Private ruling: International issues - double tax agreements
Date of advice: 6 August 2025
Published: 27 October 2025
Ruling period: Year ending 30 June 20XX
Date scheme commenced: XX January 20XX

Ruling: Q1: With reference to paragraph 5 of Article 7 of the Double Tax Agreement (DTA) as modified by the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting , do the profits from the Y-type and Z-type operations constitute items of incomedealt within Article 8 of the DTA such that the profits will not be dealt withas Business Profits under Article 7 of the DTA? | A1: Yes. | Q2: Are the profits from the Y-type operations subject to Australian tax under section 129 of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: No. | Q3: Are the profits from the Z-type operations subject to Australian tax under section 129 of the ITAA 1936 and Article 8 of the DTA? | A3: Yes.

Relevant facts and circumstances: ABC Co 1. ABC Co is a company incorporated in Foreign Country A which operates a fleet of foreign flagged vessels. ABC Co provides various shipping services to worldwide customers. 2. ABC Co is a resident of Foreign Country A for tax purposes. 3. ABC Co's principal place of business is outside of Australia. Project 4. The project involves the transportation of goods. Goods are loaded on Y-type vessels in Foreign Country B for delivery to Australia and then transhipped from the initial delivery point in Australia (Y-type site) to another delivery point in Australia (Z-type site). 5. The agreement concerning the transportation services is governed by the contract between DEF Co and ABC Co (the Contract). 6. DEF Co and ABC Co are unrelated parties. 7. Under the Contract, ABC Co was engaged on a time charter basis to provide the transport services to DEF Co. Scope of services to be provided by ABC Co include: • provision of seaworthy vessel and crew, suitable to carry the goods put on board • preparation of relevant transport services documentation • loading of goods at port of shipment • properly stowing goods on the vessel and preserving the cargo in good condition during transit, and • unloading of goods at port of discharge. 8. The scope of services under the Contract was undertaken in two stages: (i) Y-type operations, which involved ABC Co transporting goods from Foreign Country B by way of vessels to the Y-type Site, and (ii) Z-type operations, which involved ABC Co transporting goods via vessels from the Y-type site to the Z-type site. 9. The only activity performed by the Y-type Vessels in Australia was the offloading of goods at the Y-type Site. The Y-type Vessels did not perform any other activities in Australia before returning to Foreign Country B. 10. The only activity performed by Z-type Vessels was the loading of goods at the Y-type site and offloading of goods at the Z-type site. The Z-type Vessels did not perform any other activities in Australia before returning to Foreign Country B.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 129 Double Tax Agreement Article 8

Reasons for decision: Summary: The profits derived by ABC Co from the Y-type and Z-type operations constitute items of income dealt within Article 8 of the DTA such that the profits will not be dealt with as business profits under Article 7 of the DTA. | Detailed Reasoning - Article 7 of the DTA: Article 7 of the DTA provides that the profits of an enterprise of a resident of Foreign Country A will be taxable only in Foreign Country A unless the enterprise carries on business in Australia through a permanent establishment situated in Australia. However, paragraph 5 of Article 7 of the DTA states (emphasis added): For the purposes of this Article, except as provided in the Articles referred to in this paragraph, the profits of an enterprise do not include items of income dealt with in Article 6, 8 , 10, 11, 12, 13, 14, 16 and 17. The Commissioner's view of the interaction between paragraph 5 of Article 7 of the DTA and Article 8 of the DTA is set out in Taxation Ruling TR 2008/8 Income tax: the taxation treatment for ships and aircraft leasing profits under the ships and aircraft articles of Australia's tax treaties (TR 2008/8). Relevantly, paragraph 52 states (emphasis added): Business profits article Where profits from leasing ships or aircraft are covered by an exclusive residence country taxing right under paragraph 1 or a source country taxing right under paragraph 2 in the relevant ships and aircraft article, the profits are considered to be dealt with by that article. Although such profits will often also be considered to fall within the scope of the business profits article of the relevant tax treaty, the priority rule in the business profits article... provides that the ships and aircraft article applies to those profits. Accordingly, it is not necessary to consider whether an enterprise has a permanent establishment in Australia as the business profits article does not apply to the profits. Accordingly, if the profits from the Y-type and Z-type operations are dealt with under Article 8 of the DTA, then Article 7 of the DTA will not need to be considered due to the operation of the priority rule contained in paragraph 5 of Article 7 of the DTA. | Detailed Reasoning - Article 8 of the DTA: Article 8 of the DTA allocates taxing rights to Contracting States on profits from the operation of ships or aircraft. Paragraphs 1 and 2 of Article 8 state: Shipping and air transport (1) Profits from the operation of ships or aircraft derived by a resident of one of the States shall be taxable only in that State. (2) Notwithstanding the provisions of paragraph (1), such profits may be taxed in the other State where they are profits from operations of ships or aircraft confined solely to places in that other State. To determine whether profits from the Y-type and Z-type operations constitute items of income dealt within Article 8 of the DTA, it is necessary to establish that the profits are from the operation of ships. Operation of ships The Commissioner's view as to what constitutes the operation of a ship, for the purposes of Article 8, encompasses activities undertaken that involve the ship in question. TR 2008/8 states at paragraphs 114 to 117 (emphasis added): 114. Paragraph 2 deals with an enterprise of a Contracting State that is deriving profits from the operation of ships or aircraft, and applies to provide a taxing right to the other State over any parts of those profits that are derived from operations confined solely to places in that other State. Therefore this provision involves an examination of the ship or aircraft activities undertaken by the enterprise in that other Contracting State and determining whether those particular activities constitute operations that are confined solely to places in that State. 115. The predominant activities to be considered are those that involve the physical operation of the ship or aircraft , as opposed to the activities involved in the administration of an enterprise's overall shipping or aircraft business (for example, contract negotiation or ongoing management of ownership, lease or finance obligations relating to the ship or aircraft). 116. In considering whether or how particular activities constitute 'operations of ships or aircraft' guidance can be obtained from the ordinary meaning of the term 'operation' which includes the action or process of operating . Therefore, when considering the plural, 'operations', provided the activities consist of actions or processes of operating in their own right, they would constitute an 'operation'. 117. However, this does not mean that any ship or aircraft activity, or group of activities will constitute a ship or aircraft operation in their own right. The activity or activities undertaken in the other Contracting State must be sufficient to constitute a distinct ship or aircraft operation that is identifiable separately from other ship or aircraft operations of the enterprise . The Commissioner's view as to what constitutes 'profits from the operation of ships' is outlined in TR 2008/8 at paragraph 8, which states: The expression 'profits from the operation of ships and aircraft' includes profits directly obtained by an enterprise from the transportation of passengers or cargo by ships or aircraft (whether owned, leased or otherwise at the disposal of the enterprise), as well as profits from activities directly connected with such operations and profits from activities which are not directly connected but are ancillary to such operations. In some situations it may also include profits from non-transport activities. The view expressed in paragraph 8 of TR 2008/8 in respect of profits from the operation of ships including profits obtained from transportation of cargo by ships is consistent with paragraph 4 of Article 8 of the DTA which states: For the purposes of this Article, profits derived from the carriage of passengers, livestock, mail, goods or merchandise shipped in a State for discharge at another place in that State shall be treated as profits from operations of ships or aircraft confined solely to places in that State. The phrase 'carriage of goods' is not defined in the DTA or in Australian taxation legislation. As such, for the purposes of interpreting the DTA, the words are given their ordinary meaning. Relevantly, the Commissioner considers the 'carriage of goods' for the purposes of the domestic tax law in Taxation ruling 2006/1 Income tax: the scope of and nature of payments falling within section 129 of the Income Tax Assessment Act 1936 (TR 2006/1), which states at paragraph 62 (emphasis added): The complexity and intricacies of the carriage of goods by sea have already been alluded to under the heading 'Shipping trade law & practice' (paragraphs 28 to 35). It is governed by trade customs and also various national and international legislation and conventions. The contractual arrangements are complex and for financing, risk sharing and other reasons there has been a proliferation of the use of multiple charterparties. The performance of the carriage arrangement itself also involves several stages and operations. The ship has to arrive at the place specified as the loading point. The shipowner has to provide a seaworthy ship fit for navigational purposes, properly manned and suitable to carry the cargo put on board. The cargo needs to be loaded at the port of shipment and unloaded at the port of discharge. The ship's holds may need to be cleaned immediately before the loading or after unloading the cargo. The cargo needs to be properly stowed on the ship. Arrangements need to be made with port authorities and port services procured. And, the navigation of the ship and the voyage itself give rise to further obligations concerning safe navigation and preserving the cargo in good condition during transit . Thus any determination as to the nature of payments made in respect of the carriage of goods etc. will need to be made having regard to the above context. Based on the transport services provided by ABC Co under the Contract, it can be concluded that the actions performed by ABC Co in transporting goods involved the physical operation of ships for the carriage of goods. Consequently, the profits from the Y-type operations and Z-type operations are 'profits from operations of ships' for the purposes of Article 8 of the DTA. Since the profits from the Y-type operations and Z-type operations are items of income dealt withunder Article 8 of the DTA, it is not necessary to consider Article 7 of the DTA due to the operation of the priority rule in paragraph 5 of Article 7 of the DTA. | Summary: The profits from the Y-type operations are not subject to Australian tax under section 129 of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Section 129 of the ITAA 1936 relates to the tax liability that arises in respect of income that is derived from shipping operations in Australia where the owner or charterer of those shipping operations has their principal place of business outside Australia. | Detailed Reasoning - Application of section 129 of the ITAA 1936 to ABC Co's Y-type operations: Section 129 of the ITAA 1936 states: Where a ship belonging to or charted by a person whose principal place of business is out of Australia carries passengers, live - stock, mails or goods shipped in Australia, 5% of the amount paid or payable to him or her in respect of such carriage, whether that amount is payable in or out of Australia, shall be deemed to be taxable income derived by him or her in Australia. Ship belonging to a person whose principal place of business is out of Australia ABC Co owns the Y-type Vessels that were used to perform the Y-type operations and has its principal place of business outside of Australia. Carriage of goods 'Carriage of goods' is not a defined term in Australian tax legislation. As such, the words are given their ordinary meaning. As concluded in the answer to Question 1 of this Ruling, the Y-type operations involve the 'carriage of goods' consistent in nature to the actions described in paragraph 62 of TR 2006/1. Shipped in Australia The meaning of 'shipped in Australia' is considered at Appendix 1 to TR 2006/1, which states at paragraphs 72 to 74 (emphasis added): 72. The section only applies to the carriage of goods that are 'shipped' in Australia. The expression 'shipped in Australia' means that the goods are put on board a ship in Australia . This forms the factual basis upon which the deemed taxable income is given an Australian source. 73. There is no provision made in section 129 as to where the goods are to be discharged. This means that amounts paid to a shipowner or 'charterer' whose principal place of business is outside of Australia who is engaged in 'coasting trade' or the carriage of goods internationally fall within its provisions... 74. The combined effect of the references to 'a ship', 'the ship' and 'shipped in Australia' in section 129 or its accompanying provisions in sections 130 and 135 of the ITAA 1963 is to restrict the section to amounts paid in respect of the carriage of by the particular ship (that is, the ship leaving Australia) that 'shipped' goods in Australia. In cases of transhipment, for example where ship A under a contract loaded goods in Australia for delivery to London, transhipped the goods to ship B in Hong Kong for on-carriage to London, only the 'freight' charged on the Australia-Hong Kong leg would be included under section 129. This issue was decided by the High Court in Ocean Steamship Company Limited v Federal Commissioner of Taxation . Furthermore, where under a contract, goods are shipped in an overseas country and then transhipped to another ship in Australia, only the 'freight' charged in respect of the goods shipped in Australia would be included under section 129. The above outlines the Commissioner's view that 'shipped in Australia' applies to goods that are put on board a ship in Australia. The location of where the goods are discharged from the ship is not relevant. The Y-type operations performed by ABC Co involved the transportation of goods from Foreign Country B to the Y-type Site onboard the Y-type Vessels. Other than offloading the goods at the Y-type Site, the Y-type Vessels did not perform any other activities in Australia before returning to Foreign Country B. Since the goods were put on board the Y-type Vessels in a foreign country and then transported to Australia, the goods were not 'shipped in Australia' for the purposes of section 129 of the ITAA 1936. | Summary: The profits from the Z-type operations are subject to Australian tax under section 129 of the ITAA 1936 and Article 8 of the DTA. | Detailed Reasoning - Detailed reasoning: Section 129 of the ITAA 1936 addresses the tax liability that arises in respect of income that is derived from shipping operations in Australia where the owner or charterer of those shipping operations has their principal place of business outside Australia. 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 ITAA 1953. ABC Co is a resident of Foreign Country A. Therefore, the DTA applies to ABC Co. In accordance with section 4 of the ITAA 1953, the ITAA 1936 and DTA are to be read as one, with the DTA taking precedence to the extent there are any inconsistencies. As concluded in Question 1 of this Ruling, profits from the Z-type operations constitute items of income dealt withunder Article 8 of the DTA. Accordingly, if the profits derived by ABC Co from the Z-type operations are deemed to be taxable income in Australia under section 129 of the ITAA 1936, it is necessary to consider the application of Article 8 of the DTA to determine whether there are any inconsistencies. | Detailed Reasoning - Section 129 of the ITAA 1936: Section 129 of the ITAA 1936 applies where a ship belonging to or chartered by a person, whose principal place of business is out of Australia, carries goods shipped in Australia to deem 5% of the amount paid in respect of such carriage as taxable income derived in Australia. ABC Co owns the Z-type Vessels that were used to perform the Z-type operations and has its principal place of business outside of Australia. As outlined in Question 2 of this Ruling, the Commissioner's view on the meaning of 'shipped in Australia' is contained in TR 2006/1. In summary, goods are 'shipped in Australia' when the goods are put on board a ship in Australia. The Z-type operations involved the carriage of goods, being the transportation of the goods on board the Z-type Vessels, from the Y-type Site to the Z-type Site. Critically, the goods were put on board the Z-type Vessels in Australia. As the goods were put on board the Z-type Vessels in Australia, the goods were 'shipped in Australia' under section 129 of the ITAA 1936. Therefore, section 129 of the ITAA 1936 applies to the profits derived by ABC Co from the Z-type operations. The effect of section 129 of the ITAA 1936 applying is that 5% of the amount that ABC Co derives in respect of the Z-type operations will be deemed to be the taxable income of ABC Co for Australian tax purposes. | Detailed Reasoning - Article 8 of the DTA: While paragraph 1 of Article 8 of the DTA provides an exclusive taxing right to Foreign Country A in respect of profits from the operation of ships derived by residents of Foreign Country A, paragraph 2 of Article 8 of the DTA operates to also provide Australia with taxing rights over profits from the operation of ships that are 'confined solely to places in ...' Australia. Paragraph 4 of Article 8 of the DTA provides that profits derived from the carriage of goods shipped and discharged within the one State shall be treated as profits from the operations confined solely to places in that State. Paragraph 5 of Article 8 of the DTA restricts the tax chargeable on profits from operations of ships that are taxed under paragraph 2 of Article 8 of the DTA to a maximum of 5% of the amount paid or payable in respect of the carriage in such operations. Confined solely to places Australia The Explanatory Memorandum to the Income Tax (International Agreements) Amendment Bill 1976 which enacted the DTA into law provides the following on Article 8 at page 13 (emphasis added): Under this article the right to tax profits from the operation of ships or aircraft in international traffic, including profits received through participation in a pool service, in a joint transport operating organisation or in an international operating agency, is reserved to the country of residence of the operator. However, any profits derived by a resident of one country from internal traffic in the other country may be taxed in that other country. In such cases, the tax shall not exceed 5 per cent of the net amount paid or payable in respect of carriage in internal operations. By reason of the definition of "Australia" in article 3 and the terms of paragraph (4) of article 8, any shipments by air or sea from a place in Australia to another place in Australia , its continental shelf or external territories are to be treated as forming part of internal traffic. For the Z-type operations, the goods were put on board the Z-type vessels at the Y-type Site and transported to the Z-type Site. The Y-type Site is part of Australia in accordance with subparagraph 1(a) of Article 3 of the DTA. Accordingly, as the goods were shipped and discharged within Australia, then paragraph 4 of Article 8 applies to deem the profits from the Z-type operations as profits from operations of ships confined solely to places in Australia. Paragraph 2 of Article 8 of the DTA then applies to give Australia taxing rights to the profits from the Z-type operations. Australia is limited under paragraph 5 of Article 8 of the DTA to tax no more than 5% of amounts received for the Z-type operations. Since the rate of tax imposed under paragraph 5 of Article 8 of the DTA is consistent with the rate of tax imposed under section 129 of the ITAA 1936, the application of Article 8 of the DTA will not modify the result from the application of section 129 of ITAA 1936.

Does IVA apply to this private ruling?: Part IVA was not considered as part of this private ruling.