ATO ID 2004/42: Assessability of income derived by a Netherlands resident from the design and construction of a facility in Australia
Date of decision: 5 January 2004
Year of income: Year ended 31 December 2003 Year ending 31 December 2004
Business line: Public Groups and International

Issue
Is the income derived by a Netherlands resident taxpayer from the design and construction of a facility in Australia assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The income derived by a Netherlands resident taxpayer from the design and construction of a facility in Australia is assessable under subsection 6- 5(3) of the ITAA 1997. Facts The taxpayer is a resident of the Netherlands and a non-resident of Australia for income tax purposes. The taxpayer entered into an agreement with an Australian resident taxpayer. Under the terms of the agreement, the taxpayer agreed to design and construct a facility in Australia. The taxpayer used substantial equipment in Australia for a period of more than 12 months. The taxpayer's business is carried on through a permanent establishment situated in Australia. The taxpayer sub-contracted the work for the design and construction of the facility to an unrelated entity. The taxpayer received a fixed sum from the Australian resident taxpayer for the performance of the terms of the agreement. Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year. The income from the design and construction of the facility in Australia is ordinary income derived from Australian sources for the purposes of subsection 6-5(3) of the ITAA 1997. In determining liability to tax on Australian sourced income received by a non resident, it is necessary to consider not only the domestic 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 10 to the Agreements Act contains the agreement between Australia and the Kingdom of the Netherlands (the Netherlands Agreement) and the Protocol to that agreement. The Netherlands Agreement and the Protocol operate to avoid the double taxation of income received by Australian and Netherlands residents. Article 7 of the Netherlands Agreement provides that the profits of an enterprise of the Netherlands will be taxable only in the Netherlands unless the enterprise carries on business in Australia through a permanent establishment situated therein. The term 'permanent establishment' is defined in Article 5 of the Netherlands Agreement. Article 5(1) of the Netherlands Agreement provides that the term permanent establishment means a fixed place of business in which the business of the enterprise is wholly or partly carried on. Paragraph 2 of the OECD Commentary on Article 5 of the OECD Model Tax Convention explains that the definition of permanent establishment contains the following requirements: The profits from the design and construction of the facility in Australia are taxable in Australia under Article 7 of the Netherlands Agreement as the taxpayer carries on business in Australia through a permanent establishment situated in Australia under Article 5(1) of the Netherlands Agreement. Accordingly, the income derived by a Netherlands resident taxpayer from the design and construction of a facility in Australia is assessable under subsection 6-5(3) of the ITAA 1997 through the operation of Article 7 and Article 5(1) of the Netherlands Agreement.

Facts

Reasons for decision
Summary: Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year. The income from the design and construction of the facility in Australia is ordinary income derived from Australian sources for the purposes of subsection 6-5(3) of the ITAA 1997. In determining liability to tax on Australian sourced income received by a non resident, it is necessary to consider not only the domestic 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 10 to the Agreements Act contains the agreement between Australia and the Kingdom of the Netherlands (the Netherlands Agreement) and the Protocol to that agreement. The Netherlands Agreement and the Protocol operate to avoid the double taxation of income received by Australian and Netherlands residents. Article 7 of the Netherlands Agreement provides that the profits of an enterprise of the Netherlands will be taxable only in the Netherlands unless the enterprise carries on business in Australia through a permanent establishment situated therein. The term 'permanent establishment' is defined in Article 5 of the Netherlands Agreement. Article 5(1) of the Netherlands Agreement provides that the term permanent establishment means a fixed place of business in which the business of the enterprise is wholly or partly carried on. Paragraph 2 of the OECD Commentary on Article 5 of the OECD Model Tax Convention explains that the definition of permanent establishment contains the following requirements: The profits from the design and construction of the facility in Australia are taxable in Australia under Article 7 of the Netherlands Agreement as the taxpayer carries on business in Australia through a permanent establishment situated in Australia under Article 5(1) of the Netherlands Agreement. Accordingly, the income derived by a Netherlands resident taxpayer from the design and construction of a facility in Australia is assessable under subsection 6-5(3) of the ITAA 1997 through the operation of Article 7 and Article 5(1) of the Netherlands Agreement.

Legislative references: Income Tax Assessment Act 1997 section 6-5(3)
Related ATO interpretative decisions: ATO ID 2004-41
Other references: OECD Model Tax Convention on Income and Capital - Commentary
Subject references: Double tax agreements Netherlands Permanent Establishment