ATO ID 2003/75: Offshore Banking Unit: Investment advice on behalf of a foreign permanent establishment of an Australian resident
Date of decision: 26 November 2002
Year of income: Other/Substituted Accounting Period 2002
Business line: Public Groups and International

Issue
Can the management of a portfolio investment provided for the benefit of a foreign permanent establishment of an Australian resident, constitute an 'advisory activity' in terms of subsection 121D(7) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
No. The portfolio investment management for a permanent establishment of an Australian resident is not an 'advisory activity' for the purposes of subsection 121D(7) of the ITAA 1936 as the advice is not made to an 'offshore person' but rather on behalf of, an 'offshore person'.

Facts
The taxpayer is an Australia resident company and an Offshore Banking Unit (OBU). The taxpayer acts as a responsible entity or manager for a number of Australian resident, publicly offered unit trusts. Some of these trusts invest solely in foreign assets, in non-Australian currency. One of the responsibilities of the taxpayer as fund manager for non-resident investors is to provide investment advice in accordance with the approved mandate which includes analysis and stock selection through to the activity of buying and selling equities on behalf of the investors. One of the investors in the unit trusts is a foreign branch of an Australian resident company.

Reasons for decision
Summary: Subsection 121D(7) of the ITAA 1936 provides the meaning of 'advisory activity' for the purposes of qualifying as an offshore banking (OB) activity under paragraph 121D(1)(f) of the ITAA 1936. In addition, to qualify as an OB activity, it must be done by the OBU [1] (subsection 121D(1) of the ITAA 1936). An 'advisory activity' is defined under subsection 121D(7) of the ITAA 1936 to be the giving of investment or other financial advice to an offshore person. However, where the advice relates to the making of a particular investment, the investment must be of a kind that is referred to in subsection 121D(6) of the ITAA 1936. Subsection 121D(6) of the ITAA 1936 provides that an 'investment activity' is the making (but not managing), as a broker or agent for, or trustee for the benefit of, an offshore person to whom paragraph 121E(a) of the ITAA 1936 applies. In addition, the investment is not made in Australian currency; and if it involves the purchase of any thing, that it is either a share of a non-resident company, a unit in a non-resident trust or a thing not located in Australia. 'Offshore person' is defined in section 121E of the ITAA 1936 to include: The foreign branch of the Australian resident company is a permanent establishment of the company and is a 'resident of Australia' for the purposes of the definition of that term in subsection 6(1) of the ITAA 1936. The foreign branch would therefore qualify as an 'offshore person' under paragraph 121E(b) but not paragraph 121E(a) of the ITAA 1936. Subsection 121D(7) of the ITAA 1936 states the type of advice to be provided is 'investment or other financial advice'. The advice must be provided to an offshore person. The taxpayer's role and responsibilities as fund manager for non-resident investors consists of (amongst other things) providing investment advice in accordance with the approved mandate which includes analysis and stock selection through to the activity of buying and selling equities on behalf of the investors. This is providing investment advice on behalf of an offshore person and not to an offshore person as required by subsection 121D(7) of the ITAA 1936. Accordingly, as the advice is made on behalf of, and not to the foreign branch, it does not qualify as an OB 'advisory activity' for the purposes of subsection 121D(7) of the ITAA 1936. Note: Portfolio investment management as an OB activity is provided for under subsection 121D(6A) of the ITAA 1936. However, this activity is restricted to non-residents and therefore does not apply to the taxpayer.

Legislative references: Income Tax Assessment Act 1936 subsection 6(1) subsection 121D(1) paragraph 121D(1)(f) subsection 121D(6) subsection 121D(6A) subsection 121D(7) section 121E paragraph 121E(a) paragraph 121E(b)
Related public rulings and determinations: Taxation Determination TD 93/133 | Taxation Determination TD 93/207
Subject references: Offshore banking Offshore banking units Offshore banking activities Unit trusts Investment trusts