Private ruling: Pay As You Go (PAYG) Withholding
Published: December 2014
Ruling period: Income year ended 30 June 2014 | Income year ended 30 June 2015 | Income year ended 30 June 2016 | Income year ended 30 June 2017 | Income year ended 30 June 2018
Date scheme commenced: The scheme has commenced.

Ruling: Q1: Is the Company required to withhold any amount from the Production Fee paid to the agent for the artist pursuant to section 12-315 of Schedule 1 to the Taxation Administration Act 1953 ? | A1: Yes.

Relevant facts and circumstances: The Company was incorporated in Australia. The Company's registered office is located in Australia. The Company carries on a business of organising a specific type of musical events and festivals in Australia that, principally focus on dance music. The specific dance concept originated in a foreign country. The specific dance events and festival have been held in other various countries. The Company organised the first Australian dance events in 200X. In 200Y, the Company organised the first edition of the specific festival in Australia. The individuals that perform at events and festivals organised by the Company in Australia include individuals who are residents of Country X. These Country X residents are referred to as the "artists". The artists produce music in Country X for exploitation throughout the world including by way of sale of recordings and performance at events/festivals, including events and festivals organised by the Company in Australia. Each artist is represented by an entity which is incorporated in Country X. The entity's management and office is in Country X. The entity has no management, offices, or representatives employed in Australia, and Australian residents do not control its voting power. The entity is the sole booking agent for the artist and has the exclusive right to arrange for the artist to perform music. The entity is referred to as the "agent". The terms and conditions pursuant to which the Company engages an artist to perform at an event or festival in Australia are contained in three agreements to which the Company, the artist and the agent are parties: Booking Agreement It is stated that the Booking Agreement contains standard terms identifying the date, the time, the venue (being a place in Australia) and the duration of the booking for the performance. The Booking Agreement also provides that the Company must pay the "booking fee" to the agent in consideration of the booking of the artist. The Booking Agreement provides that the Company undertakes to pay the agent the total amount of the artist buy out fee together with the booking fee payable thereon, plus the travel costs of the artist, if applicable. Performance Agreement The Performance Agreement contemplates that the parties will have already entered into the Booking Agreement, and incorporates the terms of the Booking Agreement. The Performance Agreement provides that the Company must pay the "Performance Fee" to the agent in consideration for the services, which are identified in the Agreement, being the performance of the music at the Performance Venue. Production Agreement The Production Agreement contemplates that the parties will have already entered into both the Booking Agreement and the Performance Agreement, and incorporates the terms of those agreements. The artist acknowledges that they will prepare and produce the music to be performed prior to the date of performance. The Performance Agreement provides that the Company must pay the "Production Fee" to the agent in consideration for the services, being the preparation and production of music which will be performed at the performance venue.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(3) | Taxation Administration Act 1953 Section 12-315 Schedule 1 | Taxation Administration Regulations 1976 | Regulation 44B | International Tax Agreements Act 1953 Section 4 | Section 5 | Agreement between Australia and Country X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income. | The Entertainers Article

Reasons for decision: Summary: The Company is required to withhold an amount from the Production Fee paid to the agent for the artist pursuant to section 12-315 of Schedule 1 to the Taxation Administration Act 1953 ('TAA'). | Detailed Reasoning - Detailed reasoning: Section 12-315 of Schedule 1 to the TAA provides that an entity making a payment to a foreign resident must withhold an amount in certain situations. In order for an amount to be withheld from a payment made to a foreign resident the following conditions must be satisfied: • the payment must have been made by the entity in the course of carrying on an enterprise • the recipient must be a foreign resident or, where the payer does not have reasonable grounds to believe that the recipient is an Australian resident, the recipient has a foreign address or has authorised payment to a place outside Australia • the payment must be of a type prescribed by regulations (e.g. Payment in respect to entertainment activities or support). • the payment must not be: • a dividend, interest or royalty • a departing Australia superannuation payment Regulation 44B of the Taxation Administration Regulations 1976 gives examples of payments for entertainment and sports activities. Those examples are appearance fees, player awards, bonuses, endorsement fees, expense reimbursements, match payments, non-cash prizes, performance fees, preparation fees, prize money, promotional fees and sponsorship. 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. In determining liability to tax on Australian sourced income, it is necessary to consider not only the income tax laws but also any relevant double tax agreement and the application of 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 with the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law . The Agreement between Australia and Country X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income ("the Double Tax Agreement") is listed in section 5 of the Agreements Act. The Double Tax Agreement operates to avoid the double taxation of income received by residents of Australia and Country X. The Entertainers Article of the Double Tax Agreement is relevant to the present case. Paragraph (1) of the Entertainer Article states "(1) Notwithstanding the provisions of Articles 14 and 15, income derived by entertainers (such as theatrical, motion picture, radio or television artistes, and musicians and athletes) from their personal activities as such may be taxed in the State in which these activities are exercised. " This means that the article provides that taxing rights exist in Australia, being the country in which the musical performance is given, notwithstanding the independent personal services article (Article 14) and the dependent personal services article (Article 15) of the Double Tax Agreement. The High Court in Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4717; (1990) 21 ATR 531 ( Thiel ) accepted that the OECD Model Tax Convention official commentaries may be relevant to the interpretation of Double Tax Agreements that are based on the OECD Model Tax Convention. In Thiel , the OECD Model Tax Convention and Commentaries were approved as a supplementary means of interpretation to which recourse may be had under Article 32 of the Vienna Convention on the Law of Treaties. Paragraph 1 of the Entertainers Article of the OECD Model Tax Convention 2014 is on substantially the same terms as the corresponding paragraph in the Double Tax Agreement. The Commentary on Paragraph 1 of the Entertainers Article of the OECD Model Tax Convention 2014 states: "Paragraph 1 applies to income derived directly and indirectly from a performance by an individual entertainer or sportsperson. In some cases the income will not be paid to the individual, or his impresario or agent. " In this regard, payments to the agent for the artist in connection with the musical performance by the Artist is considered to be income derived by entertainers from their personal activities for the purposes of paragraph 1 of the Entertainers Article and may be taxed in Australia because the musical performance takes place in Australia. The Commissioner's view in relation to payments made to visiting entertainers for preparing a role to be performed in Australia is contained in ATO Interpretative Decision ATO ID 2002/874 titled Income Tax International tax: Preparation Fees paid to non-resident entertainers. With respect to Double Tax Agreements entered into by Australia and incorporated into Australian law, ATO ID 2002/874 states: "The 'Entertainers Article' provides a taxing right in circumstances where a payment is made to entertainers exclusively or predominantly for them to prepare for a performance in Australia and the payment is conditional upon them attending and performing in Australia." Further in respect to paragraph 1 of Article 17 of the Australia/Vietnam Double Tax Agreement which is in terms similar to paragraph 1 of the Entertainers Article of the Double Tax Agreement, ATO ID 2002/874 states: "The term 'derived' in this context is a broad term that gives the 'Entertainers Article' coverage beyond merely fees for actual appearances. If the payment for the preparation is made exclusively for the purposes of the performance or other entertainment activities in Australia, those fees constitute part of the entertainer's assessable income derived from those activities. It is not important that the preparation is carried out in a country other than Australia as there is a direct link between the performance and the income. Where the entertainment activities to which the preparation relates are exercised in Australia, preparation fees for those activities are income 'derived' from the activities exercised in Australia within the meaning of the 'Entertainers Article'. The fact that the preparation fees are paid on the condition that the primary activities are exercised in Australia, demonstrates that the fees are derived from, and integrally connected with, the activities exercised in Australia and that those activities are the real source of the income." In this case, the payment of the Production Fee is made for the artist to prepare and produce music to be performed in Australia under the terms and conditions of the Production Agreement. Accordingly, the Production Fee is conditional upon the artist attending and performing in Australia. The preparation and production activities of the artist for which the payment is made, although not being carried out in Australia, are essentially connected with the performance activities in Australia. In accordance with the Commissioner's view as expressed in ATO ID 2002/874, where there is a direct link between the performance in Australia and the income, it is not important that the preparation is carried out in a country other than Australia. The Production Fee is derived from and essentially connected with the entertainment activities the artist exercises in Australia and is taxable in Australia pursuant to the Entertainers Article of the Double Tax Agreement. Further, as mentioned above, Taxation Administration Regulation 44B with reference to section 12-315 of Schedule 1 to the TAA provides examples of payments to an entity for entertainment or sport activities. These include, amongst other things, preparation fees. As determined in the preceding paragraph, the Production Fee is regarded as a preparation fee, and thus it falls within one of the categories in Taxation Administration Regulation 44B from which amounts must be withheld for the purposes of section 12-315 of Schedule 1 to the TAA. Accordingly, the Company has an obligation under section 12-315 to withhold tax from the payment for the Production Fee made to the agent for the artist because: • The payment is made by the Company in the course of carrying on an enterprise; • The recipient, the agent for the artist, is a foreign resident; and • The payment is in respect to entertainment activities and is of a type prescribed by Taxation Administration Regulation 44B.