Exempt income: payment for services derived by an entity resident in the US from an Australian state government department

Is the payment for training services derived by an entity resident in the United States of America (US) from an Australian state government department exempt from tax under paragraph 23(r) of the Income Tax Assessment Act 1936 (ITAA 1936)?

No. The payment for training services derived by an entity resident in the US from an Australian state government department is not exempt income under paragraph 23(r) of the ITAA 1936.

The taxpayer is a resident of the US and a non-resident of Australia for income tax purposes.

The taxpayer has no permanent establishment in Australia.

The taxpayer provides specialist training at various locations in Australia under the terms of two agreements executed in Australia with a state government department.

The taxpayer receives fees for the provision of specialist training.

Paragraph 23(r) of the ITAA 1936 provides that income derived by a non-resident taxpayer from sources wholly out of Australia, except income included as assessable under a specific provision of the Act other than having an Australian source, will be exempt from income tax.

Generally, Australian courts have held that when the question of source is in issue, the weighting of the relative importance of the various factors are relevant ( Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 at 189-190 and Federal Commissioner of Taxation v. United Aircraft Corporation (1943) 68 CLR 525; (1943) 7 ATD 318; (1943) 2 AITR 458). The courts also confirmed that it is appropriate to have regard to some of the following factors in determining the source of income: • the place of making the agreement • the place of payment of fees arising from the agreement; and • the place of performance of services under the terms of the agreement.

The payment received by the taxpayer for the provision of training services is considered to be Australian sourced income taking into account the relative importance of factors such as the location for the making of the agreements, the place of provision of services and the payments for the services.

As the income received by the non-resident taxpayer from the Australian state government department is not from sources wholly out of Australia, it is not exempt from income tax under paragraph 23(r) of the ITAA 1936.