ATO ID 2005/230: Assessability of consulting income received by an Australian resident working for a German company in Australia
Date of decision: 28 July 2005
Year of income: Year ended 30 June 2006 Year ended 30 June 2007
Business line: Public Groups and International

Issue
Is income derived by the taxpayer, a resident of Australia, for consulting in Australia on behalf of German firms, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The income derived by the taxpayer from consulting on behalf of German firms in Australia is assessable under subsection 6-5(2) of the ITAA 1997.

Facts
The taxpayer intends to earn income from working as an independent consultant. The taxpayer has been approached by a German based company to represent their interests in Australia for a short period of time. The taxpayer will be acting on behalf of the German based company in lobbying Australian companies and the Australian Government. The taxpayer will undertake the independent consultancy work from home. The taxpayer will not have an office in Germany. Remuneration will be paid by the German based company directly into the taxpayer's German bank account. The taxpayer will only be paid for the services provided, and will not be paid if the contract is terminated.

Reasons for decision
Summary: Subsection 6-5 (2) of the ITAA 1997 provides that the assessable income of an Australian resident will include ordinary income derived from all sources, whether in or out of Australia, during the income year. Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. However, when income is derived from a foreign source, 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 (the Agreements Act). Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (except in some limited situations). Schedule 9 to the Agreements Act contains the double tax agreement between Australia and Germany (the German Agreement). The German Agreement operates to avoid the double taxation of income received by Australian and German residents. Article 13 of the German Agreement provides that income derived by an individual who is a resident of Australia in respect of professional services, or other independent activities of a similar character, shall be taxable only in Australia unless the taxpayer has a fixed base regularly available to them in Germany for the purpose of performing their activities. If the taxpayer has such a fixed base, the income may be taxed in Germany but only so much of it as is attributable to that fixed base. In Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 21 ATR 531; 90 ATC 4717 (Thiel), the High Court accepted that the OECD Model Tax Convention on Income and on Capital (the OECD Model) may be relevant to the interpretation of Double Tax Agreements based on the OECD Model. The High Court approved recourse to the OECD Model under Article 32 of the Vienna Convention (see paragraph 102 of Taxation Ruling TR 2001/13). Article 13 of the German Agreement is the same in substance as the former Article 14 of the OECD Model. Paragraph 2 of 'Commentary on Article 14' in the OECD Model defines the concept of professional services to include professional activities of an 'independent' nature. Thus the provision of consulting services by the taxpayer is considered independent personal services for the purposes of article 13 of the German Agreement. Paragraph 4 of 'Commentary on Article 14' in the OECD Model suggests that a fixed base is a centre of activity of a fixed or a permanent nature, and would include a physician's consulting room or the office of an architecture or lawyer. The taxpayer will not have an office or any other business premises in Germany. The taxpayer will derive income from his consultancy. As the taxpayer is a resident of Australia for tax purposes, and does not have a fixed base (such as an office) in Germany, Article 13 of the German Agreement provides that this income will be assessable in Australia, and as a consequence, the consultancy income will not be taxed in Germany. Therefore, the income the taxpayer receives from consulting in Australia will be assessable under subsection 6-5(2) of the ITAA 1997, as the German Agreement provides that Australia has the right to tax that income.

Legislative references: Income Tax Assessment Act 1997 subsection 6-5(2)
Case references: Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338 90 ATC 4717 21 ATR 531
Related public rulings and determinations: Taxation Ruling TR 2001/13
Other references: OECD Model Tax Convention on Income and on Capital (Published on 23 October 1997)
Subject references: Double tax agreements Foreign source income Germany Independent Personal Services