Assessability of income derived by a Netherlands resident from the transporting of goods by ship within Australian territorial waters

Is the income derived by a Netherlands resident taxpayer from the transporting of goods by ship within Australian territorial waters assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The income derived by a Netherlands resident taxpayer from the transporting of goods by ship within Australian territorial waters is assessable under subsection 6-5(3) of the ITAA 1997.

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

The taxpayer entered into an agreement with an Australian resident taxpayer.

Under the terms of the agreement, the taxpayer agreed to load goods to a ship, transport and unload the goods to locations within the territorial waters of Australia.

The taxpayer sub-contracted the work for the loading of goods into the ship to another unrelated entity.

The taxpayer received a fixed sum from the Australian resident taxpayer for the performance of the terms of the agreement.

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 from the transporting of goods using a ship within Australian territorial waters is ordinary income derived from Australian sources 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 domestic 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 those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 10 to the Agreements Act contains the agreement between Australia and the Kingdom of the Netherlands (the Netherlands Agreement) and the Protocol to that agreement. The Netherlands Agreement and the Protocol operate to avoid the double taxation of income received by Australian and Netherlands residents.

Article 8(1) of the Netherlands Agreement provides that the profits from the operations of ships or aircraft derived by a resident of the Netherlands will be taxable only in the Netherlands. However, Article 8(2) of the Netherlands Agreement provides that the profits may be taxed in Australia if they are profits from the operation of ships or aircraft confined solely to places within Australia.

Article 8(4) of the Netherlands Agreement provides that profits derived from the carriage of goods or merchandise shipped in Australia for discharge at another place in Australia shall be treated as profits from the operation of ships confined solely to places within Australia. Under Article 8(5) of the Netherlands Agreement, the amount upon which tax is payable on the profits from the operation of the ships under Article 8(2) of the Netherlands Agreement will not exceed 5 per cent of the amount paid or payable in respect of the carriage of goods or merchandise.

Article 3(1) of the Netherlands Agreement defines the term 'Australia' when used in a geographical sense to include any area adjacent to the territorial limits of Australia consistently with international law, a law of Australia or of a State dealing with the exploitation of any of the natural resources.

The taxpayer profits from the loading, transporting and unloading of goods by ship within Australian territorial waters. These are profits from the 'operation of ships' confined solely to places within Australia under Article 8(2) of the Netherlands Agreement. The amount upon which tax is payable, on the profits from these activities in Australia, will not exceed 5 per cent of the amount paid or payable in respect of the carriage of materials under Article 8(5) of the Netherlands Agreement.

Accordingly, the income derived by a Netherlands resident taxpayer from the loading, transporting and unloading of goods by ship within Australian territorial waters is assessable under subsection 6-5(3) of the ITAA 1997 as Article 8(2) of the Netherlands Agreement applies.