Private ruling: Residency, permanent establishment, source and assessability of income
Published: November 2014
Ruling period: A number of income years
Date scheme commenced: During the 2013 income year

Ruling: Q1: Is Finance Co a foreign resident for the purposes of section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is Finance Co a resident of an overseas country for the purposes of that country's Double Tax Agreement (DTA)? | A2: Yes. | Q3: Does Finance Co have a permanent establishment in Australia for the purposes of that country's DTA? | A3: No. | Q4: Does Finance Co's assessable income include only its ordinary and statutory income derived indirectly or directly from all Australian sources and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source in accordance with subsections 6-5(3) and 6-10(5) of the ITAA 1997? | A4: Yes.

Relevant facts and circumstances: 1. Finance Co is a company incorporated in an overseas country, and also has its effective place of management in that overseas country. 2. Finance Co is treated as a tax resident of that overseas country. 3. Finance Co is a member of Overseas Group. 4. Finance Co is the financing arm of Overseas Group. 5. Finance Co has no presence in Australia. 6. Finance Co provided finance to an entity within Overseas Group under a loan agreement executed in the overseas country. 7. Interest was payable to Finance Co under this agreement.

Relevant legislative provisions: Paragraph 6(1)(b) of the ITAA 1936 | Subsection 6-5(3) of the ITAA 1997 | Subsection 6-10(5) of the ITAA 1997 | Subsection 995-1(1) of the ITAA 1997

Reasons for decision: Summary: Yes. Finance Co is a foreign resident for the purposes of section 995-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 995-1(1) of the ITAA 1997 provides that 'foreign resident' means a person who is not a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936). For the purposes of the ITAA 1936, paragraph 6(1)(b) of the ITAA 1936 defines a 'resident of Australia', in respect of a company, as a company which is incorporated in Australia, or which, not being incorporated in Australia carries on a business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia. Finance Co is a company incorporated in an overseas country. Furthermore, Finance Co's effective place of control and its business is carried on in that overseas country, and it is wholly owned by a resident company of that overseas country. Finance Co does not therefore meet the definition of 'resident of Australia' under paragraph 6(1)(b) of the ITAA 1936, and as such, is a 'foreign resident' for the purposes of section 995-1 of the ITAA 1997. | Detailed Reasoning - Question 2: Is Finance Co a resident of an overseas country for the purposes of that country's DTA? | Summary: Yes. Finance Co is a resident of an overseas country for the purposes of that country's DTA. | Detailed Reasoning - Detailed reasoning: Question 1 above confirms that Finance Co is not a resident of Australia for Australian tax purposes and that it is in fact a foreign resident for Australian tax purposes. As such, Finance Co does not satisfy the definition of a resident of Australia for the purposes of the overseas country's DTA. As the overseas country's DTA provides that a person is a resident of the overseas country, if the person is a resident of that overseas country for the purposes of its tax, Finance Co is treated as a tax resident of that overseas country for the purposes of its DTA. | Detailed Reasoning - Question 3: Does Finance Co have a permanent establishment in Australia for the purposes of the overseas country's DTA? | Summary: No. Finance Co does not have a permanent establishment in Australia for the purposes of the overseas country's DTA. | Detailed Reasoning - Detailed reasoning: 'Permanent establishment' is a defined term under the overseas country's DTA. Finance Co does not meet any elements of this definition. Finance Co does not therefore have a permanent establishment in Australia for the purposes of the overseas country's DTA. | Detailed Reasoning - Question 4: Does Finance Co's assessable income include only its ordinary and statutory income derived indirectly or directly from all Australian sources and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source in accordance with subsections 6-5(3) and 6-10(5) of the ITAA 1997? | Summary: Yes. Finance Co's assessable income only includes its ordinary and statutory income derived indirectly or directly from all Australian sources and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source in accordance with subsections 6-5(3) and 6-10(5) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(3) of the ITAA 1997 provides that: If you are a foreign resident, your assessable income includes: (a) the ordinary income you derive directly or indirectly from all Australian sources during the income year; and (b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source. Subsection 6-10(5) of the ITAA 1997 further provides that: If you are a foreign resident, your assessable income includes: (a) your statutory income from all Australian sources; and (b) other statutory income that a provision includes in your assessable income on some basis other than having an Australian source. Question 1 above confirms that Finance Co is a foreign resident for Australian tax purposes. As such, subsections 6-5(3) and 6-10(5) of the ITAA 1997 apply to Finance Co such that its assessable income only includes its ordinary and statutory income derived indirectly or directly from all Australian sources and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source in accordance with subsections 6-5(3) and 6-10(5) of the ITAA 1997.

Is Finance Co a foreign resident for the purposes of section 995-1 of the ITAA 1997?