Issue
Is income derived by a resident of Finland from providing services in Australia in the fishing industry, assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. Income derived by a resident of Finland from providing services in Australia in the fishing industry is not assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997).
Facts
The taxpayer is an individual who is a resident of Finland and is not an Australian resident for income tax purposes.
The taxpayer provides service as a contractor to an Australian company in respect of fish handling. The income is sourced from Australia.
The taxpayer is in Australia for four months and does not have a fixed base or permanent establishment in Australia.
Reasons for Decision
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. The taxpayer derived personal exertion income that is sourced from Australia. Accordingly subsection 6-5(3) applies.
In determining liability to Australian tax it is necessary to consider 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. Schedule 25 of the Agreements Act contains the double tax agreement between Australia and Finland and the Protocol to that Agreement (Finnish Agreement).
Article 14(1) of the Finnish Agreement gives the country of residence the right to tax income from professional services or other independent activities of a similar character unless the income is attributable to a fixed base in the other country.
Article 14(2) of the Finnish Agreement defines the term 'professional services' as including independent scientific, literary, artistic, educational or teaching activities, as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.
This is an inclusive definition and is not limited to the specific examples provided. Moreover, as the Article also applies to 'other independent activities of a similar character', its scope extends to activities that are of an 'independent' nature and which are similar in character to the professional services listed in Article 14(2) of the Finnish Agreement.
Activities are considered 'independent' for the purpose of Article 14 of the Finnish Agreement where they are provided outside a formal employment arrangement. This interpretation is consistent with the OECD Commentary (1997 Version) on Article 14 of the OECD Model Tax Convention on Income and on Capital which explained, at paragraph 1, that the Article did not apply to professional services performed in employment.
In the present case, the taxpayer provides the service as a contractor and is 'independent' for the purpose of Article 14 of the Finnish Agreement. However, the service must also be 'professional' or be an activity of a similar character. Fish handling services are not professional services nor are they similar in character to the professional services listed in Article 14(2) of the Finnish Agreement because they do not require specific qualifications or a high level of skill and experience to perform the relevant functions. Accordingly Article 14 does not apply to the taxpayer.
Article 7 of the Finnish Agreement deals with the allocation of taxing rights of the profits of an enterprise. In Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4717; (1990) 21 ATR 531 the High Court held that an enterprise may consist of an activity or activities and be comprised of one or more transactions provided they were entered into for business or commercial purposes. The taxpayer's contract for services is a commercial arrangement and so is considered to be enterprise within the meaning of Article 7.
Article 7 of the Finnish Agreement gives the country of residence the right to tax the profits of an enterprise unless the profits are attributable to a permanent establishment in the country of source. In the present case, the taxpayer is a Finnish resident and does not have a permanent establishment in Australia.
Accordingly, Australia does not have the right to tax the income connected to the taxpayer's enterprise and the income will not be assessable under subsection 6-5(3) of the ITAA 1997.