Australia’s domestic tax law imposes a 5% tax on amounts paid to foreign owners or charterers of ships or aircraft for the carriage of passengers, live-stock, mail or goods shipped in Australia (section 129 of the Income Tax Assessment Act, 1936). Section 129 can apply irrespective of where the passengers or goods are discharged. However, Australia’s taxing rights under section 129 are subject to the operation of its double tax agreements (DTA). The Australian Taxation Office (ATO) has recently issued a draft ruling (TR 2013/D5) explaining how section 129 applies in the context of Australia’s DTAs.
DTAs with Australia based on the Ships and Aircraft Article 8 of the OECD Model Tax Convention (the OECD Model) reads:
Ships and Aircraft
- Profits of an enterprise of a Contracting State derived from the operation of ships or aircraft in international traffic shall be taxable only in that State.
- Notwithstanding the provisions of paragraph 1, profits of an enterprise of a Contracting State derived from the operation of ships or aircraft may be taxed in the other Contracting State to the extent that they are profits derived directly or indirectly from ship or aircraft operations confined solely to places in that other State.
- The profits to which the provisions of paragraphs 1 and 2 apply include profits from the operation of ships or aircraft derived through participation in a pool service or other profit sharing arrangement.
- For the purposes of this Article, profits derived from the carriage by ships or aircraft of passengers, livestock, mail, goods or merchandise which are shipped in a Contracting State and are discharged at a place in that State shall be treated as profits from ship or aircraft operations confined solely to places in that State.
The respective ships and aircraft article in these DTAs do not give Australia taxing rights under section 129 where the passengers or goods are discharged outside Australia (refer paragraph 1 of the OECD Model). Australia still maintains taxing rights for an internal leg of an international voyage (where passengers or goods are taken onboard in Australia for discharge in Australia) or for voyages that start and finish at a port in Australia, even though part of the voyage takes place out of Australia (refer paragraph 4 of OECD Model). Some complex issues of apportionment can arise where Australia exerts partial taxing rights under section 129 but part of the carriage fees are exempt under a DTA.
DTAs with an unconventional Ship and Aircraft Article
The ship and aircraft article in DTA’s with Australia that vary from Article 8 of the OECD Model are detailed below.