Private ruling: Income Tax and Lodgment
Date of advice: 11 September 2017
Published: January 2018
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is income tax payable under section 4-1 of the Income Tax Assessment Act 1997 (‘ITAA 1997’) by the company on Australian sourced income it receives from aircraft operations? | A1: No. | Q2: If the answer to question 1 is ‘No’, will the company be required to lodge an income tax return if it receives no other Australian sourced income? | A2: No.

Relevant facts and circumstances: 1. The company is a non-resident. 2. The company operates flights carrying passengers and goods from its resident country to Australia and Australia to its resident country. It does not operate any domestic flights within Australia. 3. The company has one branch located in Australia where it only sells international tickets through internet sales and walk-in passenger sales, and charges excess baggage fees to passengers for flights from Australia to its resident country. 4. The company also receives marketing support funds from an Australian tourism company. 5. All Australian sourced income is derived by the company in connection with its aircraft operations in Australia to service the Australia to its resident country and its resident country to Australia sectors. 6. Most of the Australian expenses are paid by the company’s Australian branch.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 161 | Income Tax Assessment Act 1997 section 4-1 | Income Tax Assessment Act 1997 section 6-5 | International Tax Agreements Act 1953 section 4

Reasons for decision: Detailed Reasoning - Detailed reasoning: Non-resident taxpayers will generally be liable to pay income tax under section 4-1 of the ITAA 1997 on Australian-sourced income unless an exemption or exclusion applies. Income tax is calculated by reference to taxable income. Taxable income is the result of subtracting allowable deductions from assessable income. Subsection 6-5(3) of the ITAA 1997 states that the assessable income of non-resident taxpayers includes ordinary income derived directly or indirectly from all Australian sources during the income year or ordinary income that a provision includes in assessable income on some basis other than having an Australian source. In determining the liability to Australian income tax on income received by a non-resident, it is necessary to consider not only Australian income tax laws but also the tax treaties that are governed by the International Tax Agreements Act 1953 (‘Agreements Act’). Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (‘ITAA 1936’) and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). The company is a non-resident for Australian income tax purposes. From its Australian operations, the company receives Australian sourced income from walk-in ticket sales, excess baggage fees, and marketing support funds. This income is directly connected to its Australian flight operations. Accordingly, this income is assessable income under subsection 6-5(3) of the ITAA 1997 as it has an Australian source. However, Australia has a Double Tax Agreement with the company’s resident country. An Article of the Double Tax Agreement considers the taxing rights over profits that a resident of either country derive from shipping and air transport operations. The Article of the Double Tax Agreement states that any profit from the operation of aircraft is only taxable in the country the entity is a resident of. The Article further provides that if the non-resident entity undertakes the operations of ships or aircraft confined solely to places in the country it is not a resident of, the income received may be taxed in that country. The OECD Model Tax Convention and the OECD Commentary on the Model Tax Convention (and subsequent revisions to that Commentary) assists in the interpretation of double tax agreements. Paragraphs 4.1 and 4.2 of the OECD Commentary on Article 8 provide guidance as to what constitutes “profits derived from the operating of aircraft in international traffic” for the purposes of international tax agreements: Any activity carried on primarily in connection with the transportation, by the enterprise, of passengers or cargo by ships or aircraft that it operates in international traffic should be considered to be directly connected with such transportation. Activities that the enterprise does not need to carry on for the purposes of its own operation of ships or aircraft in international traffic but which make a minor contribution relative to such operation and are so closely related to such operation that they should not be regarded as a separate business or source of income of the enterprise should be considered to be ancillary to the operation of ships and aircraft in international traffic. Paragraph 8.1 of the OECD Commentary on Article 8 provides an example of profits which are considered ancillary to the operation of aircraft in international traffic: Advertising that the enterprise may do for other enterprises in magazines offered aboard ships or aircraft that it operates or at its business locations ( e.g. ticket offices) is ancillary to its operation of these ships or aircraft and profits generated by such advertising fall within the paragraph. The company operates flights carrying passengers and goods from its resident country to Australia and Australia to its resident country. It does not undertake any domestic flights within Australia. Its income and expenses in Australia solely pertain to its international aircraft operations and are of a direct or ancillary nature as considered under the OECD Commentary. As the company does not operate any domestic flights within Australia and it is a non-resident, the Article of the Double Tax Agreement will apply and the profits from its Australian aircraft operations will only be taxable in its resident country. | Detailed Reasoning - Question 2: If the answer to question 1 is ‘No’, will the company be required to lodge an income tax return if it receives no other Australian sourced income? | Detailed Reasoning - Detailed reasoning: Section 161 of the ITAA 1936 states that every person must, if required by the Commissioner by notice published in the Gazette , give to the Commissioner a return for a year of income within the period specified in the notice. Law Administration Practice Statement PS LA 2011/15 Lodgment obligations, due dates and deferrals outlines that the Commissioner satisfies the requirement to publish a Gazette notice by registering a legislative instrument on the Federal Register of Legislative Instruments. The Commissioner has issued the following Legislative instruments : ● Lodgment of returns for the year of income ended 30 June 20XX in accordance with the Income Tax Assessment Act 1936 , the Income Tax Assessment Act 1997 , the Taxation Administration Act 1953 , the Superannuation Industry (Supervision) Act 1993 and the Income Tax (Transitional Provisions) Act 1997 (TPAL 20XX/1) ● Lodgment of returns for the year of income ended 30 June 20XX in accordance with the Income Tax Assessment Act 1936 , the Income Tax Assessment Act 1997 , the Taxation Administration Act 1953 , the Superannuation Industry (Supervision) Act 1993 and the Income Tax (Transitional Provisions) Act 1997 (TPAL 20XX/1) ● Lodgment of returns for the year of income ended 30 June 20XX in accordance with the Income Tax Assessment Act 1936 , the Income Tax Assessment Act 1997 , the Taxation Administration Act 1953 , the Superannuation Industry (Supervision) Act 1993 and the Income Tax (Transitional Provisions) Act 1997 (TPAL 20XX/1) These instruments outline the entities that are required to lodge a return of income for the specified period. Table F, of the Legislative Instruments, state the following taxpayers are required to lodge an income tax return: | Detailed Reasoning - TABLE F: Every person being a full self-assessment taxpayer (excluding trustees of superannuation funds, approved deposit funds and pooled superannuation trusts) not covered by Table O or Table P that during the year of income: ● was an Australian resident, and derived income (including capital gains) from sources in Australia or sources outside Australia; or ● was a non-resident of Australia, and derived income (including capital gains) that is taxable in Australia other than: ○ dividend, interest or royalty income subject to withholding payments covered by Subdivision 12-F of Schedule 1 to the Taxation Administration Act 1953 , and ○ fund payments from managed investment trusts subject to withholding covered by Subdivision 12-H of Schedule 1 to the Taxation Administration Act 1953. ○ payments covered by Subdivision 12A-C of Schedule 1 to the Taxation Administration Act 1953 (relating to deemed payments by AMITs). Paragraph 2 of Table F identifies that non-resident taxpayers that derive income that is taxable in Australia are required to lodge an income tax return. The company is a non-resident of Australia and is receiving income sourced from Australia. However, under the Article of the Double Tax Agreement, profits directly connected to, or ancillary to the company’s Australian aircraft operations are not taxed in Australia. This comprises all of the company’s income producing activities in Australia. Accordingly, the company is not required to lodge an income tax return as it is a non-resident of Australia and is not deriving any income that is taxable in Australia.

Is income tax payable under section 4-1 of the ITAA 1997 by the company on Australian sourced income it receives from aircraft operations?