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Chapter 17: Appendix A: Rules for Determining Source of Income of Non-Residents

17.A1. Income from sale of goods imported into Australia. Where goods are manufactured abroad by a non-resident and imported into Australia or bought abroad and imported, the test of source of any profit arising on their sale is whether something was done in Australia by the non-resident personally, or by his agent or representative, which was instrumental in bringing about the sale. The relevant sections of the Act (sections 38–41) appear under a heading ‘Business Carried on Partly in and Partly out of Australia’. Unless the heading is taken to control the interpretation of the sections, the profit from a casual sale may be held to have a source in Australia. In the Committee's view Australian law should be brought closer to the law of the United States and the United Kingdom so as to require that there be a place of operations in Australia through which the action to bring about the sale has been taken. The place of operations might be constituted by an agent or representative of the non-resident. The notion of action instrumental in bringing about a sale should nevertheless be preserved. To require that contracts be concluded at the place of operations in Australia is to give undue weight to a factor depending on legal forms.

17.A2. Where the goods have been manufactured abroad by the non-resident, it is only the selling profit that is subject to Australian tax. The calculation of the selling profit, under section 38, involves subtracting from the proceeds of sale of the goods ‘the amount for which … goods of the same nature and quality could be purchased by a wholesale buyer in the country of manufacture, and the expenses incurred in transporting them to and selling them in Australia’. Under this provision there is the prospect of a reconstruction of the Australian-source profit where the manufacturer's costs have been inflated, by prices he has paid to related persons, so as to prevent any profit arising. However, the calculation of the selling profit under section 39, where goods have been bought by the non-resident and then imported into Australia, does not allow of any reconstruction. The Commissioner has only such powers of reconstruction as may be given him by section 136. The need to increase his powers under that section was considered in paragraphs 17.80–17.89.

17.A3. Income from purchase and sale of goods that are at all times in Australia. The Committee's view is that a place of operations in Australia should be necessary to give an Australian source to a profit from the sale of goods imported into Australia. A casual act of purchase and sale should, however, be sufficient to give a profit an Australian source if the goods are at all times in Australia and acts done in Australia by the non-resident personally, or by his agent or representative, were instrumental in bringing about both the purchase and the sale.

17.A4. Income from purchase of goods in Australia and their sale abroad. An act done in Australia by the non-resident personally, or by his agent or representative, which is instrumental in bringing about the purchase of goods might be thought to justify giving a source to at least part of a profit resulting from the sale of those goods in an export transaction. There is some support for this view in judicial decisions. However, the Committee would prefer that the emphasis be placed on the place of selling. If an act done in Australia by the non-resident, or by his agent or representative, is instrumental in bringing about the sale, the profit should be treated as having an Australian source. It should not otherwise be treated in this fashion.




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17.A5. Income from manufacturing operations in Australia. Where manufacturing operations are carried on in Australia by a non-resident using materials or components he has imported into Australia, the determination of the amount of profit from the sale of the goods having a source in Australia will be made by the Commissioner under section 42. The Committee considers that section 42 is an appropriate provision. It is noted, however, that the Commissioner under the section must accept the profit: his function is only to determine how much of the profit has an Australian source. Here, too, any power of reconstruction must be found in section 136.

17.A6. Income from sales of Australian real property. There is no definitive decision on the source of a profit from the sale of Australian real property. Such a profit should, in the Committee's view, be treated as having a source in Australia even though the purchase and sale of the property took place abroad. While the increase in value reflected in the profit may have been generated by selling activity in the foreign country, it is more likely to have been the result of factors at work in the Australian economy. The suggestion is sometimes made, based on a judicial decisionnote concerning shares in companies, that a profit has a foreign source when it results from the sale abroad of an option over land in Australia. In the Committee's view, the sale of an option should not be distinguished from the sale of the land to which it relates. Option should be given a wide meaning for this purpose. It should not be necessary to attract the operation of the source rule that the option has conferred an interest in the land in Australia.

17.A7. Income from sale of shares. The judicial decision referred to in paragraph 17.A6 may be taken to reject any general principle that the source of a profit made on the sale of shares is the place where the shares are situated. The Committee is not disposed to disagree. A share is situated in the place where the register of the share is kept. To make this the source of the profit would be to allow form to govern the matter. It might be suggested by analogy with real property that the source of the profit on the sale of shares should be taken to be the country where the company derives its profits. While a related test referred to in paragraph 17.57 applies in determining the source of a dividend paid by a company, the Committee does not see this as the appropriate test in the present context. The test is unworkable, requiring information about company affairs that would not be available when an assessment is to be made. A profit on the realisation of shares acquired by a non-resident abroad and sold in the Australian market should, in the Committee's view, be regarded as having a source in Australia if the non-resident has a place of operations in Australia and action through that place of operations was instrumental in bringing about the sale. Where, however, the shares have been both purchased and sold in the Australian market in the sense that acts by the non-resident personally, or by his agent or representative, in Australia were instrumental in bringing about both the purchase and the sale, the resulting profit should be regarded as having a source in Australia. In this case whether or not the non-resident has a place of operations in Australia will be irrelevant.

17.A8. Under these principles many stock exchange transactions would generate profits which would have an Australian source. Where a number of sales are made on an Australian exchange the stock broker or agent instructing the sale of the shares may constitute a place of operations sufficient to give an Australian source. Where the taxpayer buys and sells on an Australian exchange there will be an Australian source. The Committee understands that the law is not at present administered so as to bring all profits of non-residents to tax where they arise from transactions on Australian stock exchanges. There is, of course, great difficulty in establishing that a non-resident has engaged in transactions which, either because he is a trader or by the operation of section 26 (a) and 26AAA, give rise to profits which are income. This is especially so when the non-resident has given instructions through a broker or agent in the foreign country, who has in turn instructed an Australian broker. In many cases a non-resident operates through a nominee company and his identity is not known to the broker or agent acting in Australia. In addition, he may buy through one broker and use another for the sale of the securities. If a liability to tax can be established the Commissioner will very likely have to rely on the agency provisions (referred to in paragraph 17.90) to collect the tax, at some inconvenience and risk of loss to the Australian broker, or other agent, who is constituted the agent for the non-resident under those provisions.




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17.A9. The difficulties for the Revenue in ascertaining and enforcing the liability of the non-resident to tax and the related difficulties for the stock broker or other agent could only be overcome by a general provision exempting from tax all profits by non-residents arising from stock-exchange transactions in Australia. The Committee would not support such an exemption as a way of dealing with these difficulties, though it could understand an exemption in these terms, or even wider terms, as a way of attracting to Australia financial operations by non-residents. The Committee would regard recommending an exemption for the latter purpose as outside its functions.

17.A10. Income from services performed as an employee. Judicial decisions suggest a somewhat elusive distinction between the wages or salary of an artisan in relation to which the place of performance tends to be an important factor in determining source, and the wages or salary of an employee whose services may be called professional, especially one holding an ‘office’, in relation to which the place of performance tends to be less important. In the Committee's view, place of performance should be the sole test of source of wages or salary. It may be appropriate, though, on grounds of administrative simplicity, to exempt the wages or salary of a non-resident if the services were performed for a non-resident and did not exceed a certain number of days—say sixty—in any year of income. In some double taxation agreements to which Australia is a party, an exemption of this kind is given in respect of a longer period of service. It may be appropriate to restrict the exemption so that it does not apply to services performed for a non-resident in connection with a place of operations the non-resident has in Australia. In another respect, however, it may be appropriate to extend the exemption so that it applies to services performed for a resident in connection with a place of operations the resident has outside Australia.

17.A11. Whether the exemption should be restricted so that it will not apply to the income derived in Australia by public entertainers and professional sportsmen, who may earn substantial rewards for very short periods of service, will need to be considered.

17.A12. Income from services performed otherwise than as an employee. Judicial decisions suggest that factors other than place of performance will determine the source of income from independent performance of services, such as the conducting of a geological survey or the giving of professional advice. The place of performance of service should, in the Commission's view, be adopted as the test of source, whether the services are performed as an employee or independently. It may be appropriate to allow an exemption parallel to that suggested in relation to wage and salary income.


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Here too it will be necessary to consider whether there should be some kinds of services in relation to which the exemption will not apply. It should be made clear that the test extends to services performed by a company through its employee or other agent.

17.A13. Income in the form of rentals in respect of real property. Rentals in respect of real property in Australia should be regarded as having a source in Australia. They are probably so regarded by the present law.

17.A14. Income in the form of rentals of chattels. The present law does not give any clear directive as to the source of rentals of chattels, for example payments for the hire of computer equipment. One factor that might be thought important is the location of the chattel at the time of rental payment. But to adopt this as the test means that the source of the rentals would alter with any change in the location of the chattel. Clearly the test would be unworkable where the item is a ship or an aircraft. In the Committee's view, the appropriate tests of source are those adopted by section 6C of the Act, which already applies where the chattel is an item of ‘industrial, commercial or scientific equipment’. Section 6C defines the source of ‘royalties’ for purposes of the Act and the definition of royalties in that section includes payments for the use of these items. The tests depend on the connection of the rentals with economic activity carried on in Australia. There is a source in Australia where the payment is made by an Australian resident to a non-resident, except to the extent that the payment was an outgoing incurred in carrying on business in a country outside Australia through a permanent establishment of the Australian resident in that country. And there is a source in Australia where the payment is made by a non-resident, to the extent that it is an outgoing incurred by that non-resident through a permanent establishment he has in Australia.

17.A15. In one respect the tests may be defective in their presumed object of ensuring that gains resulting from economic activity in Australia are treated as having an Australian source. A permanent establishment abroad of an Australian resident may pay rentals for chattels to a non-resident and receive matching rentals in respect of the same chattels from another Australian resident who uses the chattels in Australia. The rentals paid by the permanent establishment will not have an Australian source under section 6C. However, they will be deductible by the Australian resident, in computing his profits, against the rentals received from the other Australian resident. The latter will be entitled to a deduction for the rentals he pays. A similar defect in the provisions imposing withholding tax on interest paid to a non-resident has been overcome by an amendment to those provisions to which reference is made in paragraph 17.A23. An amendment may be thought appropriate to section 6C, which would give an Australian source to a payment by a resident representing an expense of a permanent establishment abroad, if payment for the use of the same property has been received from another Australian resident.

17.A16. Where the person making the payment is a resident, and the exception relating to a permanent establishment abroad does not apply, the tests assume that the resources from which the payment is made will be generated by economic activity of the resident in Australia. The assumption may not always be correct, but in the Committee's view it is justified for the sake of a workable rule. It would be possible to adopt a test making the extent of the Australian source of the rentals depend on the amount of Australian-source income compared with foreign-source income derived by the resident undertaking the payment. But the Committee would not favour introducing a complexity of this kind.




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17.A17. Income in the form of payments for the use of commercial or industrial property. Payments for the use of commercial or industrial property in Australia should be regarded as having a source in Australia. There is support for such a view in judicial decisions and in the effect of section 6C of the Act, though that section does not in its terms make the source depend on the location of the property. Reference is made to section 6C in paragraph 17.A12 above. The definition of royalties in section 6, for purposes of that section, includes payments made ‘as consideration for the use of, or the right to use, any copyright, patent, design, … trade mark, or other like property or right’.

17.A18. Income arising from payments for commercial or industrial property. A profit from the sale of Australian commercial or industrial property should be treated as having a source in Australia. The treatment of such a profit ought to parallel the treatment of a profit on the sale of real property in Australia. In each case the existence of the property depends on rights given by Australian law.

17.A19. Income arising from payments for scientific, technical, industrial or commercial knowledge or information. The source of income arising from payments for know-how—scientific, technical, industrial or commercial knowledge or information—is the subject of judicial decision in the United Aircraft Case note and of statutory provision in section 6C of the Act already referred to in paragraphs 17.A12–17.A13. The United Aircraft Case is authority that income will have a foreign source if the contract under which the information is supplied and the actual supply of the information take place abroad. The inference is that the income will have a source in Australia if both the contract and the supply take place in Australia. The case is unhelpful where only one of these elements takes place in Australia. Section 6C is not concerned with either element. Source, it was seen in paragraphs 17.A12–17.A13, depends on the payment being a ‘royalty’ as defined and on its having been made by an Australian resident or, in some circumstances, by a non-resident. The definition of ‘royalties’ in section 6 includes ‘payments … for the supply of scientific, technical, industrial or commercial knowledge[or] information’. In the Committee's view, both the United Aircraft Case principle and section 6C are unsatisfactory. The principle over-emphasises form; the section imposes tests in terms of connection with the Australian economy that may be too wide.

17.A20. The approach taken by section 6C is to be preferred but its operation in the present context should be restricted. Where the total amount of the payments for the know-how is in any way dependent on the extent of use of the know-how or the productivity of the business using it, section 6C should apply. But the section should not apply to payments that are not dependent on use or productivity. A payment for a machine should not be treated differently from a payment for plans and specifications for building the machine. The test of source in Australia should, in this case, be whether the sale of the know-how was made through a place of operations in Australia that was instrumental in bringing about the sale.

17.A21. While the operation of section 6C should be restricted in this way, it ought to be extended in the manner already considered in paragraph 17.A13. The purpose of section 6C, as at present drafted, may be defeated by an arrangement involving the supply of know-how to a permanent establishment of an Australian resident who then supplies the know-how to another Australian resident.




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17.A22. Income in the form of dividends. Dividends and interest, as has already been explained, are taxed by withholding on a basis of their origin in Australia that may differ from their source. Where withholding tax applies, section 128D excludes tax by assessment so that source in Australia has no immediate consequences. There are occasions, however, in relation both to dividends and to interest when source in Australia continues to have consequences. Some of these occasions were explained in paragraphs 17.71–17.75.

17.A23. The source of a dividend for the purpose of taxing a non-resident receiving the dividend is determined by section 44. The test is the source of the profits from which the dividend has been paid. But the source of a dividend, where it is part of the profits from which a dividend is paid to a non-resident is not determined by the Act. If regard is to be paid to the principle that origin in Australia should depend upon economic activity in Australia, the source ought perhaps to be determined by tracing back to active business profits in Australia. However, such an assertion of jurisdiction could not generally be enforced. For this reason the Committee favours the place of residence of the company (A), from which another company (B) receives a dividend out of which it pays a dividend to a non-resident (C), as being the source of the dividend profits received by B for the purpose of determining the source, under the statutory test, of the dividend received by C.

17.A24. Income in the form of interest. The source of interest has been considered in a number of judicial decisions and there are statutory provisions in section 25(2) giving an Australian source to interest in some circumstances and perhaps denying it in others. The judicial decisions tend to emphasise elements of form—where the contract of loan was made or the loan moneys were provided. The provisions of section 25(2) give a source in Australia to interest upon money secured by mortgage of any property in Australia. There is an exception to the operation of the provision when interest is paid outside Australia to a non-resident on debentures issued outside Australia by a company. It is not clear whether the exception, by preventing a deemed source arising under section 25(2), requires that the interest be treated as not having a source in Australia.

17.A25. In the Committee's view, the tests of origin for purposes of withholding tax should in general be adopted as the tests of source for purposes of tax by assessment. Those tests express the basic notion that source depends on whether the income has been produced by economic activity in Australia. The tests are payment by a resident, except where it is an expense incurred by the resident in relation to a permanent establishment he has abroad, or payment by a non-resident where it is an expense incurred by him in relation to a permanent establishment he has in Australia. A recent amendment has sought to give more effective expression to the basic notion by imposing withholding tax on a payment of interest by a resident to the permanent establishment abroad of another resident. The intention is to ensure that where the permanent establishment has borrowed in order to lend to an Australian resident, withholding tax is paid at some stage. It would have been impossible, however, to apply a provision making the liability to withholding tax on the interest paid by the resident's permanent establishment depend on the tracing of the moneys borrowed into loans made by the permanent establishment to Australian residents. But where tax is imposed by assessment, a provision making the determination of an Australian source for the interest paid by the permanent establishment depend on a tracing may be feasible. The tracing might be done by applying to the interest paid that fraction of the total interest received by the permanent establishment which was received from


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Australian residents. It would be necessary, however, to confine the liability to tax by assessment in ways proposed in paragraph 17.71.

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