ATO ID 2003/382: Assessability of business income derived by an Australian resident attributable to a New Zealand permanent establishment
Date of decision: 7 May 2003
Year of income: Year ended 30 June 2002
Business line: Public Groups and International

Issue
Does the farming income that is attributable to the carrying on of a business through a permanent establishment situated in New Zealand form part of an Australian resident taxpayer's assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The farming income that is attributable to the carrying on of a business through a permanent establishment situated in New Zealand forms part of an Australian resident taxpayer's assessable income under subsection 6-5(2) of the ITAA 1997.

Facts
The taxpayer is an Australian resident for income tax purposes. The taxpayer carried on a business of farming on an agricultural property located in New Zealand. The taxpayer derived income from the business.

Reasons for decision
Summary: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. As the taxpayer is a resident of Australia, the business income forms part of their assessable income under subsection 6-5(2) of the ITAA 1997. In determining liability to Australian tax on foreign sourced income, 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 ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited provisions). Schedule 4 to the Agreements Act contains the double tax convention between Australia and New Zealand (the NZ Convention). The NZ Convention operates to avoid the double taxation of income received by Australian and New Zealand residents. Paragraph (1) of Article 7 of the NZ Convention provides that the profits of an Australian enterprise shall be taxable only in Australia unless the enterprise carries on business in New Zealand through a permanent establishment situated in New Zealand. If the enterprise carries on business in New Zealand through a permanent establishment situated in New Zealand, the profits of the enterprise may be taxed in New Zealand but only so much of it as is attributable to that permanent establishment. Paragraph (1) of Article 5 of the NZ Convention defines a permanent establishment as a fixed place of business through which the business of an enterprise is wholly or partly carried on. Subparagraph (2)(g) of Article 5 of the NZ Convention specifically includes an agricultural, pastoral or forestry property in the definition of a permanent establishment. As the farming business was carried on through an agricultural property located in New Zealand, the business satisfies the requirements of a permanent establishment under subparagraph (2)(g) of Article 5 of the NZ Convention. Therefore, the profits of the business attributable to the permanent establishment situated in New Zealand may be taxed in New Zealand under paragraph (1) of Article 7 of the NZ Agreement. Paragraph (1) of Article 23 of the New Zealand Convention provides that, subject to the provisions of the law of Australia, a credit for any tax paid in New Zealand will be allowed against Australian tax payable on income from New Zealand sources. As the taxpayer is a resident of Australia for income tax purposes, the taxpayer's assessable income includes the farming income derived from the permanent establishment in New Zealand under subsection 6-5(2) of the ITAA 1997. The taxpayer will be entitled to a foreign tax credit for New Zealand tax paid on that income.

Legislative references: Income Tax Assessment Act 1997 subsection 6-5(2)
Subject references: Double tax agreements Foreign tax credits Foreign income Business income New Zealand