Assessability of income derived by an entity resident in the US from an Australian state government department

Is the training income derived by the non-resident taxpayer, an entity resident in the United States of America (US), for services provided to an Australian state government department assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. Even though the training income derived by the non-resident taxpayer , an entity resident in the US, for services provided to an Australian state government department would be assessable under subsection 6-5(3) of the ITAA 1997, Article 7 of Schedule 2 to the International Tax Agreements Act 1953 (the Agreements Act) applies and the income is not taxable in Australia.

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

The taxpayer provides specialist training at various locations in Australia under the terms of two separate agreements executed with a state government department. No negotiations took place on the first contract which was signed in the US. A director of the entity signed the second contract in Australia after protracted negotiations.

The training was provided in Australia by a director of the taxpayer entity.

While present in Australia, the director of the entity did not own, lease or have available for use any fixed premises in Australia for the provision of training. The state government department allowed the director to carry out the training in the department's own training rooms. The rooms were not dedicated for the exclusive use of the director. The director used a mobile phone and a laptop computer for the provision of training.

The accommodation used by the director in Australia neither had a sign advertising the name of the entity or advertised to the public as the director's office nor it was listed in the telephone book as the entity's office.

The taxpayer received fees for the provision of the specialist training.

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year.

The income derived from the provision of training is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

In determining liability to tax on Australian sourced income received by a non resident, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the Agreements Act.

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for limited provisions).

Schedule 2 to the Agreements Act contains the convention between Australia and the US (the US Convention). Schedule 2A contains the protocol amending the US Convention (the US Protocol). The US Convention and the US Protocol operate to avoid the double taxation of income received by Australian and US residents.

Under Article 7 of the US Convention, the business profits of an enterprise of the US shall be only taxable in the US unless the enterprise carries on business in Australia through a permanent establishment situated in Australia.

The term 'permanent establishment' is defined in Article 5(1) of the US Convention as a fixed place of business through which the business of an enterprise is wholly or partly carried on.

Paragraph 2 of the OECD Commentary on Article 5 of the OECD Model Tax Convention explains that the definition of permanent establishment contains the following requirements: • the existence of a place of business such as premises, machinery or equipment • fixed place of business which means that the place of business must be established at a distinct place with some degree of permanence even though it may have existed for only a very short time; and • personnel to conduct the business from that place.

Article 5(2) of the US Convention contains a list of examples each of which can be regarded as constituting a permanent establishment such as a place of management, an office, a branch, a factory or a workshop.

Article 5(4) of the US Convention provides that an enterprise of the US is deemed to have a permanent establishment in Australia if the enterprise carries on business in Australia through a person (other than an independent agent) who has authority to conclude contracts on behalf of the enterprise and habitually exercises that authority in Australia. Paragraph 32 of the OECD Commentary on Article 5 of the OECD Model Tax Convention states that: ... paragraph 5 [OECD Model Tax Convention] proceeds on the basis that only persons having the authority to conclude contracts can lead to a permanent establishment for the enterprise maintaining them. In such case the person has sufficient authority to bind the enterprise's participation in the business activity in the State concerned. The use of the term 'permanent establishment' in this context presupposes, of course, that that person makes use of this authority repeatedly and not merely in isolated cases.

See also the analysis of Gzell J in Unisys Corporation v. FC of T 2002 ATC 5146; (2002) 51 ATR 386.

The taxpayer had no permanent establishment for the purpose of Article 5(1) of the US Convention as the director of the US entity provided short term training sessions at a number of different venues in Australia. Also, the taxpayer did not keep any fixed place of business (such as premises or equipment) in a specific geographical location with some degree of permanence.

As the taxpayer did not keep a place of management, an office, a branch, a factory or a workshop, no permanent establishment existed as contained in the list of examples in Article 5(2) of the US Convention.

Even though the director of the entity is a dependent agent who has authority to enter into contracts on behalf of the entity, the limited number of contracts concluded in Australia leads to the view that the director did not habitually exercise the authority in Australia for the purpose of Article 5(4) of the US Convention to deem a permanent establishment in Australia.

Consequently, Article 7 of the US Convention applies and the training income is not taxable in Australia. The training income is therefore not assessable under subsection 6-5(3) of the ITAA 1997.