Edited version of private advice

Authorisation number: 1052293261317

Date of advice: 20 August 2024

Subject: Double tax convention

Question 1

Are you required to include director's fees you received from one of your Foreign Businesses in your assessable income pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes.

Question 2:

Are you required to include dividends you received from one of your Foreign Businesses in your assessable income pursuant to section 6-5 of the ITAA 1997?

Answer:

No.

Question 3:

Are you required to include in your assessable income capital gains from the disposal of your shares in your Foreign Businesses?

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

You and your spouse were previously residents of a Foreign Country. Since 20YY, you have been a permanent and tax resident of Australia.

You owned a number of businesses in Foreign Country. For the purposes of this ruling these businesses will be described as "the Foreign Businesses".

The Foreign Businesses had permanent establishments in the Foreign Country.

All the value of the assets of the Foreign Businesses was attributable to real property located in the Foreign Country.

Director's fees:

During the year ended 30 June 20YY, you received director's fees from one of the Foreign Businesses. You paid taxes in the Foreign Country in relation to these director's fees.

Dividends:

During the year ended 30 June 20YY, you received dividends from one of the Foreign Businesses. You paid taxes in the Foreign Country in relation to these dividends.

Share sale:

You sold your shares in two of the Foreign Businesses during the year ended 30 June 20YY and paid tax in the Foreign Country in relation to these sales.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Question 1:

Are you required to include director's fees you received from one of your Foreign Businesses in your assessable income pursuant to section 6-5?

Summary

Yes.

Detailed reasoning

ORDINARY INCOME

1.         Subsection 6-5(1) provides that your assessable income includes income according to ordinary concepts, known as ordinary income. Subsection 6-5(2) provides that Australian residents are required to include in their assessable income all ordinary income received, either directly or indirectly, from sources within and outside of Australia.

2.         The legislation does not provide guidance on the meaning of 'income according to ordinary concepts' in section 6-5. As such, guidance on the meaning of the term and for determining whether a receipt will be ordinary income can be found in case law.

3.         Ordinary income will generally have the characteristics of being periodic, recurring, and regular.[1] Where payments are made for labour or services, such as wages and director's fees, it is generally accepted that these payments constitute ordinary income.[2]

AUSTRALIA - FOREIGN FEDERATION DOUBLE TAX CONVENTION

4.         The Australian Government has entered a number of bilateral agreements with jurisdictions from other countries to prevent double taxation and fiscal evasion. The Agreement between the Australian Government and the Government of the XXXXX Federation (XXXXX) came into force on 17 December 2003 and will be referred to in this document as "the DTA".

5.         Article 3 of the DTA defines the term "Contracting state" and "Other Contracting State" to mean either Australia or XXXXX, as the context requires.

Director's fees

6.         Broadly, Article 16 of the DTA provides that director's fees, or other similar payments, paid by a company that is a resident of a Contracting State to a resident of the Other Contracting State in their capacity as a member of the board of directors of a company may be taxed in that other State. Relevant to the current circumstances, this means that an Australian resident that receives director's fees, or similar payments, may be taxed in Australia.

Application to your circumstances

7.         Since 20YY, you have been an Australian resident for tax purposes. As such, you are required to include in your assessable income, all ordinary income derived from sources inside and outside of Australia.

8.         During the year ended 30 June 20YY, you derived director's fees from one of your Foreign Businesses. The director's fees you received is income according to ordinary concepts.

9.         In accordance with Article 16 of the DTA, Australia has taxing rights in relation to the director's fees you received and you are required to include this income in your assessable income pursuant to section 6-5.

Question 2:

Are you required to include dividends you received from one of your Foreign Businesses in your assessable income pursuant to section 6-5 of the ITAA 1997?

Summary

No.

Dividends

10.         Paragraph 1 of Article 10 of the DTA provides that dividends from a company that is a resident of a Contracting State that are paid to a resident of the Other Contracting State may be taxed in the Other Contracting State. Relevant to the current circumstances, this means that dividends paid from a XXXX resident company to an Australian resident shareholder may be taxed in Australia.

11.         Additionally, paragraph 2 of Article 10 of the DTA broadly provides that such dividends may also be taxed in the Contracting State in which the company is a resident so long as the tax does not exceed either 5% or 15% of the gross dividends pursuant to the conditions in paragraphs 2(a) and 2(b) of Article 10.

12.         Paragraph 4 of Article 10 of the DTA provides that the term "dividends" includes income from shares.

13.         However, paragraph 5 of Article 10 of the DTA provides paragraphs 1 and 2 will not apply if the person beneficially entitled to the dividends, being a resident of a Contracting State, carries on a business in the Other Contracting State through a permanent establishment in that Other Contracting State in respect of the dividends paid are effectively connected with the permanent establishment. In such circumstances, Article 7 or 14 will apply, as relevant.

14.         Consequently, in relation to the current circumstances, where an Australian resident shareholder carries on a business in XXXX through a permanent establishment in XXXX and the dividends paid to the Australian resident shareholder are effectively connected to the XXXX permanent establishment, paragraphs 1 and 2 of Article 10 will not apply. Rather, either Article 7 or 14 will apply.

Business profits:

15.         Paragraph 1 of Article 7 provides that:

The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated in that other State. If the enterprise carries on business in that manner, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

Income from independent personal services:

16.         Broadly, Article 14 of the DTA provides that income derived by an individual in a Contracting State in relation to their professional services or other activities of an independent character shall be taxable solely in the Contracting State in which it was derived.

17.         Article 14 also provides that the income may be taxed in the other Contracting State if further conditions, which are not relevant to the current case, regarding a fixed base of the individual is present.

18.         Paragraph 2 of Article 14 explains that the term 'professional services' includes services performed in the exercise of:

a.            independent scientific, literary, artistic and education or teaching activities, and

b.            activities of physicians, lawyers, engineers, architects, dentists and accountants.

Application to your circumstances

19.         During the year ended 30 June 20YY, you received dividends from one of your Foreign Businesses.

20.         In accordance with paragraph 5 of Article 10 of the DTA, paragraphs 1 and 2 of Article 10 will not apply as your Foreign Business all had permanent establishments in Foreign country and those dividends are paid in connection with one of those permanent establishments.

21.         The dividends received from your Foreign Business were not in relation to your professional services or other activities of an independent character such that Article 14 doesn't apply.

22.         Rather, the dividends you received will be taxable in the Foreign Country, in accordance with Article 7 of the DTA.

Question 3:

Are you required to include in your assessable income capital gains from the disposal of your shares in your Foreign land development businesses?

Summary:

No.

Income from alienation of property

23.         Article 13(1) of the DTA broadly provides that income or profits derived by a resident of a Contracting state from the alienation of real property located in the Other Contracting State may be taxed in that Other Contracting State. The meaning of the term 'real property' for Russia is defined in Article 6 as:

(i)            property accessory to immovable property; and

(ii)            rights known as usufruct of immovable property; and

(i)            rights to which the provisions of the law respecting landed property apply; and

(iv)            a right to receive variable or fixed payments either as consideration for or in respect of the exploitation of, or the right to explore for or exploit, mineral, oil or gas deposits, quarries or other places of extraction or exploitation of natural resources...

24.         Article 13(4) of the DTA relevantly provides that income or profits derived by a resident of a Contracting State from the alienation of shares or other interests in a company, where the value of the assets of the company, is principally attributable to real property situated in the Other Contracting State may be taxed in the Other Contracting State.

25.         Article 13(5) of the DTA provides that nothing in the DTA will affect that application of the law of either Australia or the Foreign relating to the taxation of capital gains derived from the alienation of any property other than that outlined in the preceding paragraphs of Article 13.

Application to your circumstances

26.         During the year ended 30 June 20YY, you sold your shares in your Foreign Businesses. You state that the value of all the assets of these businesses was attributable to real property located in the Foreign Country. You paid tax in relation to the sale of these shares in the Foreign Country.

27.         Consistent with Article 13 of the DTA, Australia does not have any taxing rights in relation to the profits or gains you received from the sale of your shares in your Foreign Businesses as the value of the assets were primarily attributable to property located in the Foreign Country. Consequently, you are not required to include the profits or gains your received from the sale of your shares in your Foreign Businesses in your assessable income pursuant to section 6-5 of the ITAA 1997.

[1] See, for example, FC of T v. Dixon (1952) 86 CLR 540 and G.P. International Pipecoaters Pty. Ltd. v. Federal Commissioner of Taxation (1990) 170 CLR 124; 90 ATC 4413; (1990) 21 ATR 1.

[2] See, for example, in Reuter v. FC of T 93 ATC 4037.