ATO ID 2002/874: International tax : Preparation Fees paid to non-resident entertainers
Date of decision: 14 August 2002
Business line: Private Groups and High Wealth Individuals

Issue
Does the 'Entertainers Article' of the Australian Double Tax Agreements (DTAs) - as incorporated into Australian law by the various Schedules of the International Tax Agreements Act 1953 - allow Australia a taxing right on payments made to visiting entertainers specifically for 'preparing' for a role, where the preparation is carried out in another country prior to the entertainer's arrival in Australia?

Decision
Yes. The 'Entertainers Article' provides a taxing right in circumstances where a payment is made to entertainers exclusively or predominantly for them to prepare for a performance in Australia and the payment is conditional upon them attending and performing in Australia.

Facts
Various non-resident entertainers such as opera singers, musicians, conductors and film actors are regularly engaged by Australian promoters such as opera companies, symphony orchestra companies, or film producers to perform in Australia. The contracts or negotiations to engage those entertainers are usually arranged up to two years prior to the actual date of performance in Australia. The fees which are negotiated in consideration of the entertainer's engagement, include payments made to the entertainer specifically to prepare for a part or a role in Australia, even though the preparation may be carried out in another country prior to the entertainer's arrival in Australia. This payment (so called 'preparation fee') is often calculated as a percentage of the gross payment for the Australian engagement. The percentage can vary according to the entertainer's stature and demand in the industry. The preparation is exclusively or predominantly for the purposes of the performance or entertainment activities in Australia. The payment of the preparation fee is conditional upon the actual performance taking place.

Reasons for decision
Summary: Australia's DTAs are international agreements that have been negotiated between Australia and other countries. The primary role of a DTA is to avoid double taxation. One mechanism for doing this is to distribute or allocate taxing rights between those countries that are parties to the DTA. The Article in DTAs relevant to the taxation of visiting entertainers is the 'Entertainers Article'. The following example from Article 17 of the Australia/Vietnam DTA is typical of most 'Entertainers Article' in Australian DTAs: '(1)...income derived by entertainers (such as theatrical, motion picture, radio or television artistes and musicians and athletes) from their personal activities as such may be taxed in the Contracting State in which these activities are exercised .' [Emphasis added] The term 'derived' in this context is a broad term that gives the 'Entertainers Article' coverage beyond merely fees for actual appearances. If the payment for the preparation is made exclusively for the purposes of the performance or other entertainment activities in Australia, those fees constitute part of the entertainer's assessable income derived from those activities. It is not important that the preparation is carried out in a country other than Australia as there is a direct link between the performance and the income. Where the entertainment activities to which the preparation relates are exercised in Australia, preparation fees for those activities are income 'derived' from the activities exercised in Australia within the meaning of the 'Entertainers Article'. The fact that the preparation fees are paid on the condition that the primary activities are exercised in Australia, demonstrates that the fees are derived from, and integrally connected with, the activities exercised in Australia and that those activities are the real source of the income.

Legislative references: International Tax Agreements Act 1953 Schedule 38, Article 17
Subject references: Entertainers Prepayments Double tax agreements