ATO ID 2005/341: Permanent Establishment: goods manufactured in Australia on behalf of a Singaporean resident
Date of decision: 12 August 2004
Year of income: Year ended 30 June 2002 Year ended 30 June 2003
Business line: Public Groups and International

Issue
Is a portion of the sale income derived by a Singaporean resident from the sale of goods manufactured by an Australian company on its behalf assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)

Decision
Yes. A portion of the sale income derived by a Singaporean resident from the sale of goods manufactured by an Australian company on its behalf is assessable under subsection 6-5(3) of the ITAA 1997.

Facts
An Australian company is a 'toll manufacturer' of the Singaporean resident. This toll manufacturer is a contract manufacturer of products where it does not take title and does not assume ownership risk in respect of raw materials, work-in-process and finished goods. The Singaporean resident owns the raw materials used to manufacture the goods. The Australian company manufactures the goods and provides the packaging materials for the Singaporean resident. The Singaporean resident pays the Australian company a toll fee for this service. The Singaporean resident owns all finished goods at the end of the manufacturing process. At the end of the manufacturing process, the Singaporean resident sells to the Australian company the finished goods that the Australian company requires for its Australian domestic market and exports the rest. The Australian company maintains a stock of goods belonging to the Singaporean resident and regularly fills orders on behalf of the Singaporean resident. All of the Australian company's revenue from manufacturing and warehousing services is derived from the Singaporean resident. It does not provide these services to any other entity.

Reasons for decision
Summary: Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year. In determining liability to tax on Australian sourced income received by a Singaporean resident, it is necessary to consider not only the domestic income tax laws but also the applicable double tax agreement contained in the International Tax Agreements Act 1953 (Agreements Act). Schedule 5 and 5A to the Agreements Act contains the agreement between Australia and Singapore and the Protocol to that agreement (Singapore Agreement). Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited provisions). Article 5 of the Singapore Agreement provides that the profits of an enterprise of Singapore shall be taxable only in Singapore unless the enterprise carries on business in Australia through a permanent establishment situated therein. The term 'permanent establishment' is defined in Article 4 of the Singapore Agreement. Article 4(5) of the Singapore Agreement deems a permanent establishment of the enterprise of the other Contracting State and provides that: A person acting in one of the Contracting States on behalf of an enterprise of the other Contracting State, other than an agent of an independent status to whom paragraph (6) applies, shall be deemed to be a permanent establishment of the enterprise in the first-mentioned Contracting State if- The Australian company fulfils paragraphs (b) and (d) of Article 4(5) of the Singapore Agreement that is maintains a stock of goods belonging to the Singaporean entity, regularly fills orders on behalf of the Singaporean entity and manufactures and processes goods. Accordingly, the Singaporean resident has a permanent establishment in Australia. The portion of the profits derived by the Singaporean resident from the sale of goods manufactured by the Australian company on its behalf that are attributable to the permanent establishment may be taxable in Australia by Article 5 of the Singapore Agreement. Article 17 of the Singapore Agreement provides that income derived by a resident of Singapore which, under Article 5, may be taxed in Australia, shall be deemed to be income from sources in Australia for Australian tax purposes. Accordingly, part of the sale income derived by the Singaporean resident taxpayer from the sale of goods manufactured by the Australian company on its behalf is assessable under subsection 6-5(3) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 subsection 6-5(3)
Subject references: Double tax agreements International tax Manufacturing Permanent establishment