Private ruling: Corporate residency - central management and control - whether a distribution warehouse is a permanent establishment under a relevant tax treaty
Date of advice: 3 July 2023
Published: 21 August 2023
Ruling period: 1 July XXXX to 30 June XXXX
Date scheme commenced: Time AAAA

Ruling: Q1: Is Company A an Australian resident for tax purposes under subsection 6(1)? | A1: Yes for Periods 1, 3 and 4. No for Period 2. | Q2: If the answer to Question 1 is 'yes', does Company A carry on business at or through a permanent establishment in the United States of America for the purposes of section 23AH? | A2: No for Periods 1, 3, and 4. Not applicable for Period 2. | Q3: If the answer to Question 2 is 'no', is Company A able to carry forward and deduct losses to future years in accordance with section 36-17 subject to Division 165? | A3: Yes, assuming Divisions 165 and 175 don't apply. Company A will be able to carry forward any tax losses incurred in Periods 1, 3 and 4 to future income years. However, Company A will only be able to deduct these losses where Divisions 165 and 175 don't operate.

Relevant facts and circumstances: 1. Company A is a limited liability company organised in the United States of America at time AAAA. 2. Company A is owned by Company B as trustee for Trust C. 3. Person D is, and has always been, the Chief Executive Officer of Company A and the sole director of Company B. 4. Person D was a resident of Australia for tax purposes for all the periods this ruling applies to. 5. Person D has always been Company A's sole responsible decision maker. Person D sets its business direction, operational policy, and makes all high-level decisions. 6. Company A is part of a group that includes Company E. Company E is a company incorporated in Australia that specialises in X products. Company E's goods are manufactured in Country F, and it mainly sells to the Australian market. Company A was set up to be the USA distributor of X products. It ordinarily purchased its products from Company E. However, occasionally, the manufacturing contract was between Company A and the Country F manufacturer. 7. An Advisory Board for the Group was established in time EEEE to give advice to Person D. However, Person D remained the sole decision maker. The Advisory Board included Person D, professional advisers, and a senior employee in the Group. Its function was to develop and drive strategy for the Australian and USA businesses. It gave counsel and recommendations only and didn't make decisions. Person D remained the sole decision maker for the Group, including Company A. Person D always exercised independent judgment when considering the Board's recommendations. 8. For context, we'll summarise some background about the Group's business. • Australia is the main market for the Group. • Most (about X%) of the Group's customers are in Australia. • <redacted for privacy reasons> • The Group's products are manufactured in Country F. • Company E's premises and staff are all in Australia. It has no premises, staff, or assets overseas. It engages agents when undertaking activities in other countries. 9. Company A has two main channels for distributing products to the USA market. • It secures commercial clients to sell products. • It makes online sales directly to consumers. 10. Company A's operations have changed several times in its history. We've grouped this history into four periods. These changes relate to premises, warehousing and distribution arrangements, staff, and Person D's locations. Table 1 gives details. Table 1: Group's USA activities across 4 periods from time AAAA to present Table 1: Group's USA activities across 4 periods from time AAAA to present Topic Period 1 time AAAA to time BBBB Period 2 time BBBB to time CCCC Period 3 time CCCC to time DDDD Period 4 time DDDD to present Person D's location Resided in Australia and controlled Company A's operations from Company E's Australian offices. Person D visited the USA X times for training and trade shows. Relocated to the USA to manage Company A's operations, and to establish a warehouse facility. Relocated back to Australia. Visited the USA on an ad hoc basis. There were X trips totalling X days across Period 3. The purpose of these trips was to attend trade shows and visit the warehouse. Person D remained in Australia and hasn't been to the USA since Period 3. Products: manufacturing and purchase arrangements All products manufactured in Country F. The manufacturing contract was generally between the Country F manufacturer and Company E, with Company A acquiring the stock from Company E. Occasionally the contract was directly between the Country F manufacturer and Company A. Negotiations and arrangements were conducted from Australia, except for Period 2, when some were made in the USA. Warehousing, storage, and distribution Products were sent directly to USA clients from the Australian warehouse using third-party logistics providers - there was no storage in the USA. Company A starting arranging this from the USA once it started renting the serviced office. Inventory was moved to the USA to have on hand there, stored using third-party logistics providers. Used the USA warehouse to store products. The USA warehouse completed the picking, packing, and arranged products to be shipped to customers. The warehouse operations stopped. Used third-party logistics providers. Staff/ agents/ contractors Used an agent or contractor in the USA to assist with distribution services; that agent had no authority to conclude contracts. The agent stopped working for Company A. Company A started to employ USA-based staff members. Continued to employ USA based staff members, who worked out of the USA warehouse. There were up to X staff at the USA warehouse at any one time. The USA staff duties covered distribution and administration functions. No staff in the USA. Premises None. Rented a serviced office in the USA. (This ended at time CCCC when the warehouse opened.) Rented a warehouse in the USA. None. Shipping products to customers All goods were shipped directly from Australia to the USA customers, using third-party logistics. This was arranged from Australia. Goods were shipped from the third-party logistics storage in the USA to customers, using third party-logistics providers. This was arranged from Australia and the USA. Goods shipped from the USA warehouse operated by Company A. The USA staff picked, packed, and organised outbound shipping to customers. Warehouse closed - returned to using third-party logistics. USA sales Conducted from Australia. Conducted from the USA. Conducted from Australia. Shipping products to the USA Arranged from Australia, except for Period 2, when Person D was in the USA. Generally products were shipped from Country F to Australia, then from Australia to the USA. However, occasionally products were shipped direct from Country F to the USA. All logistics decisions were made in Australia, except for Period 2, when some decisions were made in the USA. Web and outbound marketing Completed from Australia. 11. In Periods 1,3, and 4, Person D entered into all Company A's significant contracts and made all its high-level decisions from Australia. Only in Period 2 did Person D enter into any significant contracts or make any high-level decisions for, or on behalf of, Company A while in the USA. 12. During Period 2, Person D occupied rented office space in the USA for general business management and to meet larger potential clients. 13. Company A's premises in the USA during Period 3 was a rented warehouse of X square metres, with a small adjoining office. 14. Company A never maintained premises other than the rented office in Period 2 and the rented warehouse in Period 3. 15. Person D decided to establish the USA warehouse because of a change in strategic direction. Person E decided to reduce Company A's focus on low-margin, larger clients, and redirect its focus to consumer customers. Person D considered it was important to have a USA warehouse presence to run a successful consumer business. This would allow it to reduce third-party logistics shipping times. 16. Company A engaged staff who undertook duties at the warehouse in the USA during Periods 2 and 3. • A total of X staff were employed across the period spanning time BBBB through time DDDD. • Up to X staff were employed at any one time. • Their duties at the serviced office and warehouse included administration tasks (like generating invoices to accompany deliveries), packing samples and orders, answering phones, phone orders, and outbound freight administration. • They weren't responsible for sales or concluding contracts. • One was a warehouse team leader who also did some photography for marketing purposes (but no other advertising or sales tasks beyond that). 17. Company A didn't use its USA warehouse to make or conclude sales. • Company A generated its sales predominantly online or through Person D's trips to trade shows. • It also generated some sales through wholesale agreements and customers who dealt directly with Person D. • While customers occasionally visited the warehouse, this was rare and only for the purpose of viewing displayed goods. 18. Phone calls involving warehouse staff were mainly about delivery arrangements. • The USA website had a phone number which was routed to the warehouse. • Some incoming calls were about organising pick-up times from couriers and logistics providers. • Other calls were customer questions about delivery. Customers often called the warehouse to complain about missing or late delivery. Staff would take details and follow up with the courier or logistics provider to locate the goods. When goods went missing, warehouse staff contacted Company E to request orders to be reshipped. • Sometimes customer calls were about returns or changes to orders. The warehouse staff were authorised to organise returns and credits under the returns policy. One customer often rang to change orders, and warehouse staff were authorised to process those changes. • The warehouse also received phone requests for samples from an established customer; they sent out samples in response. • Warehouse staff also received calls from two account customers who didn't use email or web-based ordering. These customers sent through orders by fax, and then called to confirm the orders had been received. Warehouse staff would take the call and then process the order. Person D had already agreed on the pricing and contract terms, so these phone calls were mainly about delivery. 19. The warehouse staff didn't deal with general questions or complaints, beyond delivery. They weren't trained to deal with complaints or questions about Group products. They passed on product or sales enquiries to the Australian sales team (employed by Company E). The USA staff received these questions only rarely (perhaps once every 2 or 3 weeks), because all website questions about products were handled by the Australian sales team. When a product question call came through to the warehouse, the USA staff would arrange for the Australian team to call the customer back. 20. In time DDDD the warehouse was shut down because it was taking too much money and management focus away from Company E. The Advisory Board advised Person D to focus on the Australian market. 21. Company A made losses in every income year from XXXX through to XXXX. Assumptions • Company B didn't carry on business in Australia, except to the extent that the central management and control of its activities may have occurred here. • Company B wasn't incorporated in Australia. • Company B's losses are tax losses for the purposes of section 36-10 (meaning that they are calculated correctly, accounting for all assessable income, exempt income, and allowable deductions under Australian tax law) in the relevant periods.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 6 | Section 23AH | Income Tax Assessment Act 1997 Section 36-10 | Section 36-17 | Section 36-25 | Section 960-115 | Section 995-1 | OECD Model Convention | Article 5 | USA Convention | Article 5 | Detailed reasoning | In these reasons: | • un-hyphenated provisions (eg, section 23AH) are in the Income Tax Assessment Act 1936 | • hyphenated provisions (eg, section 36-10) are in the Income Tax Assessment Act 1997 | • Divisions 165 and 175 are in the Income Tax Assessment Act 1997 • 'DTA' means 'double tax agreement' | • 'USA DTA' means the Convention Between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, as amended by the United States Protocol (No. 1) | • 'OECD model' means the OECD Model Tax Convention on Income and on Capital 2017 | • 'PE' means 'permanent establishment' | • 'Period 1' means from time AAAA until time BBBB | • 'Period 2' means from time BBBB until time CCCC | • 'Period 3' means from time CCCC until time DDDD | • 'Period 4' means from time DDDD until the date the applicant applied for this ruling. | Question 1 | Is Company A an Australian resident for tax purposes under subsection 6(1)? | Summary | 1. Company A was a resident of Australia under subsection 6(1) in Periods 1, 3 and 4 because it carried on business in Australia and had its central management and control in Australia. The central management and control of Company A was undertaken exclusively by Person D, who made all high-level decisions and set the general strategy. The central management and control of Company A was located where Person D was located. For Periods 1, 3 and 4 Person D principally lived in Australia meaning Company A carried on a business in Australia and had its central management and control in Australia. | 2. During Period 2, Person D principally lived in the USA, meaning that Company A wasn't a resident of Australia because it neither carried on business in Australia, nor had its central management and control in Australia. | Detailed reasoning | Companies not incorporated in Australia will be Australian residents if they carry on business and have their central management and control in Australia. | 3. Section 6 defines when individuals and companies will be treated as Australian residents for Australian tax purposes. | 4. Company includes entities incorporated as companies. Section 6 says company has the meaning given by section 995-1, which says 'company' includes a body corporate. 'Body corporate' isn't defined in either tax act, but ATO guidance says it means an artificial entity with a separate legal existence. See MT 2006/1 [1] at paragraphs 30-34. | 5. Company A is a company. It's organised as a limited liability company under USA law, so it's an artificial entity with separate legal existence. That makes it a body corporate, so it's treated as a company for Australian tax purposes. | 6. A company will be treated as an Australian resident if any of three tests apply. The effect of the definition of ' resident or resident of Australia' in section 6 is that a company will qualify if it's: | • incorporated in Australia, or | • not incorporated in Australia, but carries on business in Australia, and has its central management and control in Australia, or | • not incorporated in Australia, but carries on business in Australia, and has its voting power controlled by shareholders who are residents of Australia. | 7. The second and third corporate residency tests are relevant. Company A is organised under USA law. (We assume it wouldn't be incorporated in Australia.) Company A will be an Australian resident if it carried on business in Australia, and had either central management and control in Australia, or had its voting power controlled by Australian resident shareholders. | 8. As a preliminary point, the ATO view is that carrying on a business is a question of fact, determined by balancing several indicia, including intention to make a profit, size and scale, whether activities are repeated and regular, and whether activities are conducted in a business-like manner. [2] | 9. There's ATO guidance relevant to the second corporate residency test. TR 2018/5 [3] gives the ATO view about when a company has its central management and control in Australia. We'll summarise some propositions made by this ruling. | • If a company carries on business, and has its central management and control in Australia, it will meet the second corporate residency test. It will be carrying on business in Australia. This is because central management and control of a business is part of carrying on business. [Paragraphs 7-8] | • Central management and control means the control and direction of a company's operations. This is about making high-level decisions that set the company's general policies and determine the types of transactions it enters. It isn't usually about conducting day-to-day operations. [10-13] | • Who exercises central management and control is a question of fact. As a starting point, companies are normally controlled by their directors, who have legal power to control the company. However, legal power isn't decisive; companies may be effectively controlled by other entities. [19-29] | • While no single consideration is decisive, the location of central management and control is generally about where the decision makers meet and exercise control from. [34-38] | Company A meets the second corporate residency test for Periods 1, 3, and 4: Person D exercised central management and control over Company A from Australia, which means it was also carrying on business in Australia. | 10. Person D alone exercised central management and control over Company A. He or she has always been Company A's sole responsible decision maker. Person D set its business direction, operational policy, and made all its high-level decisions. While Person D received advice from the Advisory Board, he or she always exercised independent judgment when considering that advice. Applying TR 2018/5, Person D, and nobody else, exercised central management and control in the sense of the second corporate residency test. | 11. The location of central management and control would be where Person D exercised that control from. | 12. It follows that Company A's central management and control was in Australia in Periods 1, 3, and 4, and the USA in Period 2. | • Person D was mostly in Australia for Periods 1, 3, and 4, and controlled Company A's operations from Australia during those periods. Person D only made short visits to the USA in Periods 1 and 3, and didn't enter significant contracts or make any high-level decisions during those USA visits. Person D concluded all significant contracts from Australia. | • In Period 2, Person D was located in the USA and controlled Company A's operations from the rented office in the USA. Person D entered some negotiations and conducted some sales and shipping arrangements from the USA during this period. | • We infer that Person D, as the sole decision maker, would have made most high-level decisions about Company A in the place he or she lived and worked. | 13. This means that Company A meets the second corporate residency test for Periods 1, 3, and 4. | • Company A was carrying on business. Company A was clearly carrying on business because it sold commercial products to customers in a systematic, business-like way on a significant scale. | • Company A's central management and control was in Australia in Periods 1, 3, and 4. | • Following TR 2018/5, this means Company A was carrying on business in Australia for Periods 1, 3, and 4. The ATO view is that simply managing and controlling a business is part of carrying on business. | • Company A didn't meet the second corporate residency test in Period 2 because its central management and control was in the USA, not Australia. | 14. The third corporate residency test isn't met for Period 2. We've assumed that Company A's activities, apart from Person D's control, weren't significant enough to constitute carrying on business in Australia. Therefore, Company A wouldn't have been carrying on business in Australia for Period 2, because Person D was exercising control from the USA. | Conclusion: Company A was an Australian resident for the periods Person D was exercising central management and control from Australia. | 15. It follows that Company A is an Australian resident for Periods 1, 3, and 4, but not Period 2. Company A meets the second corporate residency test for Periods 1, 3, and 4 because Person D was exercising central management and control from Australia, and that also means it was carrying on business in Australia. It doesn't meet the corporate residency tests in Period 2, because it: | • wasn't incorporated in Australia, | • didn't have its central management and control in Australia, and didn't carry on business in Australia. | Question 2 | If the answer to Question 1 is 'yes', does Company A carry on business at or through a permanent establishment in the United States of America for the purposes of section 23AH ? | Summary | 16. Company A had a PE in the USA in Period 2. | • Section 23AH adopts the USA DTA meaning of a PE. | • Company A didn't have any fixed place of business in either Periods 1 or 4. | • In Period 2, it maintained a rented office. That qualifies as a PE under the USA DTA as a fixed place of business, and as an office. | • In Period 3, it maintained a rented warehouse, almost exclusively for storing, displaying, and delivering its products to customers. The only other activities were preparatory or auxiliary. | • Therefore, the warehouse is excluded as a PE under paragraph 5(3) of the USA DTA. | • It follows that Company A will be treated as having a PE for Period 2 for the purposes of section 23AH, but not for Periods 1, 3, and 4. | Detailed reasoning | Section 23AH treats income from a resident company's foreign branch as non-assessable non-exempt income. | 17. Foreign branch income derived by resident companies may be treated as non-assessable non-exempt income. The effect of subsection 23AH(2) is that a resident company's foreign income will be non-assessable non-exempt income when the following conditions are met. | • First, the income must be derived when the company is a resident. | • Second, the income must be derived in carrying on business at or through a PE of the company. | • Third, that PE must be carried on in a listed or unlisted country. | 18. There are some exceptions where the rule in subsection 23AH(2) doesn't apply, but they aren't immediately relevant to the question. [4] Question 2 asks whether Company A has a PE for the purposes of applying section 23AH. | 19. For this purpose, PE has the meaning given by the relevant DTA, if there is one. Subsection 23AH(15) says for the purposes of the section, PE, in relation to a listed [5] or unlisted country [6] , if there is a DTA in relation to that country, has the same meaning as in the DTA. If there isn't a DTA, then PE takes its definition under subsection 6(1). | 20. The ruling question identifies the USA as the relevant country, so we'll focus on the meaning of PE under the USA DTA. | Broadly, under the USA DTA, PE means a fixed place of business, but excludes facilities solely used for storing, displaying, or delivering the enterprise's goods. | 21. In the USA DTA, PE broadly means a fixed place of business, with extensions and exclusions. This meaning is covered by Article 5. Paragraph 5(1) says a PE means a fixed place of business through which the business of an enterprises is wholly or partly carried on. Paragraphs 5(2) and 5(4) list circumstances which are included as or deemed to be PEs for the purposes of the DTA, including a place of management, a branch, and an office. Paragraphs 5(3), 5(5), and 5(6) exclude other circumstances from being PEs. | 22. In the USA DTA, undefined terms, when applied by one of the contracting states, take their meaning from their domestic law unless the context requires otherwise: see Article 3(2). | 23. We summarise and apply the elements of the USA DTA PE provision in Table 2. | 24. The ATO has guidance about how to interpret DTAs. We'll summarise some propositions made in TR 2001/13. [7] | • DTAs may contain variations in terms from other DTAs because each is negotiated in a different background, including model tax conventions of the OECD and UN. [46] | • Given that background, DTAs cannot always be expressed with the same precision as domestic tax legislation. [47] | • DTAs aren't drafted uniformly. This means that different wording may represent the same intended meaning, but in other cases different wording may represent specific negotiating intentions. It's even possible that the same wording could mean different things in different DTAs. [48-51] | • The starting point for interpreting a DTA should always be the definitions in the treaty itself. [62] | • DTAs may need to be interpreted more flexibly with reference to their object and purpose, to 'smooth over' or accommodate imprecision, gaps, and imperfections. [85, 92-94] | • OECD commentaries and UN materials are relevant where the DTA reflects the relevant models. [85] | • However, the text of the DTA has primacy and the commentaries shouldn't be considered to the exclusion of words in the DTA. [92, 105A] | 25. We haven't relied on OECD materials in this case because they reflect different wording to the USA DTA. The OECD model's [8] PE article has a provision with a similar effect to paragraph 5(3) in the USA DTA: Article 5(4) of the OECD model deems certain listed items not to be a PE, including the use of facilities for storage, display, or delivery. However, all listed items have a proviso. They're only excluded "provided that such activity or...the overall activity of the fixed place of business, is of a preparatory or auxiliary character." In the USA DTA, this requirement that items be of a 'preparatory or auxiliary character' is only included in paragraph 5(3)(e). It isn't phrased as a proviso which limits paragraphs 5(3)(a) or (b). Because of this difference, we don't think the OECD model or any commentary upon it would be a reliable reference or guide in this private ruling. | Company A's leased office was a PE in Period 2, but the warehouse wasn't. While they're both fixed places of business, the warehouse meets the PE exception for storing, displaying, and delivering the enterprise's goods. | Table 2: applying the USA DTA meaning of PE to Company A | Table 2: applying the USA DTA meaning of PE to Company A | Element of the USA DTA meaning of PE in Article 5 | Application to Company A | Paragraph 5(1): PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on. | Met for both Period 2 and Period 3. Both the rented office and warehouse in the USA represent fixed places of business. Company A's business was partly carried on in both locations for the relevant periods. | Not met for Periods 1 and 4 because Company A didn't have any premises which could be classified as a fixed place of business in the USA. | Paragraph 5(2): PE includes a list of specified things, including: | • a place of management | • a branch | • an office. | 'Branch' isn't defined in either the USA DTA or Australian Tax legislation. | The Macquarie Dictionary suggests 'branch' may mean a local operating division of a company. [9] | Met for both Period 2 and Period 3. The rented office and warehouse both functioned as offices, and both may also qualify as a 'branch' of the Group or Company A. | Paragraph 5(3): notwithstanding paragraphs 5(1) and 5(2), an enterprise shall not be regarded as having a PE solely as a result of one or more of a list of things, including: | • the use of facilities for the purpose of storage, display, or delivery of goods or merchandise belonging to the enterprise: subparagraph (a) | • the maintenance of a stock of goods or merchandise belonging to the enterprise for the purpose of storage, display, or delivery: subparagraph (b) | • the maintenance of a fixed place of business for the purpose of activities which have a preparatory or auxiliary character, such as advertising or scientific research, for the enterprise: subparagraph (e). | Paragraph 5(3) operates to exclude the rented warehouse from being a PE. The warehouse was primarily used to store, display, and deliver Company A's products. To the extent other things happened at the warehouse, we accept that they had a preparatory or auxiliary character. See our discussion at paragraphs 26 through 29. | Paragraph 5(4): notwithstanding paragraphs (1) and (2), an enterprise of shall be deemed to have a PE in the other state if a list of things happen including: | • carrying on business through a person (other than an agent) who has authority to conclude contracts, unless those activities are limited to those mentioned in paragraph (3) | • maintaining substantial equipment for rental purposes for more than 12 months | • supervising a building site or construction, assembly, or installation project for more than 9 months in a 24-month period | • having goods or merchandise purchased in the other state (without prior substantial processing outside that state), or produced on its behalf in the other state, where the good or merchandise is subjected to substantial processing in the other state by an enterprise. [10] | Not relevant. For Period 2, the rented warehouse is already a PE under paragraphs (1) and (2). For Period 3, the warehouse is excluded from being a PE under paragraph 5(3). Paragraph 5(4) wouldn't operate. | Paragraph 5(5): an enterprise of one of the states shall not be deemed to have a PE in the other state merely because it carries on business in the other state through a broker, general commission agent, or any other agent of independent status, acting in the ordinary course of their business. | Company A won't be deemed to have a PE in the USA in Periods 1 and 4 to the extent they engaged an agent or contractor to manage distribution operations. | Paragraph 5(6): (to loosely paraphrase) a company won't be taken to carry on business in another state simply because it controls or is controlled by a company which is a resident in that other state. | Not relevant because Company A isn't controlled by a USA resident company. | 26. We think that on these facts, Company A's warehouse isn't a PE. We've characterised it as being solely used for activities which fit within subparagraphs 5(3)(a), (b), and (e) for two reasons, as we'll explain in the following paragraphs. First, the warehouse's primary function is storage, display, and delivery in the sense of paragraphs (a), and (b). Second, Company A didn't undertake any significant business activities at the warehouse, except ones we characterise as either having a preparatory or auxiliary character or being incidental to the storage, display, and delivery function. That means Company A won't be taken to have had a PE in the USA simply because of the USA warehouse. | 27. First, we think the warehouse's primary function qualifies for the exemptions under the first two paragraphs about storing, displaying, and arranging delivery. The warehouse was established and used to allow the Group to keep the X products in the USA as stock on hand until they could be shipped to customers. Some customers also viewed the goods on site. Those X products were clearly goods or merchandise because they're items Company A sells to customers. They belonged to Company A because Company A purchased them from Company E. Therefore, the warehouse was a facility for storing, displaying, and delivering goods belonging to Company A, and a place for maintaining a stock of those goods for the same purpose. | 28. Second, almost all of Company A's activities at the warehouse were closely connected with the storage, display, and delivery functions. | • The warehouse staff's primary duties were to pick, pack, and arrange shipping of the products to customers. | • Most phone calls they made or received were about arranging couriers to ship the goods, handling customer queries about delivery, or arranging returns. | • The administrative tasks were limited to printing invoices to accompany deliveries. | • All those activities are part of the warehouse's delivery function. | • Warehouse staff weren't responsible for sales or concluding contracts. While staff sent out some samples and were authorised to make changes to orders over the phone, these duties were limited to specific customers. We think that on these facts, they're best treated as supporting the delivery function rather than being part of Company A's sales or other business activities. | • According to the facts, the only other activity at the warehouse was when the manager took photos for marketing purposes. | 29. That photography would be best characterised as preparatory or auxiliary. The facts suggest those tasks were a minor part of a single staff member's duties. Using an internal staff member to take photos for marketing purposes is preliminary to substantive selling activity, not a core business function. We think that would be covered by paragraph 5(3)(e), not significant enough (on its own) to make the warehouse a PE. | 30. It follows that Company A's leased office was a PE, but the warehouse wasn't. The office qualifies as a PE, and the exclusions aren't relevant to it. But the warehouse fits within the exclusions in paragraph 5(3) because it was used for storage, display, and delivery of its own goods, and some other activities which are preparatory and auxiliary. | 31. Our conclusion is limited to these facts and the USA DTA. On the facts, Company A's activities at the warehouse were almost exclusively confined to storage, display, and delivery. It didn't have any substantive business activities outside that; other activities were so limited that they are best treated as preparatory or auxiliary. We may have reached a different conclusion under different DTAs. Company A's storage, display, and delivery function was a substantial part of its business as the Group's USA distributor, suggesting it was more than preparatory or auxiliary. It's therefore possible that the warehouse wouldn't be excluded as being a PE under a DTA which had a PE provision corresponding to Article 5(4) of the OECD model. | Conclusion: Company A had a PE in the USA in Period 2, but not in Periods 1, 3, or 4. | 32. Company A had a PE in the USA in Period 2, but not Periods 1, 3, or 4. Section 23AH adopts the USA DTA meaning of a PE. Company A didn't have any fixed place of business in either Periods 1 or 4. In Period 2, Company A maintained a rented office. That qualifies as a PE under the USA DTA as a fixed place of business, and as an office. However, in Period 3, it maintained a rented warehouse, almost exclusively for storing, displaying, and delivering its products to customers. The only other activities were preparatory or auxiliary. Therefore, the warehouse is excluded as a PE under paragraph 5(3) of the USA DTA. Company A will be treated as having a PE for Period 2 for the purposes of section 23AH, but not for Periods 1, 3, and 4. | Question 3 | If the answer to Question 2 is 'no', is Company A able to carry forward and deduct losses to future years in accordance with section 36-17 subject to Division 165? | Summary | 33. Yes, assuming Divisions 165 and 175 don't apply. Company A will be able to carry forward any tax losses from income years corresponding to Periods 1, 3, and 4 to future income years. It may be able to apply those losses as a deduction against assessable income if it meets the conditions of section 36-17. However, it would need to consider whether Divisions 165 or 175 would apply to deny the losses being deducted in those future years. | Detailed reasoning | 34. Very broadly, Division 36 is about deducting tax losses from earlier income years. | 35. Section 36-10 says you calculate a tax loss for an income year by adding up amounts you can deduct (excluding tax losses for earlier income years), before subtracting your total assessable and exempt income. | 36. Section 36-17 allows corporate tax entities to deduct tax losses from earlier income years in later income years using a method statement that applies if they meet conditions. We'll loosely summarise some of those conditions. | • The corporate tax entity must be a corporate tax entity at any time in the later year. | • The entity must choose to deduct an amount of the loss if its assessable income exceeds its total deductions. | • There are specific rules applying where the entity has net exempt income or excess franking offsets. | • Tax losses can only be deducted if they haven't already been utilised. | 37. Corporate tax entity includes companies: see section 960-115. | 38. Company A is a corporate tax entity because it's a company. See our reasoning in Question 1 at paragraphs 3 to 5. | 39. Section 36-25 lists special provisions limiting access to tax losses, two of which are relevant to companies. Very broadly: | • Division 165 requires companies to pass either a same (or similar) business test or an ownership continuity test before it can deduct a tax loss. | • Division 175 contains integrity provisions that allow the Commissioner to disallow tax losses or deductions if income or deductions are injected into a company in circumstances which create a tax benefit. | 40. Company A made losses in every income year from XXXX through to XXXX. | 41. Each loss will be a tax loss for section 36-17 purposes to the extent they were made up of amounts that were allowable deductions that exceeded Company A's assessable income and exempt income for the corresponding periods. | 42. It follows that Company A can carry forward any tax losses from income years corresponding to Periods 1, 3, and 4 [11] and may be able to apply those losses as deductions to reduce assessable and exempt income in future income years. | 43. However, Company A won't be able to deduct those losses against income in future years if Divisions 165 or 175 apply. Whether those Divisions could apply would depend on the facts and circumstances in the relevant future income year. Company A would need to test its eligibility to deduct losses against those provisions during the relevant income years. | [1] Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the morning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number. | [2] See generally Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? and Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? | [3] Taxation Ruling TR 2018/5 Income tax: central management and control test of residency. | [4] Those exceptions include when the PE doesn't pass an 'active income' test and the foreign income is adjusted tainted income, or alternatively, where the income is branch hybrid mismatch income: see subsections 23AH(4A), (5), and (7). | [5] The USA is a listed country. Subsection 23AH(15) says listed country has the same meaning as in Part X. Section 320 (in Part X) says 'listed country' has the meaning given by regulations. Section 19 of the Income Tax Assessment (1936 Act) Regulation 2015 lists the USA as a listed country. [6] Broadly, section 320 says unlisted countries are foreign countries that aren't listed countries. | [7] Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements. | [8] OECD (2019) Model Tax Convention on Income and on Capital 2017 (Full Version), OECD Publishing, accessed at https://www.oecd.org on 23 June 2023. | [9] Macquarie Dictionary Publishers (2023) The Macquarie Dictionary online, accessed at www.macquariedictionary.com.au on 22 June 2023 (entry for 'branch' ). | [10] The first enterprise must participate directly or indirectly in the management, control, or capital of the other enterprise (or the same people participate in those things for both enterprises). | [11] For completeness, losses from Period 2 are unlikely to reflect tax losses, because any losses our outgoings from Period 2 would likely have been incurred to gain or produce income that was non-assessable non-exempt under section 23AH.