ATO ID 2012/23: Assessability of prize money derived by foreign resident horse trainer
Date of decision: 28 March 2012
Year of income: ended 30 June 2011
Business line: Private Groups and High Wealth Individuals

Issue
Is prize money derived from sources in Australia by a visiting horse trainer resident in a treaty country assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. Prize money derived from sources in Australia by a visiting horse trainer resident in a treaty country is not assessable under subsection 6-5(3) of the ITAA 1997 as the trainer does not have a permanent establishment in Australia.

Facts
The taxpayer was a foreign resident horse trainer, resident in a treaty country. The taxpayer obtained a Victorian training licence, which was valid for 12 months. A horse that the taxpayer trained arrived in Australia in a late September 2010 shipment for the Victorian Spring racing carnival. Upon arrival in Australia, the horse underwent 3 weeks of post arrival quarantine at the Werribee International Horse Centre (WIHC) at Werribee Racecourse. The horse was maintained the whole time, other than race days, at the WIHC, which was fully equipped with stables, a racetrack for training and veterinary facilities. The horse was taken care of by the taxpayer's head lad and other staff of the taxpayer. The taxpayer kept in daily contact with the head lad by telephone and email. The taxpayer arrived in Australia in early October 2010. The horse trained by the taxpayer finished a place during the Victorian Spring racing carnival and Racing Victoria paid 10% of the total prize money directly to the horse trainer's nominated account. The taxpayer departed Australia in early November 2010. The horse departed Australia in a late November 2010 shipment.

Reasons for decision
Summary: Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a foreign resident includes ordinary income derived directly or indirectly from all Australian sources during the income year. In determining liability to tax on Australian income derived by a foreign resident, it is necessary to also consider the applicable agreement as defined in section 3AAA or section 3AAB of the International Tax Agreements Act 1953 (the Agreements Act). Subsection 4(1) of the Agreements Act incorporates the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that those Acts are read as one with the Agreements Act. Subsection 4(2) of the Agreements Act, provides that the Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (except for some limited provisions). In Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4717; (1990) 21 ATR 531, the High Court accepted that the OECD Model Taxation Convention's official Commentaries (the OECD Commentary) may be relevant to the interpretation of Double Tax Agreements based on the OECD Model Tax Convention on Income and on Capital. In Thiel, the High Court approved recourse to the OECD Model and Commentaries under section 32 of the Vienna Convention (see paragraph 90 of Taxation Ruling TR 2001/13). Paragraph 1 of the Business Profits article of the relevant Tax Treaty (generally Article 7 in Australia's tax treaties) states that the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. Therefore, in order for Australia to have a taxing right, one of the requirements is that the taxpayer has a permanent establishment in Australia. Paragraph 1 of the 'permanent establishment' definition in the relevant Tax Treaty (generally Article 5 in Australia's tax treaties) is identical to Article 5(1) of the OECD Model Convention which defines 'permanent establishment' to mean a 'fixed place of business through which the business of an enterprise is wholly or partly carried on'. Paragraph 6 of the 2010 OECD Commentary on Article 5 relevantly states: Since the place of business must be fixed, it also follows that a permanent establishment can be deemed to exist only if the place of business has a certain degree of permanency, that is if it is not of a purely temporary nature...Whilst the practices followed by member countries have not been consistent in so far as time requirements are concerned, experience has shown that permanent establishments normally have not been considered to exist in situations where a business had been carried on in a country through a place of business that was maintained for less than six months (conversely, practice shows that there were many cases where a permanent establishment has been considered to exist where the place of business was maintained for a period longer than six months)..." Guidance can also be drawn from Taxation Ruling TR 2002/5, which considers the definition of permanent establishment in the context of subsection 6(1) of the ITAA 1936. Paragraph 33 of the TR 2002/5 states: Whether temporal permanence exists is a matter of fact and degree. However, as a guide, if a business operates at or through a place continuously for six months or more that place will be temporally permanent. It is considered that the taxpayer commenced an enterprise in Australia from the time the horse arrived at the WIHC, being the time the taxpayer commenced the horse's preparation for the Spring carnival from a base in Australia. The taxpayer conducted their business by instructing the head lad via telephone and email daily until such time as they arrived in Australia. It is also considered that the taxpayer maintained their business operation in Australia until such time that the horse departed Australia. This is the case even though the taxpayer left Australia at an earlier time. The horse arrived in Australia in late September and departed Australia in late November, being a period of three months. The period of three months is considered insufficient to represent the requisite degree of permanency to establish the existence of a fixed based, in which case, the taxpayer did not have a permanent establishment in Australia. In the absence of a permanent establishment in Australia, Australia does not have a taxing right over the prize money derived by the taxpayer in Australia. As such, that income is not assessable under subsection 6-5(3) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 subsection 6-5(3)
Case references: Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338 90 ATC 4717 (1990) 21 ATR 531
Related public rulings and determinations: Taxation Ruling TR 2001/13 | Taxation Ruling TR 2002/5
Other references: 2010 OECD Model Tax Convention on Income and on Capital 2010 OECD Commentaries on the Articles of the Model Tax Convention
Subject references: Double tax agreements Horse racing Permanent Establishment Prizes & awards