Private ruling: Income - source
Published: December 2012
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Questions and Answers: | Is the entity carrying on a business in Australia? | No | Is the entity's source of income from Australia? | No

Relevant facts and circumstances: The entity is a non-resident company incorporated in Country A and is registered for the Australian goods and services tax (GST). The entity is an online retailer selling certain goods to Australian customers and to customers in other countries. The goods are designed and manufactured outside Australia. The server on which the website is hosted is located outside Australia. The processing of sales invoices and sales orders takes place outside Australia. The receipt and processing of all customer payments and refunds takes place through a foreign payment processor. The entity's bank account is located in Country A and all payments to third party contractors are made from Country A. The entity has no physical presence in Australia nor does it employ any people in Australia. In order to facilitate the sales to the Australian customers, the entity has the following activities outsourced from Australian third party independent contractors: · clearing, · warehousing, · distribution. The contractors provide their services to the general public at large. Further, in order to facilitate prompt delivery of the goods to the Australian customers, bulk stock of goods are imported into Australia by the entity and are warehoused by a third party independent contractor. The entity pays duties including GST when the goods are cleared from the Australian and Border Protection Service (Customs). The entity claims the GST paid on the importation of the goods in Australia when completing their Business Activity Statement (BAS). At the time of importation, the imported goods are not specifically for a particular customer. When an order is placed online, a sales order and invoice is generated and sent to the warehouse contractor. The specific goods ordered are picked, packed and delivered to the Australian customer by the distribution contractor. Any returns are handled by the warehousing contractor. At regular intervals, an employee of the entity is sent to Australia to review returns and to deal with any other operational matters.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(3).

Reasons for decision: Summary: Subsection 6-5(3) of the Income Tax Assessment Act 1997 (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. Business income is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997. To determine the tax treatment of income from international transactions involving Australia, non-residents must first determine whether the income has an Australian or foreign source. | Detailed Reasoning - Source of income: Apart from certain rules prescribed for statutory income (for example, royalties and dividends), there are no statutory guidelines in the income tax legislation for determining the source of income. In the absence of statutory source rules, reliance is placed on the general common law source rules as they relate to income. Generally, Australian courts have held that when the question of source is in issue, the weighting of the relative importance of the various factors are relevant ( Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 at 189-190 and Federal Commissioner of Taxation v. United Aircraft Corporation (1943) 68 CLR 525; (1943) 7 ATD 318; (1943) 2 AITR 458). The courts also confirmed that it is appropriate to have regard to some of the following factors in determining the source of income: · the place of making the agreement · the place of payment of fees arising from the agreement; and · the place of performance of services under the terms of the agreement. One factor may sometimes be more important than another. In certain circumstances, the location of the business premises, where the majority of the business activities were carried out, may be the more important factor. In Watson v CT (WA) (1930) 44 CLR 94; 1 ATD 61, an accountant in private practice in Western Australia travelled to Victoria to meet with the taxation office on his client's behalf. It was held that the source of the income was Western Australia because that was where the taxpayer carried on his practice. | Detailed Reasoning - Trading profits: The source of income in the case of trading profits is usually where the business is conducted from. A permanent establishment is a fixed place of business through which the business of an enterprise is wholly or partly carried on. It includes a sales outlet, a branch, place of management, a factory, a workshop, an office or a dependent agent (who has authority to enter into contracts on behalf of the enterprise and habitually exercises that authority. If the business has a permanent establishment in Australia, the business profits that are attributable to the enterprise will be subject to income tax. Where the source of income consists of several factors, the dominant factor should be determined and the essence of the business established. In the case of the entity in question, the essence of its business is the sale of goods online from a website hosted outside of Australia. It is considered that the entity does not have a permanent establishment in Australia as: · the entity is incorporated overseas · the entity does not have Australian directors and does not employ any staff in Australia · the entity essential business activities are conducted outside of Australia including: · hosting of its website · advertising of goods · design and manufacture of goods · processing of sales invoices and orders · processing of payments and receipts · business meetings and decisions · bank account is located in Country A The only activities that take place in Australia are the storage and delivery of goods to customers who have placed their orders online. As the entity does not have a permanent establishment in Australia, the business profits that are attributable to the enterprise are not subject to income tax in Australia. The source of the entity's income is not from Australia and it is not carrying on a business in Australia.

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