Assessability of business income derived by a non-resident

Is the income derived by the taxpayer, a resident of South Africa, from the sale of magazines, assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. Even though the income derived by the South African resident taxpayer from the sale of magazines in Australia is assessable under subsection 6-5(3) of the ITAA 1997, Article 7 of Schedule 42 to the International Tax Agreements Act 1953 (the Agreements Act) applies and the income is not assessable in Australia.

The taxpayer company is a resident of South Africa and a non-resident of Australia for income tax purposes.

The taxpayer produces a magazine mainly for sale in South Africa and surrounding African countries.

The taxpayer also exports the magazines to Australia for sale.

The magazines are delivered to an independent distribution company in Australia for distribution to newsagents and retail outlets in Australia.

The Australian distribution company services a large number of publishers.

The taxpayer has no legal or economic control over the Australian distribution company.

The distribution company has no authority to conclude contracts on behalf of the taxpayer.

The taxpayer is paid by the Australian distribution company according to the number of copies of magazines sold after a particular issue of the magazine has been on sale in Australia for about 2 months and the recall period has passed. The payment is made by electronic transfer directly to the bank account of the taxpayer in South Africa.

The taxpayer does not have any offices, place of business or employees in Australia.

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.

The income received by the taxpayer from the sale of magazine in Australia is ordinary income under subsection 6-5(3) of the ITAA 1997.

In determining the liability to tax on Australian sourced income received by a non-resident taxpayer, 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 both Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for limited situations).

Schedule 42 to the Agreements Act contains the double tax agreement and the Protocol between Australia and the Republic of South Africa (the South African Agreement).

Under Article 7 of the South African Agreement, the business profits of a South African enterprise shall be taxable only in South Africa 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 South African Agreement 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 on Income and on Capital 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 South African agreement 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(5) of the South African Agreement provides that a permanent establishment will be deemed to exist if a South African 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.

Under Article 5(6) of the South African Agreement, an enterprise of South Africa shall not be deemed to have a permanent establishment in Australia merely because it carries on business in Australia through a broker, general commission agent or any other agent of an independent status, and the agent is acting in the ordinary course of business as a broker or agent.

Paragraph 37 of the OECD Commentary on Article 5 of the OECD Model Tax Convention on Income and on Capital explains that a person will come within the scope of Article 5(6), only if: • the person is independent of the enterprise both legally and economically, and • the person acts in the ordinary course of the business when acting on behalf of the enterprise

The taxpayer has no fixed place of business in Australia for the purpose of Article 5(1) of the South African Agreement.

The taxpayer does not have a place of management, a branch, an office, a factory or a workshop in Australia for the purposes of Article 5(2) of the South African Agreement.

The taxpayer does not have a dependent agent who has the authority to conclude contracts on its behalf in Australia for the purposes of Article 5(5) of the South African Agreement.

The Australian distribution company is an agent of an independent status under Article 5(6) of the South African Agreement, and therefore will not constitute a permanent establishment.

The income received by the taxpayer from the sale of magazines in Australia is not assessable, as the taxpayer's business does not have a permanent establishment in Australia. The income is consequently not taxable under subsection 6-5(3) of the ITAA 1997 by virtue of the overriding effect of Article 7 of the South African Agreement.