Private ruling: Source of income
Published: December 2011
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the income derived from performing contracting services in Country X considered to be sourced in Australia? | A1: No.

Relevant facts and circumstances: You are a foreign resident for tax purposes. You reside in Country X and you are a resident of Country X. You have entered into a contract with an Australian based company to provide services. The contract was signed and negotiated in Country X. These services are performed in Country X. Your work activities consist of providing services in various places in Country X under the term of the company contract with Company X for a project. Other additional works and services may be requested of you by the company from time to time in writing. You do not have any relationship with the company you are working for, either as a shareholder or a director. The only relationship you have with the company is a contractor providing services. All of your payments are deposited in your foreign bank account. Your spouse is living with you in Country X.

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 foreign resident includes ordinary income derived directly or indirectly from all Australian sources during the income year. The source of income is determined in the general principle set out in Nathan v Federal Commissioner of Taxation (1918) 25 CLR 183 , where the High Court held that the determination of source of income is a practical, hard matter of fact. Generally, the courts held that when the question of source of income is in issue, the weighting of the relative importance of various factors are relevant (Nathan v Federal Commissioner of Taxation (1918) and Federal Commissioner of Taxation v United Aircraft Corporation (1943) . The courts also confirmed that it is appropriate to examine some of the following factors in determining the source of income: · the place where the services are performed · the place where the contract is made · the place where the payment is made One factor sometimes may be more important than another. The source of income for services performed will depend on the facts of each case. However, the source of income is generally the place where services are performed as per Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 11 ATD 288; (1957) 7 AITR 76) where Williams J stated that: "…..the locality of the source of income derived from personal exertion in the capacity of employee or in relation to any services rendered surely must be where such personal exertion took place, and the locality of the source of the proceeds of any business where the activities are carried on…." However, in the case of income from the provision of independent personal services, the place where contract was made and the place where payment was made can be more important than the place where the services are performed as per Federal Commission of Taxation v Mitchum (1965) 113 CLR 401; 13 ATD 497) . In your case, you are providing contracting services. The contract was signed and negotiated in Country X, and all services are performed Country X. The payments derived from contracting service provided are made in Australia by an Australian based company. Currently, your activities in Country X consist of providing various services for a project. Your company may request you to do other additional work and services from time to time in writing. Your role under the contract entered into with an Australian based company is to carry out activities in Country X. It is the activities being performed in Country X that give rise to the derivation of your income. These are considered more significant and outweigh the fact that the payments are made in Australia by an Australian company and deposited in your bank account in Country X. In view of the above case law and the circumstances in your case, it is considered that the source of income is the place of performance of the services under the contract. Accordingly, the contracting services performed in Country X are not sourced in Australia.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.