Review of the “source of income” rules


Whether an item of income or a gain is derived from sources in Australia is often an important question for taxpayers.

The answer can mean that the income or gain is subject to Australian income tax.

In his session at the 12th Annual NSW Tax Forum, King Tan, FTI, provided a refresher on the source of income rules and their interactions with various Australian tax provisions.

His paper is excerpted in this post.

In his paper, King undertakes a review of the source of income rules by considering first, the significance of the term “source” in Australian income tax law, and second, the meaning of “source” in Australian income tax law.

The paper then looks at general source principles relating to five categories of income which are commonly derived by taxpayers, being dividend income, interest income, royalty income, income from real property and business income.

It consider common law principles and statutory rules relating to source and the potential relevance of Australia’s bilateral tax treaties (“DTAs”) and The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”). 

It also considers the recent decision handed down by the Full Federal Court of Australia in Commissioner of Taxation v Resource Capital Fund IV LP [2019] FCAFC 51 (“RCF IV”), where the Court determined that gains made by Cayman Islands limited partnerships from the sale of shares in an Australian company were derived from Australian sources;

King goes on to provide an overview of two statutory regimes which are designed to override the source of income rules and provide foreign investors with certainty. These are Division 855 of the Income Tax Assessment Act 1997 (Cth) (“ITAA 1997”) and the Investment Manager Regime (“IMR”).

The paper looks at the treaty source rule found in many of Australia’s DTAs and the Full Federal Court’s decision in Satyam Computer Services Limited v Commissioner of Taxation [2018] FCAFC 172 (“Satyam”), where the Court determined that payments received by an Indian tax resident for services provided by employees in India to Australian customers were deemed to be sourced in Australia by reason of the treaty source rule and were assessable in Australia, even though such payments would not be considered to be sourced and assessable in Australia under Australia’s domestic tax laws.

Finally, it covers some other recent developments on source which are not covered by the foregoing discussions.

The paper also covers:
  • The significance of the term “source” in Australian income tax law as well as the meaning; 
  • The source of dividend income, including what is a “dividend”?, some common law principles, and the relevance of DTAs and the MLI. 
  • The source of interest income including what is "interest", common law principles and
    relevance of DTAs 
  • The source of royalty income, including what is a “royalty”?, common law principles, statutory rule, and the relevance of DTAs. 
  • The source of real property income including what is income from real property?, common law principles, and the Relevance of DTAs 
  • The source of business income, what is business income?, common law principles, Australian Machinery, TD 2011/24, RCF IV, the relevance of DTAs and the relevance of the MLI. 
  • Statutory provisions which override source, division 855, and IMR. 
  • Treaty source rule; and 
  • Other recent developments.
You can access the paper here.

King Tan FTI, is a Senior Associate in the tax practice of King & Wood Mallesons.

King advises corporate taxpayers and high net worth groups on income tax and duty, including in respect of transactions and tax disputes. His experience includes advising on cross-border investments, corporate restructures and M&A transactions as well as acting for taxpayers in ruling applications, tax audits and tax objections.

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