Private ruling: Assessability of internet business income
Published: August 2014
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Is any part of your income from your overseas internet business assessable in Australia? | No

Relevant facts and circumstances: You are a non-resident of Australia. You operate an internet business as a sole trader. You do not have any employees. The server on which the website is hosted is located outside Australia. You enter into arrangements with certain producers worldwide and then establish transaction accounts to market and to sell those products. You complete the sales transactions and receive a percentage commission on each sale. You incur your own costs for maintaining your business operations and derive a net income for each reporting period. You do not possess your own stock. The stock is owned by the supplier in Country A who you sometimes act as a sales agent for. You offer their items on third party websites. You process sales invoices and sales orders. Customers place orders on third party websites. You gather the orders together and then email them over daily to the company in Country A for processing. The processing of customer payments and refunds takes place on third party websites. The website host company is located in Country C. You operate through a foreign bank account. You conduct your business and make decisions from your home in a rented apartment in Country B where you live. Some of your customers are from Australia.

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

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. You are a non-resident of Australia and you operate an internet business overseas 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 your internet business, the essence of the entity's business is the sale of goods online from a website hosted outside of Australia. It is considered that your internet business does not have a permanent establishment in Australia as: • You live in Country B and conduct your operations as a sole trader in Country B • You do not employ any staff in Australia • Your essential business activities are conducted outside of Australia including: • hosting of the business website • marketing and selling of goods • processing of sales invoices and orders • processing of payments and receipts • business operations and decisions • bank account is located overseas Whilst some of the customers who place their orders are from Australia, your business does not have a permanent establishment in Australia. The source of your business income is not from Australia and you are not carrying on a business in Australia. Thus your income from your overseas internet business is not subject to income tax in Australia.