Taxation of income of non-resident performing independent personal services: fixed base - the 1967 UK Agreement

Is income derived by the taxpayer, a resident of the United Kingdom (UK), from the provision of services in Australia as a designer, assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The income derived by the taxpayer from the provision of services in Australia as a designer is not assessable income under subsection 6-5(3) of the ITAA 1997.

The taxpayer is a non-resident for Australian income tax purposes and carries on a design business from a home office in the UK.

The taxpayer entered into a contract with an Australian company to provide design services within the arts and entertainment industry. The taxpayer negotiated and concluded the contract in the UK. The taxpayer provided services solely under that contract and to no other clients for the duration of the contract.

After initially providing the services pursuant to the contract from the home office in the United Kingdom, the taxpayer then continued doing this in Australia continuously for 111 days in the 2003 year of income at space made available to the taxpayer within a studio.

The space made available each time the taxpayer provided the services was merely an area within the studio not already in use at that particular point in time. The space made available was not a specifically defined area within the studio, such as an office or other such room, nor was it the same space on all occasions.

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

In determining liability to Australian tax 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 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one.

Former Schedule 1 to the Agreements Act contained the double tax agreement between Australia and the United Kingdom of Great Britain and Northern Ireland (the 1967 UK Agreement). Former Schedule 1A to the Agreements Act contained the Protocol to the 1967 UK Agreement (the 1980 Protocol).

The 1967 UK Agreement and 1980 Protocol were replaced by the 2003 UK Convention which entered into force on 17 December 2003, and in the case of Australia, applies to income or gains for the income year beginning on 1 July 2004 and thereafter. However, the 1967 UK Agreement and the 1980 Protocol continue to operate to avoid the double taxation of income received by Australian and UK residents before 1 July 2004.

Article 11 of the 1967 UK Agreement provided that the income derived by a UK resident taxpayer from professional services or other independent activity of similar character may be taxed in Australia where a fixed base was regularly available to the UK resident for the purposes of performing those activities.

The provision of design services by the taxpayer is a professional service or other independent activity of a similar character for the purposes of Article 11 of the 1967 UK Agreement.

To assist in the interpretation of the 1967 UK Agreement reference is made to Taxation Ruling TR 2001/13 - Income tax: Interpreting Australia's Double Tax Agreements.

Under this Ruling, regard may be had to the OECD Model Tax Convention on Income and on Capital (the OECD Model) and the Commentaries on the Articles of the OECD Model (the OECD Commentary) including any subsequent revisions to that OECD Commentary to assist in the interpretation of double tax agreements. This approach was also accepted by the High Court in Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 21 ATR 531; 90 ATC 4717 (Thiel) (see paragraph 102 of Taxation Ruling TR 2001/13). Unless specified otherwise, references to the OECD Model and OECD Commentary are to the version published on 28 January 2003.

Article 11 of the 1967 UK Agreement was the same in substance as former Article 14 of the OECD Model published on 23 October 1997.

Paragraph 3 of the OECD Commentary published on 23 October 1997 on Article 14 stated that 'the provisions of the Article were similar to those for business profits and rest in fact on the same principles as those of Article 7' of the OECD Model concerning the taxation of business profits. Moreover, 'the provisions of Article 7 and the Commentary thereon could therefore be used as guidance for interpreting and applying Article 14'.

Article 7 of the OECD Model permits the source country to tax the profits of an enterprise where that enterprise carries on business through a permanent establishment in that country.

Article 5 of the OECD Model defines permanent establishment to be '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 explains that this definition provides three conditions necessary for a permanent establishment to exist: • There must be a place of business • The place of business must be fixed so that there is a distinct location with a certain degree of geographical and temporal permanence; and • The business of the enterprise must be conducted through that fixed place.

Paragraph 4 of the OECD Commentary on Article 5 of the OECD Model notes that the term 'place of business' covers any premises, facilities or installations used for carrying on the business whether or not they are used exclusively for that purpose. Paragraph 4 also notes that a place of business may exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented by the enterprise or are otherwise at its disposal.

Paragraph 4.1 states that the fact that 'an enterprise has a certain amount of space at its disposal which is used for business activities is sufficient to constitute a place of business'. The space made available to the taxpayer when providing the services under the contract falls within the meaning of paragraph 4 of the OECD Commentary referred to above.

Paragraph 5.4 of the OECD Commentary on Article 7 of the OECD Model suggests that a consultant moving from one office to another within the same branch location remains in the same place of business. Similarly, the taxpayer remained in the same place of business even though the taxpayer moved within the one studio when utilising the premises of the Australian company.

Paragraph 6 of the OECD Commentary on Article 5 of the OECD Model suggests that a permanent establishment can be deemed to exist only if the place of business has a certain degree of permanency and is not of a purely temporary nature. A place of business may, however, constitute a permanent establishment even though it exists, in practice, for a very short period of time because the nature of the business is such that it will only be carried on for that short period of time.

Paragraph 6 of the OECD Commentary on Article 5 of the OECD Model further provides that 'experience has shown that permanent establishments have normally not been considered to exist in situations where a business has been carried on in a country through a place of business that was maintained for less than six months'.

This is also the approach generally taken by the Commissioner as set out in Taxation Ruling TR 2002/5. However, paragraph 34 of TR 2002/5 also states that 'a period of less than six months is sufficient to lead to the conclusion that temporal permanence exists. Where the period in Australia is less than six months there may still be temporal permanence where the connection with Australia is very strong'.

Although the UK resident taxpayer carried on design services from space made available at the studio for a period of less than 6 months, the activities in Australia did not have a strong connection with Australia for the following reasons: • The taxpayer did not set up a place in Australia with a view to carrying on a design business permanently in Australia. This is demonstrated by the fact that the taxpayer negotiated and concluded the design services contract in the UK. The taxpayer also commenced the design services under the contract in the UK before continuing these services in Australia until the conclusion of the contract; and • The taxpayer did not travel to Australia on a regular basis to carry on the design services.

Accordingly, while providing design services in Australia, the taxpayer did not have a fixed base for the purposes of Article 11 of the 1967 UK Agreement.

Article 11 of the 1967 UK Agreement therefore does not provide Australia with a taxing right in this case. The income generated by the design services that the taxpayer provided under the contract will not be assessable income under subsection 6-5(3) of the ITAA 1997.