC 397, 404, 408-409).

In Sixsmith v. Commissioner of Taxation (1928) 28 SR (NSW) 456, a US company agreed in the US with its Australian subsidiary to license its subsidiary to exhibit or lease films in Australia in return for 65% of gross sales revenue. Advertising material was also supplied for an agreed price. It was held that the licence consideration was Australian-sourced while the income from supply of the advertising material was US-sourced.

In Liquidator, Rhodesia Metals Ltd (In Liquidation) v. Commissioner of Taxes [1940] AC 774, PC; the sole business operation of an English company was the purchase of immovable property — mining claims — in Southern Rhodesia, and their development in that territory for purposes of transfer there at a profitable price. Both the contracts of purchase and subsequent sale were made in England, and the consideration for the sale was also received there. It was held that the company received the sale price from a source within Southern Rhodesia. On behalf of the Privy Council, Lord Atkin stated that:

As a hard matter of fact the only proper conclusion appears to be that the company received the sum in question from a source within the territory, namely, the mining claims which they had acquired and developed there for the very purpose of obtaining the particular receipt.

In Federal Commissioner of Taxation v. United Aircraft Corporation (1943) 68 CLR 525, the taxpayer was a company incorporated in the USA and carrying on business in USA. The (taxpayer) American company by agreement licensed an Australian company to manufacture and sell specified aircraft engines and parts in Australia. Included in the agreement was the right to use Australian patents and Australian registered designs. However the American company did not own either of these items of property. The source of the payments received by the American company from the Australian company was considered by the High Court of Australia. The High Court held by majority that the licence fees were not sourced in Australia.

Latham CJ based his judgement on the fact that the American company did nothing in Australia and owned no property in Australia. It owned no rights which could be regarded as located in Australia and did not derive income from any property in Australia. That which produced the income was the agreement made in the United States together with performance of the agreement which took place in the United States. Latham CJ noted that:

The agreement purports to grant a licence to manufacture engines of a certain description. But in fact no licence was granted by the agreement. A licence provides an excuse for an act which would otherwise be unlawful as, for example, an entry upon a person’s land, or the infringement of a patent or copyright. It is an authority to do something which would otherwise be wrongful or illegal or inoperative: See Byrne’s Law Dictionary-sub “licence.” The American company had no patents in Australia and had no right to manufacture engines in Australia other than that possessed by every person in the world. Any person could, without infringing any right of the American company, have manufactured the engines in question in Australia if he had the necessary knowledge, skill, and means of manufacture. The agreement was in reality an agreement for the communication of information which would facilitate the manufacture of the engines in Australia. The American company communicated the information in New York and it received payment in New York. …

Before the agreement was made and after the agreement was made the American company owned no property in Australia of any kind. The making and the performance of the agreement did not vest in the American company any property in Australia. It owned no rights which could be regarded as located in Australia. It did not derive income from any property in Australia. …

Property is one possible source of income. The work of persons or acts done by persons are other possible sources of income. But I have not been able to think of any sources of income other than property and acts done. If a person has rights over property or in relation to property he may derive income from that property. The American company had no such rights in Australia. … Income derived from property means, in my opinion, income derived from the property of the person sought to be taxed as having derived the income. … A person who neither owns anything in a country nor does nor has done anything in that country cannot, in my opinion, derive income from that country. …

Rich J agreed with Latham CJ adding that:

It is, I think, necessary to emphasize the fact that at no material time has the respondent company owned or had any interest in any patents in Australia for or in respect of the licensed engines or spare parts referred to in the agreement annexed to the admissions… The terms, wherever occurring, of “licence,” “licensed” and “royalties” are not referable to any patent.

Subsequently, in Case 125 (1958) 7 CTBR(NS), it was held that the source of royalties paid by a resident company to a US company was the use by the former of a trade mark registered in Australia in favour of the US company. Thus, the royalties were derived from a source in Australia.

And in the Full High Court of Australia in Esquire Nominees Limited as Trustee of Manolas Trust v. Federal Commissioner of Taxation 73 ATC 4114, Stephen J referring to the United Aircraft Corporation case, stated:

It has been said that the doing of acts or the possession of property are the only two sources of income and that in the case of the latter the location of the property in a particular country identifies the source of income flowing from it – United Aircraft case per Latham C.J. at p. 536…

The Commissioner’s contention appears to me to deny that ownership of income-producing property necessarily constitutes a relevant source of income …

The authorities seem to me to be opposed to what I have called the Commissioner’s contention. … In the United Aircraft case, Latham C.J., after describing property as one possible source of income, said, at p. 536, “if a person has rights over property or in relation to property he may derive income from that property”. His Honour regarded as essential to the identification of income as having a source in a particular country the ownership of something in that country or the doing of something in that country. No qualification upon the nature of what was owned, so long as it was income-producing, was hinted at.

Finally, in Commissioner of Inland Revenue v. Hang Seng Bank Ltd [1990] 3 WLR 1120; (1990) 3 HKTC 351, [1991] 1 AC 306 the Privy Council considered the source of profits from the acquisition and disposal of foreign currency certificates of deposits and bonds. In the course of their judgment the Privy Council, (through Lord Bridge of Harwich) alluded to the source rules which would apply to a number of different transactions. At WLR 1129; HKTC 360, Lord Bridge stated:

Their Lordships were referred in the course of the argument to many authorities on different taxing statutes in different common law jurisdictions raising a variety of questions as to the geographical source to which income or profits should be ascribed. But the question whether the gross profit resulting from a particular transaction arose in or derived from one place or another is always in the last analysis a question of fact depending on the nature of the transaction. It is impossible to lay down precise rules of law by which the answer to that question is to be determined. The broad guiding principle, attested by many authorities, is that one looks to see what the taxpayer has done to earn the profit in question. If he has rendered a service or engaged in an activity such as the manufacture of goods, the profits will have arisen or derived from the place where the service was rendered or the profit making activity carried on. But if the profit was earned by the exploitation of property assets as by letting property, lending money or dealing in commodities or securities by buying and reselling at a profit, the profit will have arisen or derived from the place where the property was let, the money was lent or the contracts of purchase and sale were effected.

Thus, it is clear from the above authorities that determining the source from which income is derived by a taxpayer is one of fact, having regard to the nature of the transaction and weighing of the relative importance of the various factors which the cases have shown to be relevant. It is also clear from the above authorities that the place of execution of a contract is not solely determinative of the source of the income that is to be derived under the contract.

In this case, Company X holds SFRs issued under an Act of the Commonwealth of Australia, the Fisheries Management Act 1991 (FMA). These SFRs give Company X the right to conduct fishing activities within the Australian fishing zone. Whilst Company X does not itself exercise those SFRs, having leased them to the resident trust, the income it derives by way of the lease payments is sourced from its ownership of the SFRs, which were granted by an authority of the Australian Government under an Act of the Australian Parliament. Thus the SFRs have the necessary “property” connection to Australia.

Accordingly, the income derived by Company X as a result of leasing the SFRs is sourced in Australia and is to be included in Company X’s assessable income by virtue of subsection 6-5(3).

Question 2

Summary

The leasing fee payments made by the resident trust to Company X are not covered under Article 7 (Business Profits) of the Convention as leasing out fishing rights by Company X to the resident trust does not constitute carrying on business by Company X.

As Company X is a resident of Country X, it is necessary to look at the International Tax Agreements Act 1953 (Agreements Act) to determine the allocation of taxing rights for this type of income.

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that those Acts are read as one. However, the provisions of the Agreements Act take precedence over the provisions of the ITAA 1936 (apart from Part IVA of that Act) and the ITAA 1997 to the extent of any inconsistency.

Subsection 5(1) of the Agreements Act contains a list of current agreements, which includes the Convention. This subsection gives the force of law to any provision in any of the listed agreements from the date of entry into force of the provision.

The Convention operates to avoid the double taxation of income received by Australian and Country X residents.

Article 7 (Business Profits) of the Convention

Article 7 of the Convention governs the taxation of business profits derived from Australia by a resident of Country X.

Under Article 7 of the Convention, the business profits of an enterprise of Country X shall be only taxable in Country X unless the enterprise carries on business in Australia through a permanent establishment situated in Australia. If so, so much of the profit of the enterprise attributable to the permanent establishment in Australia may be taxed in Australia.

For Article 7 of the Convention to apply to a Country X resident taxpayer, there must be an enterprise deriving profits.

Article 3 of the Convention provides that the term “enterprise” applies to carrying on any business.

In Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4717; (1990) 21 ATR 531 (Thiel’s Case) the High Court accepted that the Organisation of Economic Co-operation and Development (OECD) Commentaries may be referred to when interpreting tax treaties in accordance with Article 32 of the Vienna Convention.

Paragraphs 101 to 105 of Taxation Ruling TR 2001/13 Income tax: Interpreting Australia’s Double Tax Agreements explain the Commissioner’s view that the OECD Commentaries are relevant to interpreting Australia’s tax treaties.

Paragraph 1 of the OECD’s Commentaries on Article 7: Concerning the taxation of business profits affirms that:

This Article allocates taxing rights with respect to the business profits of an enterprise of a Contracting State to the extent that these profits are not subject to different rules under other Articles of the Convention.

This is further supported by the Explanatory Memorandum which implemented the Convention which provides guidance about the terms ‘enterprise’ and the application of Article 7 of the Convention.

The Explanatory Memorandum confirms that Article 7 is concerned with the taxation by one country of business profits derived by an enterprise that is a resident of the other country.

Hence, it is necessary to ascertain whether leasing out SFRs constitutes an ‘enterprise’ or ‘carrying on business’ of Company X for the purpose of Article 7 of the Convention. The relevant question to be answered is not whether Company X is carrying on business but whether leasing out SFRs constitutes ‘carrying on business’.

Carrying on business

The Convention provides that ‘the term “enterprise” applies to the carrying on of any business’. This restricts the application of Article 7 to profits from the carrying on of a business. Further, the Convention defines business but does not define the term ‘carries on business’. Therefore, pursuant to Article 3 of the Convention unless the context requires otherwise, the term will have the meaning that it has under Australia’s domestic tax law.

Section 995-1 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

In Federal Commissioner of Taxation v. Murry [1998] HCA 42; 193 CLR 605; 72 ALJR 1065; 155 ALR 67; 98 ATC 4585; 39 ATR 129, Gaudron, McHugh, Gummow and Hayne JJ observed that:

...A business is not a thing or things. It is a course of conduct carried on for the purpose of profit and involves notions of continuity and repetition of actions.

To the same effect see also Smith v. Anderson (1880) 15 Ch.D. 247, Kirkwood v. Gadd (1910) A.C. 422 and Smith v. Capewell (1979) 142 C.L.R. 509.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production summarises indicators that have been found to be relevant by Australian courts in determining whether a taxpayer’s activities constitute the carrying on of a business.

TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case, and no one indicator will be decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922).

‘It is not possible to definitively state whether a company is carrying on a business. It is always a question of fact to be determined by reference to the relevant principles as to when a person carries on a business’ (Brookton Co-operative Society Ltd v. FCT (1981) 147 CLR 441 (Brookton) per Aicken J at 28) and is ‘ultimately based on the overall impression of the activities of the company’ (Martin v. FC of T (1953) 90 CLR 470 5 AITR 548).

Whether a company has a purpose or prospect of profit is an important factor in determining whether a taxpayer’s activities amount to carrying on a business. However it is ultimately a question that must be determined by reference to all the relevant facts relating to the company and its activities. The nature of the activities is often closely related to whether a company has a profit making purpose and prospect of profit.

However whether the letting of property amounts to the carrying on of a business will depend on the circumstances of each case (Californian Copper Syndicate (Limited and Reduced) v. Harris (1904) 5 TC 159).

In Kennedy Holdings & Property Management Pty Ltd v. Federal Commissioner of Taxation 92 ATC 4918 (Kennedy Holdings), the Federal Court held that a company which co-owned one commercial rental property was not carrying a business for income tax purposes.

The American Leaf Blending Co. Sdn Bhd v. Director-General of Inland Revenue (Malaysia) [1978] 3 All E.R. 1185 (American Leaf Blending Co) case and the Commissioner’s ruling in Taxation Ruling IT 2423 do not take an absolute position in respect to company ownership of rental properties. Consistent with the phrase ‘prima facie inference’, in American Leaf Blending Co, Lord Diplock said:

…that…the letting of its property was one of the objects set out in its memorandum of association… was in law conclusive that in making any letting of its premises it was carrying on a business…is, in their Lordships’ view, too broad a proposition.

Their Lordships would not endorse the view that every isolated act of a kind that is authorised by its memorandum if done by a company necessarily constitutes the carrying on of a business.

…the question whether the company was carrying on a business of letting out its premises for rent was one of fact…

Whether the activity said to amount to a business is repeated and regular is relevant to determining whether a taxpayer carries on a business. In American Leaf Blending Lord Diplock observed that:

The carrying on of ‘business’, no doubt, usually calls for some activity on the part of whoever carries it on, though, depending on the nature of the business, the activity may be intermittent with long intervals of quiescence in between.

Similarly, in Inglis v. FCT (1979) 40 FLR 191; 10 ATR 493; 80 ATC 4001, Brennan J said:

The carrying on of a business…is a matter of activity. …At the end of the day, the extent of activity determines whether the business is being carried on.

In Ferguson v. Federal Commissioner of Taxation (1979) 37 FLR 310; 79 ATC 4261; 9 ATR 873; 26 ALR 307, Bowen CJ and Franki acknowledged that all businesses have to start with a single activity, but it is the subsequent regularity of such conduct that turns it into a business, stating that:

Repetition and regularity of the activities is…important. However, every business has to begin, and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organisation of activities in a businesslike manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on.

Consistent with this in Stone v. Federal Commissioner of Taxation 2003 ATC 4584, Heerey, Emmett and Hely JJ held that:

…it will be relevant to determine whether a relevant activity is carried on in a businesslike way and in accordance with commercial principles. If there is a system in the activity, coupled with repetition and continuity, that will be indicative of a business.

The words ‘carries on business’ in Article 7 imply a repetition of activity and a continuity of operations; i.e. a series of actions or course of conduct habitually and systematically exercised.

In the High Court of Australia in Hope v. The Council of the City of Bathurst [1980] HCA 16; 80 ATC 4386; 144 CLR 1; 54 ALJR 345; 29 ALR 577; 12 ATR 231; Mason J said:

It is the words “carrying on” which imply the repetition of acts (Smith v. Anderson (1880) 15 Ch. D. 247, at pp. 277-278)… It denotes…activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis.…I conclude that the appellant’s activities amounted to a business.…Transactions were entered into on a continuous and repetitive basis for the purpose of making a profit.

In Thiel’s case (referred to above) the High Court of Australia considered the meaning of the undefined term ‘enterprise’ for the purposes of the tax treaty between Australia and Switzerland. The High Court also discussed the meaning of carrying on a business. Dawson J stated:

In Smith v. Anderson (1880) 15 Ch.D. 247 at pp. 277-278, Brett L.J. said:

“The expression ‘carrying on’ [business] implies a repetition of acts, and excludes the case of an association formed for doing one particular act which is never to be repeated.”

In Kirkwood v. Gadd (1910) A.C. 422, Lord Atkinson cited this passage with approval (at p. 431) and Lord Loreburn L.C. said at p. 423: “What is carrying on business? It imports a series or repetition of acts.” …

In Smith v. Capewell (1979) 142 C.L.R. 509, Gibbs J. referred to these cases and said at p. 517:

“The expression ‘carry on business’, in its ordinary meaning, signifies a course of conduct involving the performance of a succession of acts, and not simply the effecting of one solitary transaction.”

In these cases the expression “carrying on” takes its colour from its context which is that of a business or its equivalent.

While McHugh J stated that:

Cases such as Kirkwood and Smith, to which Sheppard J. referred, deal with the …expression “carrying on any... business”. Those cases hold that an isolated transaction of a business nature does not constitute “carrying on... a business”. But that is because the carrying on of a business requires the habitual pursuit of business activities. … The concept of carrying on of a business requires repetition of activity. …

That the business of a subsidiary is different from the business of its parent company was addressed in the Commissioner of Taxation v. Tasman Group Services Pty Ltd (2009) 180 FCR 128 at [56]; 2009 ATC 20-138; 74 ART 739, where the Full Federal Court stated:

It is a trite proposition that, where a subsidiary, even if wholly owned by a parent company, carries on a business, the business is that of the subsidiary not the parent. Irrespective of how closely it may monitor the business activities of the subsidiary, the parent does not itself carry on those activities but is engaged in the separate business of a parent or holding company which is, normally, the receipt of income in the form of dividends from the subsidiary.

In this case, Company X is a commercial fishing and marine procurement corporation. Company X’s business activities comprise of:

● catching fish

● selling fish

● manufacturing food

● marine engineering, and

● breeding fish.

Leasing out fishing rights does not form a business segment of Company X.

The arrangement in Australia concerning SFRs is unique for Company X’s group in that Company X holds SFRs in its own right and leases out these fishing rights to Australian resident trust. Company X itself is not involved in any fishing operations in Australia and carries no commercial risk associated with the operation. Company X does not have a similar arrangement anywhere else in the world.

Company X’s activity of leasing out fishing rights is better described as leasing of property to receive a passive income stream. The income is not derived from any of the business activities Company X is engaged in; it is derived from letting intangible property which is considered to be passive income, akin to the Federal Court’s conclusion in Kennedy Holdings.

The lease arrangement between Company X and the resident trust has been in place since 20XX, which shows a degree of permanence and the annual payments made by the trust to Company X show repetition. However, the scale of activity indicates that the activity conducted is a passive activity akin to an investor and would therefore not be considered to be an activity in the nature of business.

Whilst the applicant has contended that Company X leases out fishing rights in other countries in addition to Australia, the evidence supplied by the applicant shows Company X subsidiaries lease out fishing rights. Company X does not hold these rights in its own right. Company X does not lease fishing rights anywhere else in the world.

Even if Company X’s subsidiaries were held to be carrying on business of leasing out fishing rights, this would be the business of Company Y and Company Z as subsidiaries and not Company X as the parent.

Whilst the Articles of Incorporation authorise Company X to conduct general lease business, leasing out fishing rights in Australia is an isolated act which does not constitute the carrying on of a business.

Accordingly, the leasing fees received by Company X are not considered to be in relation to carrying on business leading to the conclusion that these fees fall outside the scope of Article 7 of the Convention.

Therefore, Company X is not entitled to relief from taxation in Australia under Article 7 of the Convention.

Article 21 of the Convention

The purpose of Article 21 of the Convention is to cover income that falls outside the scope of other Articles of the Convention.

Leasing fees are not specifically covered under the Convention. However, Article 21 of the Convention addresses this situation.

Paragraph 1 of the OECD’s Commentaries on Article 21: Concerning the taxation of other income states:

This Article provides a general rule relating to income not dealt with in the foregoing Articles of the Convention.

Paragraph 13 of the OECD’s Commentaries on Article 21: Reservation of this Article affirms that Australia reserves its position on Article 21 and maintains the right to tax income arising from sources in Australia.

For Article 21 of the Convention to apply, the leasing fees must be sourced in Australia. It has already been concluded that the leasing fees are sourced in Australia (see Question 1, Detailed reasoning ‘source of income’)

In line with Article 21 of the Convention and the OECD Commentaries, it is concluded that the taxing rights on income derived by Company X as a result of leasing out SFRs to the resident trust, are allocated to Australia as the income is sourced in Australia and Australia reserves the right to tax ‘other income’ that is sourced in Australia.