Assessability of income received by a US resident company where the sole director and shareholder is present in Australia

Is the income received by a taxpayer company, a resident of the United States of America (US), from the sale of merchandise at performance venues in Australia, assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) if the sole director and shareholder of the taxpayer company is present in Australia at the time of the sale of the merchandise?

No. The income received by a taxpayer company, a resident of the US, from the sale of merchandise at performance venues in Australia is not assessable under subsection 6-5(3) of the ITAA 1997 where the sole director and shareholder of the taxpayer company is present in Australia at the time of the sale of the merchandise.

The taxpayer company is a resident of the US and is not a resident of Australia for income tax purposes.

The main income earning activity of the taxpayer is producing entertainment.

The taxpayer also earns income in Australia from the sale of merchandise during and after the performance depicting characters from the performance.

The performances are conducted at different locations in Australia for a limited period.

The merchandise depicting characters from the performance is sold at stands set up at the performance venues by the venue staff.

The taxpayer's sole director and shareholder is present in Australia to conduct the performance during the time of sale of the merchandise.

The taxpayer does not have any employees, an office, a factory or a workshop in Australia.

Section 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.

The income derived by the taxpayer from the sale of merchandise to Australian consumers is ordinary income under subsection 6-5(3) of the ITAA 1997.

In determining liability to Australian 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 International Tax Agreements Act 1953 (the Agreements Act).

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

Schedule 2 to the Agreements Act contains the convention between Australia and the US (the US Convention). Schedule 2A to the Agreements Act 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.

Article 7 of the US Convention governs the taxation of business profits derived from Australia by a resident of the US. Under Article 7, the business profits of an enterprise of the US shall be taxable only 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. 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.

In discussing the operation of Article 5 of the US Convention, paragraph 4 of Taxation Ruling IT 2324 refers to the earlier US Convention where the term 'permanent establishment' was defined to include 'a management'. Based on that definition, where the principal performer who was also a majority shareholder and director of the company was present in Australia, the approach was taken that the company had a management present in Australia and therefore a permanent establishment in Australia. Paragraph 5 of IT 2324 states that this approach is no longer applicable under Article 5(1) of the revised US Convention. The revised US Convention states that a permanent establishment means a 'fixed place of business through which the business of an enterprise is wholly or partly carried on'. IT 2324 states that two things follow from the revised US Convention: • existence of a place of business such as a premises or other facilities, and • the place of business must be fixed i.e., it must have a degree of permanence.

The taxpayer's business does not have a permanent establishment in Australia as there is no fixed place of business through which the business of the enterprise is wholly or partly carried on for the purposes of Article 5(1) of the US Convention. The presence of the sole director and shareholder in Australia during the time of sale of merchandise will not itself constitute a 'place of management' under Article 5(2) of the US Convention.

As the taxpayer's business does not have a permanent establishment in Australia, the income will not be assessable under subsection 6-5(3) if the ITAA 1997 through the overriding effect of Article 7 of the US Convention. Note: Article 17 of the US Convention on entertainers will not apply to the income received from the sale of merchandise as that Article applies to income derived by the entertainer from their personal activities.