Opinion Number. 764

Subject

INCOME TAX INCOME DERIVED FROM SOURCES WITHIN AUSTRALIA: WHETHER INCOME RECEIVED FROM CHARTER-PARTIES IN VARIOUS SITUATIONS IS DERIVED FROM SOURCES WITHIN AUSTRALIA

Key Legislation

INCOME TAX ASSESSMENT ACT 1915, ss. 10 (I), 14 (a)

Date
Client
The Acting Commissioner of Taxation

The Acting Commissioner of Taxation has forwarded the following memorandum for advice:

The question has arisen as to the extent to which moneys received by owners of ships under charters are assessable under the Income Tax Assessment Act 1915 in the cases set out hereunder and I shall be glad to be favoured with your advice in the matter.

The cases which have arisen might broadly be divided into two classes, viz.:

  1. ships owned in Australia;
  2. foreign-owned ships.
  1. Ships owned in Australia
  2. Case (1) Charter-party entered into in Australia but the charterer uses the vessel solely for operations conducted outside Australia.

    In this case it is thought that as the vessel is owned in Australia and the contract is made in Australia the owner is assessable on the whole of the 'hire' money.

    Case (2) Charter-party entered into in New Zealand; vessel used solely outside Australian waters.

    I am in doubt as to the assessability of the owner on the 'hire' money in this case. The contract is not made in Australia, but can it not be said that the ownership of the vessel is the source of the derivation of the income? If this is not so, Australian shipowners could evade payment of tax simply by arranging for all such charters to be made in New Zealand.

    In regard to cases (1) and (2) the owners appear to be in the same position as a person in Australia who leases his property to another. It is immaterial to the company where the chartered vessels are employed by the charterers.

    Will it affect the question whether the charterer is a resident of Australia or not?

  3. Foreign-owned ships

Case (3) Japanese boat chartered by an Australian firm; contract signed in Melbourne; charter money payable in Melbourne.

In this case it is considered the foreign owner is assessable on the hire money. Case (4) Similar to case (3), except that charter money is payable in Japan. Case (5) Japanese boat chartered by an Australian firm; contract signed in London; charter money payable in London.

Case (6) Vessel requisitioned by the Commonwealth Government as a transport. A copy of the conditions governing the hiring of the steamers is attached. The hire money is payable in London.

If the Departmental conclusions in cases (1) and (2) are correct, the charter money in cases (3) to (6) appears to be exempt.

As the matter is one of urgency, I should be glad if it could receive your early consideration.

By sub-section (1) of section 10 of the Act income tax is payable on taxable income derived directly or indirectly from sources within Australia.

The income must be derived from a source in Australia. Case (1) In this case the owner is resident in Australia and the contract was made in Australia, and I think that it is clear that the leasing of the ship forms part of the business carried on in Australia by the shipowner.

The earnings of the charterer are made outside Australia but this cannot affect the receipt by the owner of the amount due to him, as the 'hire' money must be paid whether the vessel earns anything or not.

In my opinion, the owner is liable to tax on the whole of the 'hire' money. Case (2) As regards the source of income to an owner of a ship where the ship is chartered, I think that the business carried on by the shipowner must be taken to be the source of the income.

If the owner is resident in Australia and the central control and management is exercised in Australia, then the business is being carried on in Australia, but for reasons set forth in my opinion relating to Australian houses doing business outside Australia(1), the profits arising from this transaction do not constitute profits from a business within the meaning of section 14 (a) of the Act, as the transaction is a 'foreign' transaction.

In my opinion, the 'hire' money in this case is not taxable. Case (3) I agree with the Departmental contention in this case. In my opinion the Japanese owner is carrying on a business in Australia and under section 14 (a) is taxable on the profits arising from that business.

Case (4) I do not think that the fact that the charter money is payable in Japan is material to distinguish this case from the previous case. If the charter-party were actually made in Australia, then the Japanese owner is carrying on business in Australia and is taxable on the profits of that business.

Case (5) In this case, the contract having been made in London the owner does not appear to be carrying on business in Australia, and in my opinion, the 'hire' money is not taxable.

Case (6) Before advising on this case I should like to know the manner in which the vessel was requisitioned. If the owner was not resident in the Commonwealth, and the vessel was taken by the Government by 'force majeure', I do not think that the shipowner can be regarded as carrying on business in the Commonwealth.

[Vol. 15, p. 37]

(1)Opinion No. 765.