ATO ID 2005/301: Activities from the 'operation of ships' in Australia by a Singapore company
Date of decision: 19 August 2005
Year of income: Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007
Business line: Public Groups and International

Issue
Do the activities of a Singapore resident company in Australia constitute the 'operation of ships' under Article 7(1) of Schedule 5 to the International Agreements Act 1953 (Agreements Act)?

Decision
Yes. The activities by the Australian office of the Singapore Company will constitute the 'operation of ships' pursuant to Article 7(1) of Schedule 5 of the Agreements Act.

Facts
The company is a resident of Singapore for the purposes of the Singapore Double Tax Agreement (Singapore Agreement) as set out in Schedule 5 of the Agreements Act. The company also has an office located in Australia. The company's core business consists of the provision of international shipping services. The Australian office of the company effectively acts as an 'intermediary' whereby it will source cargo from parties who are typically commodity owners or shippers themselves, who need transportation. The cargo is transported on ships chartered by the company. The cargo is exported directly from Australia to a foreign country and no goods are transported from Australia to another port in Australia. The Australian office of the company also sources vessels for charter and identifies potential vessels to charter. The Australian office of the company will increase the scope of its existing services and will be involved in providing the following services:

Reasons for decision
Summary: Schedule 5 of the Agreements Act contains the Singapore Agreement. The Singapore Agreement operates to avoid double taxation of income received by Australian and Singaporean residents. Article 7 of the Singapore Agreement deals with the taxation treatment of profits derived from shipping and air transport. The effect of this Article is that the right to tax profits from the operation of ships or aircraft is generally reserved to the country of residence of the operator. In this case the country of residence of the operator is Singapore. Where Article 7 applies to the company, Australia will not have taxing rights over profits covered by this Article. That means that Australia will not require the Singaporean company to include an amount in assessable income under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997). Of particular relevance is Article 7(1) which provides that: profits from the operation of ships... derived by a resident of one of the Contracting States shall be taxable only in that State. To determine whether the activities of the Australian office of the company constitute 'profits from the operation of ships' reference is made to Taxation Ruling TR 2001/13 - Income tax: Interpreting Australia's Double Tax Agreements. Under this Ruling, regard may be had to the OECD Model Tax Convention and the OECD Commentary on the Model Tax Convention (and subsequent revisions to that Commentary) to assist in the interpretation of double tax agreements. The OECD Commentary was also considered by the Full Federal Court in McDermott Industries (Aust.) Pty Ltd v. Federal Commissioner of Taxation [2005] FCAFC 67; 2005 ATC 4398; 59 ATR 358 which examined the Singapore Agreement. The present OECD Commentary on the taxation of profits from shipping notes that: profits obtained purely from the carriage of passengers or cargo... would be unduly restrictive when interpreting the Article, in view of the development of shipping and for practical considerations as well (see C(8)-2 of the OECD Model Commentary). On that basis the OECDs current view is that this Article: covers other classes of profits as well ie. those which by reason of their nature or their close relationship with the profits directly obtained from the transport may all be placed in a single category' (see C(8)-2 of the OECD Model Commentary). Having regard to TR 2001/13 and the OECD commentary, the proposed expanded services by the company in its Australian office will constitute the 'operation of ships' for the purposes of Article 7(1) of the Singapore Agreement. Accordingly, any profits that arise from the proposed services shall only be taxable in Singapore. Therefore, these profits will not be included in assessable income under subsection 6-5(3) of the ITAA 1997.

Legislative references: International Tax Agreements Act 1953 Schedule 5 Article 7
Case references: McDermott Industries (Aust.) Pty Ltd v. Federal Commissioner of Taxation [2005] FCAFC 67 2005 ATC 4398 59 ATR 358
Related public rulings and determinations: Taxation Ruling TR 2001/13
Related ATO interpretative decisions: ATO ID 2004/41 | ATO ID 2004/111 | ATO ID 2004/314
Other references: OECD Commentary on the Model Tax Convention on Income and Capital
Subject references: Double tax agreements Income Shipping Shipping income Singapore