Private ruling: Company assessable income
Date of advice: 13 December 2017
Published: May 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is Company X a resident of Australia for taxation purposes? | A1: No | Q2: Does Company X have a permanent establishment in Australia? | A2: No | Q3: Is Company X’s Australian sales income assessable in Australia? | A3: No

Relevant facts and circumstances: Company X is a Country A resident company which is wholly owned by a Country A resident. Company X is registered in Country A. The company’s owner and director is a Country A resident. Company X’s centre of management is in Country A. The company’s head office is in Country A. The company does not have an establishment or employees in Australia. The company sells products to Australian customers. Products are designed and manufactured in Country A. Products are sold via online shopping; Australian customers order from the company’s website and pay in foreign currency directly into the company’s business bank account in Country A. The company imports products into Australia; the company stores it in a logistics warehouse owned by another entity. After an Australian customer places an order, the company meets the order from stock in the Australian warehouse. The company does not send goods to the Australian warehouse to fulfil an order. At present, only one product that is available on the company’s Country A based website. The company is planning to sell other items on the Company’s website to Australian customers. The company’s products are now available on the relevant Market in Australia.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 6(1) | Income Tax Assessment Act 1997 Subsection 995-1(1) | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | International Tax Agreements Act 1953

Reasons for decision: Summary: The terms resident and resident of Australia are defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). A company will be a resident if: ● it is incorporated in Australia, or ● if the company is not incorporated in Australia, but it is either: ● carrying on a business in Australia and its central management and control is in Australia, or ● carrying on a business in Australia and its voting power is controlled by shareholders who are Australian residents. Company X is not incorporated in Australia, so it is necessary to consider if the company is carrying on a business in Australia with further consideration to whether its central control and management is in Australia; or whether the voting power is controlled by shareholders who are Australian residents. Whether a company carries on business in Australia is a question of fact to be decided on the particular facts of the case under consideration. The nature and extent of activities conducted in Australia are relevant. In this case, Company X sells its product via online shopping; Australian customers order from the company’s website and the relevant Market and pay in foreign currency directly into the company’s business bank account in Country A. Company X has its head office in Country A; the director lives and works in Country A; the director controls and manages the company and the business activities of the company are carried out in Country A. Therefore, Company X is not carrying on a business in Australia. As the company is not carrying on business in Australia, it is not necessary to consider whether the company's central management and control is in Australia or if its voting power is held by Australian resident shareholders. Company X is not a resident of Australia for taxation purposes. | Detailed Reasoning - Permanent establishment and assessability of Australian source income: The assessable income of a company that is a foreign resident of Australia for taxation purposes will generally include all the company’s ordinary and statutory income from all Australian sources. In determining liability to tax on Australian sourced income, it is necessary to consider not only the income tax laws but also any applicable tax treaties contained in the International Tax Agreements Act 1953 (Agreements Act). Section 4 of the Agreement Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country A Convention is listed in section 5 of the Agreements Act. The Convention operates to avoid the double taxation of income received by entities that are residents of Australia and Country A for taxation purposes. In interpreting the wording of the tax treaty, the Commissioner accepts in Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements that it is appropriate to have reference to commentary of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital (the OECD Model Commentary). Under Article Y of the Convention, the business profits of an enterprise of Country A shall be only taxable in that country unless the enterprise carries on business in Australia through a permanent establishment situated in Australia. If so, so much of the profit of the enterprises profit attributable to the PE in Australia may be taxed in Australia. The term “permanent establishment” is defined in Article B of the Convention as a fixed place of business through which the business of an enterprise is wholly or partly carried on. A place of management, a branch, an office, a factory and a workshop are all places especially included as places of permanent establishment. Article B of the Convention provides that the term "permanent establishment" shall be deemed not to include: a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs a) to e) of this paragraph, provided that such activities are, in relation to the enterprise, of a preparatory or auxiliary character. In this case, Company X does not have an office, a branch, a factory or a workshop in Australia; all products are designed and manufactured in Country A; the products are sold via online shopping through Country A based company website and the another market. Moreover, Company X does not have employees in Australia, although the company has engaged a logistics warehouse to store products in Australia, the purpose for that is solely for storage, display or delivery of its products to Australian customers. Company X does not have a permanent establishment in Australia. Therefore, the sole taxing rights rest with Country A because the company does not derive income through any permanent establishment in Australia. Accordingly, the income derived by Company X from sales made in Australia is not assessable.