The Allocation of Taxing Rights of Ship and Aircraft Leasing Profits under Australia's Tax Treaties

• Author: Kerrie Lee Sadiq
• Position: Senior Lecturer, TC Beirne School of Law, The University of Queensland, Research Fellow, Taxation Law and Policy Research Institute, Monash University
• Pages: 220-227

THE ALLOCATION OF TAXING RIGHTS OF SHIP AND AIRCRAFT LEASING

PROFITS UNDER AUSTRALIA’S TAX TREATIES

Kerrie Sadiq∗

The Australian Federal Commissioner of Taxation recently released Draft Taxation

Ruling TR 2008/D3 with the stated purpose of clarifying ‘what profits derived from the

leasing of ships or aircraft fall within the ship and aircraft articles of each of Australia’s

tax treaties’. In particular, TR 2008/D3 explains the taxing rights over different types of

leasing profits, such as a full basis lease in respect of any transport by a ship operated in

international traffic and bareboat leases which are ancillary to the lessor transport

operations of ships in international traffic. This article outlines the Commissioner’s views

on the application of the standard ships and aircraft articles in the tax treaties to which it

is a party as well as considering the major variations on the standard adoption. In doing

so, guidance is provided as to the allocation of taxing rights of ship and aircraft leasing

profits under Australia’s tax treaties.

1 Introduction

The taxation consequences of international transactions have always been complex. International shipping is no

exception.1 To this extent, the taxation treatment of leasing profits within the maritime industry has been

considered recently, both by the Court and by the Federal Commissioner of Taxation (the Commissioner). In

particular, in 2005 the Full Federal Court handed down its decision in McDermott Industries (Aust) Pty Ltd v

Commissioner of Taxation.2 In this case the question arose as to whether a fiscal non-resident had a deemed

permanent establishment in Australia under the Singapore-Australia double tax treaty, thereby giving the taxing

rights to Australia. Subsequent to, but independent of, McDermott Industries, the Commissioner released

Taxation Ruling TR 2007/10.3 This Ruling deals with the treatment of shipping and aircraft leasing profits of

United States and United Kingdom enterprises under the deemed substantial equipment permanent

establishment provision of the respective taxation treaties. Both the Federal Court decision and the opinion of

the Commissioner offer insight into how the Australian taxation regime applies to particular aspects of the

maritime industry and have added some certainty to the taxation of international shipping profits.4 However,

until recently there has been no general statement as to the taxation treatment of ship and aircraft leasing profits

under the ships and aircraft articles which are generally contained in all of Australia’s international tax treaties.

Given the fiscal significance of ship and aircraft profits, both to the Federal Government and individual

taxpayers, it is important that the application of the Australian income tax law be clarified. To this extent, the

Commissioner has addressed the uncertainty by releasing a draft Taxation Ruling. Earlier this year the

Commissioner released Draft Taxation Ruling TR 2008/D3 (TR 2008/D3) entitled ‘Income Tax: the taxation

treatment of ship and aircraft leasing profits under the ships and aircraft articles of Australia’s tax treaties’. The

aim of TR 2008/D3 is to clarify the scope of the ships and aircraft articles of the tax treaties to which Australia is

a party. Specifically, it sets out the Commissioner’s views on which profits derived from the leasing of ships or

aircraft fall within the relevant ships and aircraft profits provisions. TR 2008/D3 also considers the

circumstances under which Australia has the exclusive right to tax the profits and the method of assessment of

those profits under the relevant Income Tax Assessment Acts. While the draft taxation ruling is primarily

∗ Senior Lecturer, TC Beirne School of Law, The University of Queensland, Research Fellow, Taxation Law and Policy Research Institute,

Monash University.

1 While the specific provisions of Australia’s international tax agreements focus on shipping and aircraft, this article primarily considers the

application to the maritime industry.

2 McDermott Industries (Aust) Pty Ltd v Commissioner of Taxation (2005) 142 FCR 134.

3 Taxation Ruling TR 2007/10 Income Tax: the treatment of shipping and aircraft leasing profits of United Stated and United Kingdom

enterprises under the deemed substantial equipment permanent establishment provision of the respective tax Treaties.

4 Secondary literature provides an interpretation on these primary sources. See for example: Brabazon, M, ‘International Taxation of Cross-

Border Equipment Leasing’, (2006) 35 Australian Tax Review, 127 at 131; Burton, M, ‘The Meaning of ‘Permanent Establishment’ in

McDermott Industries Case’, CCH Tax Week, Issue 21, 9 June 2005; AUTHOR, 2007.

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