Ruling on Shipping and Aircraft Article of Tax Treaties
A draft taxation ruling issued last month could impact the way shipping and air freight businesses deal with the taxation system in Australia.
Taxation Ruling 2013/D5 was issued on 28 August 2013 and deals with the interaction between the Shipping and Aircraft Article of Australia's Tax Treaties, and section 129 of the Income Tax Assessment Act, 1936.
Section 129 operates in the appropriate circumstances to deem 5% of the amount paid or payable in respect of the carriage of passengers or goods shipped in Australia to be taxable income derived by a shipowner or charterer whose principal place of business is out of Australia. A detailed explanation of the operation of section 129 can be found in Taxation Ruling 2006/1.
Summary of TR 2013/D5
The Ruling mainly intends to clarify which voyages are subject to Australian tax under the provisions of section 129 when carried out by a resident of a country that Australia has a Double Tax Agreement ("DTA") with.
Broadly speaking, section 129 treatment will apply where the voyage is confined solely to places in Australia. This includes the internal leg of an international voyage where loading and discharge of passengers or goods takes place within Australia, or 'voyages to nowhere', even where these take place partly outside Australian waters and the passengers temporarily alight at overseas ports.
Importantly, the draft tax ruling should not impact on the interpretation or application of the shipping tax changes introduced in 2012 as part of the "Rebuilding Australian Shipping" reforms.
Details of the ruling
The draft tax ruling notes the following:
- Where an entity meets the requirements of section 129 this is the appropriate section to apply to determine the tax treatment of the entity.
- Income to which section 129 applies constitutes 'profits from the operation of ships' for the purposes of applying the standard ships and aircraft article of Australia's DTAs.
- Profits from carrying passengers or goods that are discharged outside Australia will be considered profits from the operation of ships in international traffic. Australia doesn't have the right to tax such profits where these are derived by a relevant treaty partner resident because the standard ships and aircraft article allocates taxing rights for such profits to the country of residence of the entity.
- Australia does have the right to tax such income under the ships and aircraft article, however, where the income arises from ship operations confined solely to places in Australia. This would include:
- An internal leg of an international voyage but only where passengers or cargo are loaded in Australia for discharge at another place in Australia (i.e. the internal leg of an international voyage where goods are only unloaded in Australia would not be taxable);Â
- 'Voyages to nowhere' involving (more likely passengers) who board in Australia and are ultimately discharged at a port in Australia, even where such voyages take place outside Australian waters. Please note that income would still be caught by these provisions even where the relevant passengers temporarily alight at overseas ports.
- If any carriage takes place under a time-charter party arrangement, the same principles apply, however, depending on the contractual arrangements and voyage patterns it may be necessary to time-apportion the hire paid under the time charter-party in order to ascertain how much of the income will be subject to the deemed taxing provisions of section 129.
- The ATO are of the view that the above treatment applies to Australia's DTAs with Argentina, Austria, Belgium, Canada, Chile, China, Czech Republic, Denmark, Fiji, Finland, France, Germany, Hungary, India, Indonesia, Ireland, Japan, Malaysia, Mexico, the Netherlands, New Zealand, Norway, PNG, Poland, Russia, Singapore, Slovakia, South Africa, Spain, Sweden, Switzerland, Taipei, Turkey, the United Kingdom and Vietnam.
- There are variations on the above outcomes applicable to Australia's DTAs with Italy, Kiribati, Korea, Malta, the Philippines, Romania, Sri Lanka, Thailand and the USA. These variations should be considered further in the relevant circumstances.
If you require any further information about the above draft Ruling, or any specific shipping industry advice please contact Iain Spittal on (02) 8346 0000.