Edited version of private advice

Authorisation Number: 1052238126748

Date of advice: 24 April 2024

Ruling

Subject: International tax treaty - withholding exemption

Question

Is income received by a Spanish Not-for-Profit Organisation from contracts in Australia for services of performers in February 20XX exempt from Australian tax under Article 17(3) of the 'Agreement Between Australia and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income'?

Answer

No.

This ruling applies for the following period:

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

a Spanish Not-for-Profit Organisation is a registered cultural organisation in Spain. The Spanish Not-for-Profit Organisation is administered by a Board of XX directors including a representative of the government of a foreign jurisdiction.

The Spanish Not-for-Profit Organisation receives public funds from various public bodies in a foreign jurisdiction. These public funds were general grants and not given specifically for the visit to Australia.

The Spanish Not-for-Profit Organisation was contracted to perform concerts in Australia.

A foreign management organisation acted as agent for The Spanish Not-for-Profit Organisation for the Australian concert contracts entered into.

Under the provisions of the contracts, The Spanish Not-for-Profit Organisation was provided by the venues with airfares and accommodation for each musician.

The Spanish Not-for-Profit Organisation provided X musicians from Spain. The musicians entered into separate agreements with The Spanish Not-for-Profit Organisation before the tour that determine how much they get paid. In this instance, the musicians received contract fees from The Spanish Not-for-Profit Organisation totalling $X each for musicians and $X for the principal artist.

The Spanish Not-for-Profit Organisation does not pay tax in Spain on the amounts received from the concerts as they are a charity for the purposes of Spain's taxation law.

The Spanish Not-for-Profit Organisation has extensive Commissions, touring expenses and administration expenses.

The Spanish Not-for-Profit Organisation had provided a copy of its profit and loss statement for the calendar year ending 31 December 20XX as part of its application for a Private Binding Ruling. The profit and loss statement indicates that for the 31 December 20XX calendar year it's funding can be summarised below:

Table 1: The profit and loss statement indicates that for the 31 December 20XX calendar year it's funding can be summarised below:

The Spanish Not-for-Profit Organisation had total income for the year ending 31 December 2022 of $X.

The Spanish Not-for-Profit Organisation received total subsidies from public funds for the year ending 31 December 20XX of $X. This represents approximately 26.3% of the total income of the organisation.

The Spanish Not-for-Profit Organisation had total profit for the year ending 31 December 20XX of $X.

Relevant legislative provisions

Income Tax Assessment Act 1997section 6-5

International Tax Agreements Act 1953 section 5

Does IVA apply to this private ruling?

No

Reasons for decision

Question 1

The income received by the Spanish Not-for-Profit Organisation is beneficially for the purposes of remunerating musicians it has contracted.

Foreign residents are taxed on the ordinary income they derive from all Australian sources during the income yea pursuant to subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

This section will apply to the foreign resident musicians unless there is a specific exclusion provided by the "Agreement Between Australia and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income" (The Convention). Section 5 of the International Tax Agreements Act 1953 provides that agreements including The Convention are ratified into Australian law and will have force of law.

Article 17 of the Convention applies to activities where an entertainment character is present. The Article is as follows:

ARTICLE 17 Entertainers

(1)

Notwithstanding the provisions of Articles 14 and 15, income derived by entertainers (such as theatrical, motion picture, radio or television artistes and musicians and athletes) from their personal activities as such may be taxed in the Contracting State in which these activities are exercised.

(2)

Where income in respect of the personal activities of an entertainer as such accrues not to that entertainer but to another person, that income may, notwithstanding the provisions of Articles 7, 14 and 15, be taxed in the Contracting State in which the activities of the entertainer are exercised.

(3)

Notwithstanding the provisions of paragraphs (1) and (2), income derived by a resident of one of the Contracting States as an entertainer, from activities as an entertainer exercised in the other Contracting State, shall be exempt from tax in the other Contracting State if the visit to that other State is substantially supported by public funds of the first mentioned State or a political subdivision or local authority thereof, in connection with the performance of such activities.

In this instance, the income is derived by the Spanish Not-for-Profit Organisation on behalf of musicians who would be covered by this Article. The OECD Commentaries on the Articles of the Model Tax convention, which as stated in Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements provide important guidance when wording in agreements is ambiguous, provides that where an 'impresario', being someone who organises concerts, receives income on behalf of the relevant entertainers, then Article 17 will apply to them. In this instance, the Spanish Not-for-Profit Organisation can be considered to have received income on behalf of the musicians as they organised the concert on behalf of them and entered into contracts with the relevant venues. The income derived by the Spanish Not-for-Profit Organisation may be taxed by the contracting state being Australia for all income the Spanish Not-for-Profit Organisation derives from Australian sources.

Article 17(3) provides an exception to the general rule of taxation and states that the income derived by a resident of a contracting state from activities exercised in the other state if that visit to the other contracting state is substantially supported by public funds by the first contracting state. In this case, if it can be shown that the visit to Australia was substantially supported by public funds from Spain, then the income will be exempt from tax in Australia.

There are no definitions within The Convention that indicate the meaning of "substantially supported". There is also no guidance in the OECD commentary on what 'substantially' means for the purposes of this Article.

Article 3(3) of the Conventions provides that if a term is not defined in the Convention, it shall have the meaning which it has at that time under Australian law (as Australia applying the Spanish convention) concerning the taxes to which the Convention applies.

In applying Australian law interpretation principles to the Convention, the Commissioner follows the principles established by the High Court in SAS Trustee Corporation v Miles [2018] HCA 55 at 64 where Edelman J provided:

"The task of statutory construction involves the legal application of the meaning of statutory words, as interpreted, to the facts of a case. In Federal Commissioner of Taxation v Consolidated Media Holdings Ltd, this Court said that the task of statutory construction must begin and end with the text of the statute."

This was supported later in the decision by Kiefel CJ and Keane J at 32:

"The method to be applied in construing a statute to ascertain the intended meaning of the words used is well settled. It commences with a consideration of the words of the provision itself, but it does not end there. A literal approach to construction, which requires the courts to obey the ordinary meaning or usage of the words of a provision, even if the result is improbable, has long been eschewed by this Court."

It follows that we are required to look to the ordinary meaning of 'substantially' under Australian law.

The Macquarie dictionary defines substantial as '2. Of ample or considerable amount, quantity, size, etc'. The definition does not provide support for the Commissioner to make a quantitative determination that would represent "substantially".

The Commissioner is required to consider additional context for the purposes of Article 17(3). This is supported again by the High Court in SAS Trustee Corporation v Miles [2018] HCA 55at 33 where Kiefel CJ and Keane J provided:

"Consideration of the context for the provision is undertaken at the first stage of the process of construction. Context is to be understood in its widest sense. It includes surrounding statutory provisions, what may be drawn from other aspects of the statute and the statute as a whole. It extends to the mischief which it may be seen that the statute is intended to remedy."

In considering additional context to assist the Commissioner in determining if the 26% of public funds is "substantial" for the present purposes we can consider the decision in Ong v Minister for Immigration & Multicultural & Indigenous Affairs (2003) AATA 178 at 24-25 where Senior Member Allen in citing the decision in Commissioner for Superannuation v Scott (1987) FCA 79 at 412 provided:

"The word "substantial" has been said to be a word calculated to conceal a lack of precision.. what is substantial ownership of an eligible business is a question of fact or degree."

While Senior Member Allen is primarily concerned with what is a substantial ownership of a business, the attribution of a value to what 'substantial' mean is relevant to the scheme of this ruling to determine if the 26.3% of public funding is substantial for the purposes of The Convention. Senior Member Allen continues at 26:

"No doubt if a person owned 12.25 percent of a large publicly listed company such as Coles Myer or the Commonwealth Bank that would be a substantial shareholding (or ownership). I do not, however, regard 12.25 percent of Prestige to be a substantial ownership of that business".

The Commissioner takes the position that in determining if an interest or amount of public funding is substantial, it is necessary to consider the other sources of the funding to determine if the 26% represents the largest portion of funding and would otherwise lead to an inference that the amount could otherwise be considered as "substantial" in the same way that a 12.25% shareholding in a large business such as Coles Myer would also be considered to be a 'substantial shareholding'.

The Spanish Not-for-Profit Organisation receives 68.2% of its funding from the revenue generated from ticket sales to music events globally. The next largest portion of funding is the support of public funds it receives from a foreign government representing 26.3%. The remainder of its sources of funds are all less than 5%. In considering the funding allocation of The Spanish Not-for-Profit Organisation, the Commissioner is not satisfied that 26.3% represents a substantial amount. When The Spanish Not-for-Profit Organisation has a collective funding source from ticket sales of 68.2% this would be its primary source of revenue and it can be said that it is substantially supported by this revenue rather than substantial support from public funds.

The Commissioner takes further guidance from the Administrative Appeals Tribunal of Australia where 'substantial' was considered in the context of corporate ownership. In the decision of Jian Ping Li v Minister for Immigration and Citizenship (2009) AATA 244 at 34 Senior Member Allen provided:

"She has a substantial interest in the Australia company, namely a 50 percent share with her husband".

In this instance Senior Member Allen considered a 50% shareholding to be a 'substantial' amount. The case represented a smaller enterprise but maintains the position that a 50% shareholding would be considered to be 'substantial'.

In considering other secondary sources to provide support for the ordinary meaning of "substantial" the Commissioner has regard to the Laws of Australia 31. Revenue Law journal on Deductions and the Deductibility and Carrying Forward of Losses where commentary is provided on section 165-12 of the ITAA 1997:

"In particular, s 165-12 prevents prior year losses from being taken into account in a subsequent year where there is not substantial continuity of beneficial ownership (more than 50 percent of the voting power, dividend or capital distribution rights) of a company between the years in which the losses were incurred and the year in which the deduction for them is claimed."

In this instance 'substantial' has been quantified to mean more than 50% of the voting power. In the present case, the Commissioner would consider an amount greater than 50% to mean a 'substantial' amount of public funding when considering the fact and degree of The Spanish Not-for-Profit Organisation's other sources of income.

There is view on how substantial is considered in other contexts. Taxation Ruling TR 2005/5 Income tax: ascertaining the right to tax United States (US) and United Kingdom (UK) resident financial institutions under the US and the UK Taxation Conventions in respect of interest income arising in Australia at paragraphs 96 - 99 states the following:

96. An enterprise is required to be substantially deriving its profits from carrying on a business of 'spread activities' (see paragraph 63 of this Ruling).

97. In Commissioner for Superannuation v Scott, F.O. [1987] FCA 98, the meaning of 'substantially' was interpreted when the Court decided whether the respondent was wholly or substantially dependent upon her husband at the time of his death. In this case, the juxtaposition of the word 'wholly' influenced the Courts' decision that:

the meaning, in relation to a person in the expression "'wholly or substantially dependent"', [is] that that person is primarily, essentially or in the main dependent upon another person.

98. In the case of Deputy Commissioner of Taxation of the Commonwealth of Australia v Comcorp Australia Ltd & Ors [1996] FCA 848; (1996) 70 FCR 356 at [395], the Federal Court examined the issue of whether a person substantially complied with a provision of a deed. Carr J decided that in this instance 'substantially' involved a degree of compliance and was used in a relative sense rather than in an absolute sense. The meaning of 'substantially' is therefore different to what may be considered 'substantial'.

99. In considering these cases, the Commissioner is of the view that when the word 'substantially' is used in the context of an enterprise substantially deriving its profits from its 'spread activities', it is also used in a relative sense. The relevant term 'substantially' when used in conjunction with 'deriving profits', requires that the main source of the enterprise's profits be derived from its business of undertaking 'spread activities'.

Similar to the conclusion in paragraph 99 of TR 2005/5 and the conclusions reached by the AAT, the Commissioner considers the word 'substantially' in the context of Article 17 is used in a relative sense in consideration of the fact and degree of its use.

The main consideration is whether the main source of the funding of The Spanish Not-for-Profit Organisation comes from public funds from a foreign jurisdiction. The public funding does not need to be the sole source of funds for The Spanish Not-for-Profit Organisation. But it must constitute its main source of funding. It must be substantially supported by those public funds to be entitled to the exemption provided by Article 17(3). While the Commissioner is cognisant of the lack of precision granted by the word 'substantial' he is satisfied that considering its ordinary meaning is a question of fact or degree while considering the relevant spread of activities.

In the present case The Spanish Not-for-Profit Organisation received total public funds of $X. This represented 26% of the total income of The Spanish Not-for-Profit Organisation for the year ended 31 December 20XX. The Spanish Not-for-Profit Organisation received $X from the sale of tickets to events where foreign resident musicians performed. This represented 68.2% of the total income of The Spanish Not-for-Profit Organisation for the same period.

The Commissioner considers that the ticket sales substantially support The Spanish Not-for-Profit Organisation more so than any public funding it receives, and this contributes to the conclusion that The Spanish Not-for-Profit Organisation cannot be substantially supported by public funds.

The public funds are not given specifically for the visit to Australia. However, it can be assumed a proportion of the public funds received went towards the Australia trip.

Having 26% of the total income of the organisation come from public funds is not sufficient for the visits and income earned in Australia to be substantially supported by public funds. Therefore Article 17(3) of the Convention cannot apply to make the income exempt in Australia.