Edited version of private advice

Authorisation Number: 1052322371679

Date of advice: 9 April 2025

Ruling

Subject: Assessable Income - foreign resident

Question

Subject to the answer to question 3, are the professional fees, in connection with work performed in Australia, ordinary or statutory income of the LLC under the Income Tax Assessment Act 1936 (ITAA 1936) or Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are the professional fees, in connection with work performed in Australia, ordinary or statutory income of the Director under the ITAA 1936orITAA 1997?

Answer

No.

Question 3

Is Australia prevented from taxing the LLC on any of the fees in connection with work performed in Australia because of Article 5(1) of the Agreement between the Government of the Commonwealth of Australia and the Government of the Republic of XXXX for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income?

Answer

Yes.

Question 4

Does Article 7 of the Multilateral Instrument apply to cause the Director to be taxable instead of the LLC?

Answer

No.

Question 5

Does Part IVA of the ITAA 1936 apply?

Answer

No.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commenced on:

XX December 20XX

Relevant facts and circumstances

Background

The taxpayer (the Director) is a director and sole shareholder of a Limited Liability Company (the LLC), a law corporation in XXXX.

The LLC was established by the Director in XXX 20XX after he opted to incorporate his practice from a sole proprietorship into a law corporation. This decision was influenced by encouragement from the Law Society of XXXX for sole legal practitioners to consider corporatisation of law practices to meet the changing needs and demands of the legal profession in XXXX. Furthermore, several government grants, rebates, and tax incentives were made available as a result of the decision.

The practice since 20XX

The LLC remains the legal entity through which the Director practices. The ruling application states that since the conversion of the practice into a law corporation more than 10 years ago, the professional services rendered by the Director have been provided in his capacity as an agent of and trustee for the LLC as well as an employee of the LLC.

The Director receives an annual salary of S$XXX,XXX from the LLC for his services. A copy of the Notice of Assessment from the Inland Revenue Authority of XXXX shows that the Director's only source of income in the 20XX calendar year was his gross salary of S$XXX,XXX from the LLC, no other professional fees were earned by the Director in that period.

The LLC also employs several lawyers to support the legal practice, along with two support staff members.

The LLC has primarily focused on international law around the world since late 20XX. The Director worked in a number of locations outside of XXXX.

All bills for legal services in locations outside XXXX have been rendered under the name of the LLC and are paid into a XXXX bank account held by the LLC. The expenses of the legal practice (including all remuneration to staff) are paid by the LLC, and any profits are kept by the LLC as retained earnings and are taxed by the XXXX tax authorities.

It has been the common practice for all professional services rendered by the Director and any other employee of the LLC to be invoiced in the name and for the benefit of the LLC.

The LLC maintains an office in XXXX where the Director performs most of the work through the LLC for clients of the LLC generally and where he holds meetings and hearings for the conduct of the work by video conference.

The LLC holds professional indemnity insurance for the law practice of the LLC that covers any claim made against the LLC, as well as any claim made against any employee of the LLC, including the Director in the discharge of his legal professional duties.

Work in Australia

On a specified date, the Director was approached by a partner from an Australian law firm regarding potential work for a matter to be conducted in Australia. The Director was subsequently appointed as one of the legal professionals in charge of the matter.

The Director remained in his home base in XXXX for all the work done before the physical hearing commenced in Australia.

On a specified date, the Director arrived in Australia to commence his onsite participation in the first tranche of the physical hearing. He returned to XXXX 10 days later after the conclusion of the physical hearing. He has since attended the physical hearing in Australia for the following periods:

•                     For the second tranche of the physical hearing: 12 days

•                     A further hearing of 16 days

It is anticipated that the Director will return to Australia in the future for hearings on an ad hoc and as-needed basis.

The Director has not regularly conducted work in Australia immediately prior to the appointment. The last Australian-based work the Director was involved in was in 200X, prior to the incorporation of the LLC. The Director did conduct work between 20XX and 20XX where he co-presided over the case from XXXX by video conference during the Covid-19 pandemic, and never physically entered Australia for this purpose.

In the Director's application for a Temporary Work (Short Stay Specialist) Visa for the purposes of his attendance at the physical hearing in Australia for the matter, it is stated that the Director is employed, with the LLC's details being listed in the organisation details in the "Current overseas employment".

Assistance/support from other staff of the LLC

The LLC has provided one of its legally qualified Associates to assist the Director in this matter, in particular, to assist with the management of correspondence, drafting and research of the law, and attendance (by videoconference) at various hearings in connection with the matter. This is in addition to two support staff members (who are also employed by the LLC).

Professional fees

A financial administrator was appointed for the matter. The Director informed the financial administrator that the professional fees for his services were to be remitted to the LLC's XXXX bank account.

From the commencement of the Director's participation until the physical hearings, bills for the Director's services have been submitted in the name of (and paid to) the LLC. This is in accordance with the practice adopted by the LLC.

Tax invoices dated XX XXX 20XX were the first tax invoices issued for the Director's professional services rendered in relation to the matter. They were issued in the name of the LLC and signed by the Director as Sole Director of the LLC. Payments for these tax invoices were required to be paid to the LLC's bank account in XXXX.

Other Information

The Director does not own any property in Australia for his personal residence.

Neither the LLC nor the Director has a permanent office in Australia. When the Director attended the physical hearings in Australia, he conducted work at the hearing venue provided by the parties to the matter. To the extent that work was required outside of business hours, he conducted work in his hotel room.

Assumptions

Throughout the ruling period:

•                     The Director is a resident of XXXX for tax purposes.

•                     The Director is a foreign resident for Australian tax purposes.

•                     The Director is not present in Australia for any period exceeding, in the aggregate, 183 days in the year of income.

•                     The LLC is a resident of XXXX for tax purposes.

•                     The LLC is a foreign resident for Australian tax purposes.

•                     Neither the Director nor The LLC has a permanent establishment in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 paragraph 6-5(3)(a)

Income Tax Assessment Act 1997 paragraph 6-5(3)(b)

Agreement between the Government of the Commonwealth of Australia and the Government of the Republic of XXXX for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 subsection 177C(1)

Income Tax Assessment Act 1936 subsection 177D(b)

Income Tax Assessment Act 1936 section 177F

Reasons for decision

Questions 1, 2 and 3

Summary

Based on the information provided, we accept that the professional fees, in connection with the work in Australia, are ordinary income of the LLC, a tax resident of XXXX. As the LLC does not have a permanent establishment in Australia, the income is not taxable in Australia under the double tax agreement between Australia and XXXX.

Detailed reasoning

Section 6-5 of the ITAA 1997 provides that a resident of Australia is assessable on their worldwide income, while a foreign resident is assessable on income that has, or is deemed to have, its source in Australia. Specifically, subsection 6-5(3) of the ITAA 1997 states that the assessable income of a foreign resident includes:

•                     the ordinary income derived directly or indirectly from all Australian sources during the income year (paragraph 6-5(3)(a) of the ITAA 1997); and

•                     other ordinary income which is included in assessable income on some basis other than its Australian source (paragraph 6-5(3)(b) of the ITAA 1997).

Ordinary income is income according to ordinary concepts which is not specifically defined in the legislation. However, the courts accept that ordinary income generally arises in one of the following ways:

•                     as a reward for rendering personal services (e.g. salary and wages and professional fees);

•                     as profits from carrying on a business, including profits from unusual or isolated business transactions; or

•                     as a return on an investment (e.g. rent, interest and dividends).

Income for rendering personal services such as professional fees is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

In determining liability to Australian tax on Australian sourced income derived by a foreign resident, it is necessary to consider not only the relevant Income Tax Assessment Act, but also any applicable double tax agreement. Section 4 of the International Tax Agreements Act 1953 (ITAA 1953) incorporates that Act with the ITAA 1936 and ITAA 1997 so that they are read as one. Subsection 4(2) of the ITAA 1953 provides that in the case of any inconsistency with the provisions contained in the Assessment Acts, other than for Part IVA of the ITAA 1936, the provisions of the ITAA 1953, prevail.

In this instance, the relevant double tax agreement is the Agreement between the Government of the Commonwealth of Australia and the Government of the Republic of XXXX for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the XXXX Treaty). In particular Article 5(1) of the XXXX Treaty states the following:

The profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, 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.

The term 'permanent establishment' is defined in Article 4(1) of the XXXX Treaty as 'a fixed place of business through which the business of the enterprise is wholly or partly carried on'.

Application to your situation

The fees received in connection with the work in Australia represent fees for professional services and would constitute ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.The question of which entity derives the income is key to determining which country has a taxing right over the income under the XXXX Treaty.

When assessing which entity derives the income, we have considered the following:

•                     As stated in the ruling application, following the incorporation of the LLC, the professional services rendered by the Director are provided in his capacity as an agent of and trustee for the LLC as well as an employee of the LLC. The LLC has been the recipient of all the income and fees generated from the professional services rendered by the Director.

•                     Information has been provided to support that:

-                    It has been the common practice that all professional services rendered by the Director and any other employee of the LLC have been invoiced in the name and for the benefit of the LLC.

-                    To protect the practice and its employees from claims for professional negligence, the LLC holds professional indemnity insurance which covers any claim made against the LLC and its employees, including the Director in the discharge of his legal professional duties.

•                     In relation to the work in Australia:

-                    The LLC has engaged one of its legally qualified Associates to assist the Director in his role as one of the legal professionals in charge of the matter. The role of the Associate in this case is to assist with the management of correspondence, drafting and research, and includes the Associate's attendance (by videoconference) at various hearings in connection with the matter. This is in addition to two support staff members (who are also employed by the LLC) that provide administrative and managerial support for keeping the file and time records for the LLC.

Based on the information provided, we accept that, in line with the LLC's practice that has applied to any work that the Director has been engaged to provide services since the incorporation of the LLC, in the present case, the legal professional services are performed by the Director in his capacity as an employee of the LLC, with the assistance of other employees of the LLC, for the benefit of the LLC. As such, the LLC is the entity that derives the income, and the fees received from this work are the LLC's ordinary income.

We also accept that the LLC does not have a permanent establishment in Australia. As the LLC is currently a resident of XXXX for tax purposes, in accordance with Article 5(1) of the XXXX Tax Treaty, the income derived by the LLC in connection with the work in Australia shall be taxable only in XXXX.

Conclusion

The LLC derives income in the form of professional fees in relation to the work in Australia. The LLC is a resident of XXXX for the purposes of the XXXX Tax Treaty. As the LLC does not have a permanent establishment in Australia, pursuant to under Article 5(1) of the XXXX Tax Treaty, XXXX has taxing rights over the income derived by the LLC from this work.

Question 4

Summary

Based on the information provided, it is considered that Article 7 of the Multilateral Instrument as applicable to the XXXX Treaty does not apply to assess the Director on the fees received in connection with the work in Australia.

Detailed reasoning

The XXXX Treaty has been modified by the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting [2019] ATS 1 (also referred to as Multilateral Instrument or MLI). Article 7 of the MLI seeks to address treaty abuse and it applies what is often referred to as the principal purposes test (PPT) to Covered Tax Agreements (CTAs). Both Australia and XXXX have chosen to adopt the PPT in the XXXX Treaty. More specifically, Article 7(1) provides that a treaty benefit will not be granted where it is reasonable to conclude, having regard to all relevant facts and circumstances that:

•                     one of the principal purposes of any arrangement or transaction was to obtain the benefit (directly or indirectly), and

•                     granting such a benefit in the circumstances would not accord with the object and purpose of the provisions of the CTA.

Paragraph 1 of Article 7 of the MLI states:

"Notwithstanding any provisions of [the Agreement], a benefit under [the Agreement] shall not be granted in respect of an item of income [...] if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of [the Agreement]."

Application to your situation

In the present case, the following factors are relevant:

•                     The LLC structure, through which the Director's legal services are provided, has been in place more than 10 years ago, since 20XX. It was established due to the initial availability of XXXX government grants, rebates and tax incentives. Further, as stated, with several lawyers and two support staff, it was more appropriate to conduct the practice under the corporate structure of the LLC.

•                     The LLC structure has been used by the Director to provide his professional services in various jurisdictions including XXXX and other countries.

Based on the information provided, it is accepted that the LLC structure was established and has been used for reasons unconnected to the XXXX Treaty.

Conclusion

Based on the purpose for establishment and the use of the LLC through which the Director has provided legal services since 20XX, it is considered that Article 7 of the Multilateral Instrument as applicable to the XXXX Treaty does not apply to the income derived by the LLC in connection with the work in Australia.

Question 5

Summary

Part IVA of the ITAA 1936 applies to schemes entered into for the dominant purpose of obtaining a tax benefit. Based on the information provided, it is considered that the arrangement under which the LLC has derived income in connection with the work in Australia will not trigger Part IVA.

Detailed reasoning

Part IVA of the ITAA 1936 is a general anti-avoidance provision that gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F, be obtained by a taxpayer in connection with a scheme to which Part IVA applies. If anything in Part IVA is inconsistent with the provisions of the International Tax Agreements Act (including a double tax agreement contained in a Schedule to the Act), Part IVA prevails.

Part IVA applies to an arrangement where the following elements exist:

•                     There is a scheme as defined in subsection 177A(1);

•                     There is a tax benefit as defined in subsection 177C(1) obtained by a taxpayer in connection with the scheme;

•                     It would be concluded, having regard to the eight matters listed in paragraph 177D(b) that a person who entered into or carried out the scheme did so for the dominant purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme; and

•                     The Commissioner makes a determination under section 177F to cancel the relevant tax benefit.

Application to your situation

Having regard to the relevant facts surrounding the establishment of the LLC and the use of the LLC in providing the Director's legal professional services since 20XX, it is accepted that the LLC structure was adopted and used for reasons unconnected with Australian income tax laws. Therefore, the Commissioner considers the scheme was not entered into for the dominant purpose of obtaining a tax benefit and Part IVA will not apply to the income received by the LLC in connection with the work in Australia.