Edited version of private advice

Authorisation Number: 7925148462343

Date of advice: 16 December 2021

Ruling

Subject: International shipping and income tax

Question

Are payments the ship charterer receives from a shipper under a contract of carriage in respect of a voyage charterparty agreement, Australian taxable income under section 129 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes. However, the Double Tax Agreement overrides section 129 of the ITAA 1936 to exclude the payments by the shipper to the ship charterer from Australian taxable income.

This ruling applies for the following periods:

1 January 20XX to 31 December 20XX

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

The ship charterer is based overseas.

The ship charterer entered into a voyage charterparty agreement with the shipper on two occasions to transport goods under a contract of carriage from Australian waters to overseas destinations.

The ship charterer also entered into voyage charterparty agreements on each occasion with two shipowners to provide the ship and crew to effect the carriage of the goods.

The shipper and the ship charterer have the same parent entity and are both overseas companies. The shipper is the trading arm and the ship charterer, the shipping arm for the group.

The ship owners operating under the voyage charterparty agreements with the ship charterer, also have their principal places of business outside of Australia.

The following are details relating to the first voyage charterparty agreement:

•                     the ship charterer chartered a vessel under a voyage charterparty from the registered owner of the vessel who is based overseas.

•                     the ship charterer used the vessel to provide transportation services to the shipper. The vessel loaded goods in Australia for delivery to non-Australian ports.

•                     a Bill of Lading (BOL) shows the goods were 'free on board' (F.O.B.) which discharges the seller from their obligation to the deliver the goods after they pass over the ship's rail at loading. The shipper's name is noted on the document.

•                     an invoice was supplied that shows the shipowner billing the ship charterer for the freight of the goods.

•                     an invoice from the seller shows it billing the shipper for the goods.

•                     an invoice from the ship charterer shows it billing the shipper for the freight.

•                     Australian income tax was paid in XXXX by the ship charterer.

The following are details relating to the second voyage charterparty agreement:

•                     the ship charterer chartered a vessel under a voyage charterparty. The registered owner of the vessel is an overseas company.

•                     the ship charterer used the vessel to provide transportation services to the shipper. The vessel loaded goods in Australia for delivery to non-Australian ports.

•                     a BOL and an invoice show goods sold to the shipper by the seller. There is the subsequent billing by the shipowner of the ship charterer for freight and the ship charterer's billing of the shipper for freight of the goods.

•                     Australian income tax was paid in XXXX.

The ship charterer derived a profit on the freight charged the shipper on each voyage made by the two vessels.

The charterer, the shipowners and the shipper are all entities that have their principal place of business outside of Australia.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 129

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 7

Article 7 of the Double Tax Agreement

Reasons for decision

All legislative references are to the ITAA 1936, unless otherwise stated.

Section 129 captures, as taxable income, freight charged by an off-shore shipowner or charterer for goods shipped from Australia when the following happens:

Where a ship belonging to or chartered by a person whose principal place of business is out of Australia carries passengers, live-stock, mails or goods shipped in Australia, 5% of the amount paid or payable to him or her in respect of such carriage, whether that amount is payable in or out of Australia, shall be deemed to be taxable income derived by him or her in Australia.

The ship charterer entered into a voyage charterparty arrangements with two shipowners to transport two separate loads of goods from Australian waters for the purchaser of the goods, the shipper. The shipper is a party itself to a separate voyage charterparty agreement with the ship charterer.

The charterer, the shipowners and the shipper are all entities that have their principal place of business outside of Australia.

As the goods were loaded in Australian waters, the goods are shipped in Australia. The expression 'shipped in Australia' means that the goods are put on board a ship in Australia.[1]

Where a ship is the subject matter of a chain of charterparties, the amounts brought to account under section 129 are the amounts paid or payable by the 'shipper' or 'shipper charterer', as the case may be, of the goods 'shipped' in Australia to the immediate 'charterer' up the chain, so long as that person's principal place of business is out of Australia. This person may be a 'voyage charterer.'

The practical outcome of having multiple charterparties is that the profit made from the carriage of a particular shipment of goods is shared, in varying degrees, by all the parties in the chain. However, the object of section 129 in assessing an arbitrary amount of profit on a particular shipment of goods from Australia, is achieved if the last 'charterer' in the chain is assessed on the amount of 'freight' paid to him. From a commercial perspective, all the profits made in respect of the carriage of a particular shipment of goods by the parties up the chain would be reflected in the amount that the last 'charterer' in the chain charges the 'shipper'.[2] This is the case for the ship charterer which obtains its profits from the freight it charges the shipper which is more than it pays to the shipowners for the freight of the goods. The cost of the actual goods is billed to the shipper by the seller in a separate transaction that does not involve the ship charterer as the voyage charterer. The ship charterer is the beneficiary of the carriage of the goods only and is known in industry parlance as the 'freight beneficiary'.

Despite the fact that payment for the freight of both shiploads of goods occurred overseas, section 129 acts to capture the two payments as taxable income on which 5% is to be remitted to the Australian government.

In determining liability to Australian tax on income received by a non-resident, it is necessary to consider not only Australian domestic income tax laws but also any applicable double tax agreement.[3] Section 7(b) of the International Tax Agreements Act 1953 provides that currently, for any other tax than withholding tax, the provisions of the Double Tax Agreement, in so far as those provisions affect Australian tax, have the force of law.

Article 7 of the relevant Double Tax Agreement relevantly states:

(1) Profits from the operation of ships or aircraft derived by a resident of one of the Contracting States shall be taxable only in that State.

...

(5) For the purposes of this Article, profits derived from the carriage by ships or aircraft of passengers, livestock, mail, goods or merchandise shipped in one of the Contracting States for discharge at another place in that Contracting State, or at one or more structures used in connection with the exploration for or exploitation of natural resources situated in waters adjacent to the territorial waters of that Contracting State, shall be treated as profits from operations of ships or aircraft confined solely to places in that State.

Therefore, despite the ship charterer having an Australian tax liability of 5% of the freight it charges the shipper, this liability is overridden by the Double Tax Agreement. This results in the freight charges for the carriage of the goods from Australia to overseas ports on the two vessels to be subject solely to taxation in the other country.

[1] 9 Bowes v. Shand 2 App. Ca. 455.

[2] Taxation Ruling TR 2006/1 Income Tax: the scope of and nature of payments falling within section 129 of the ITAA1936, paragraph 69.

[3] International Tax Agreements Act 1953 Section 4