Assessability of income derived by a non-resident company from a tour of performers in Australia

Is income derived by a non-resident company from a tour of performers in Australia, assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Income derived from the non-resident company's Australian tour of performers is assessable under subsection 6-5(3) of the ITAA 1997.

The company is a non-resident company for Australian taxation purposes.

The company's activities include organising groups of performers to appear at venues throughout the world.

Income in Australia is generated by undertaking performances at various locations throughout Australia.

Australia has a double tax agreement with the foreign country in which the company is resident.

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 question of the source of income was discussed in Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 where it was stated that source is a 'hard practical matter of fact' and that the source of income is not so much a legal concept but what a practical man would regard as the real source of income.

The income generating activity of the company is the presentation of performances. These performances are undertaken in the countries in which the company tours. Income generated by performances undertaken in Australia will therefore have an Australian source.

The country of residence of the company is a country with which Australia has a double tax agreement. The double tax agreement between Australia and the foreign country is contained in a Schedule to the International Tax Agreements Act 1953 (Agreements Act).

The Agreements Act gives the double tax agreement the force of law in Australia. Subsection 4(1) of the Agreements Act incorporates that Act with both the Income Tax Assessment Act 1936 and the ITAA 1997 so that those Acts are read as one.

The Agreements Act must be considered to determine whether Australia retains its source country taxing rights. Subject to the application of the double tax agreement, the income of the company from performances undertaken in Australia (having an Australian source) will fall under the provisions of subsection 6-5(3) of the ITAA 1997 and will be assessable in Australia.

The entertainers Article of the double tax agreement provides that where income in respect of the personal activities of an entertainer as such accrues not to that entertainer but to another person, that income may, notwithstanding the provisions of the business profits, independent personal services and dependent personal services Articles, be taxed in the state in which the activities are exercised. 'Person' is defined in an Article of the double tax agreement to include companies.

The judgement of the full court of the High Court in Thiel v. Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4717; (1990) 21 ATR 531 provides authority for using the OECD Model Convention and Commentaries as a supplementary means of interpretation to which recourse may be had under Article 32 of the Vienna Convention on the Law of Treaties.

The second study of the Committee of Fiscal Affairs into the 'Taxation of Income Derived from Entertainment, Artistic and Sporting Activities', adopted by the OECD on 27 March 1987 states that companies to which the entertainers Article applies are not limited to entities over which the performers exercise control or have a legal or beneficial interest. Nor is it required that the performers benefit from the income generated by their activities but retained by the company.

The income of the company is generated in Australia by the audience paying for the presentation of performances. The undertaking of the performances necessitates the exercise of the skill and expertise of the group of performers. These skills and expertise cannot be substituted for another skill set. This establishes the necessary direct link between the activity of the entertainers and the income generated by those activities but accrued by the company.

The income of the company is the product of the personal activities of the group of performers in their capacity as performers. As such the income of the company is subject to the entertainers Article of the double tax agreement, notwithstanding the fact that individual performers do not control the company or may not benefit from the income retained by the company.

The entertainers Article will apply notwithstanding the provisions of the business profits, independent personal services and dependent personal services Articles of the double tax agreement. The company is a performance company constituted as a legal entity. The income accruing to the company from performances undertaken in Australia will be liable to tax in Australia pursuant to subsection 6-5(3) of the ITAA 1997.