Private ruling: Residency and FITO
Published: January 2014
Ruling period: Year ended 30 June 2013.
Date scheme commenced: 1 July 2012.

Ruling: Questions and answers: | 1. Is C Limited an Australian resident for taxation purposes? | Yes | 2. Is C Limited entitled a Foreign Income Tax Offset in relation to tax paid in the overseas country? | No


Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 6(1). | Income Tax Assessment Act 1997 Section 770-70.

Reasons for decision: Detailed Reasoning - Residency: The definition of resident in subsection 6(1) of the Income Tax Assessment Act 1936 provides that, in order to be a 'resident' or 'resident of Australia', a company that is not incorporated in Australia must be carrying on business in Australia and either have its central management and control in Australia or have its voting power controlled by shareholders who are residents of Australia. The Taxation Ruling TR 2004/15 discusses the issue of residency in relation to companies that are not incorporated in Australia. As discussed in TR 2004/15, the question of where a business is carried on is one of fact. However, in TR 2004/15 the Commissioner recognises a distinction between a company with operational activities (for example trading, service provision, manufacturing or mining activities) and a company which is more passive in its dealings. TR 2004/15 states that where a company's income earning activities are in relation to passive investments a company will carry on its business where these decisions are made, which will often be where its central management and control is located (paragraph 11 of TR 2004/15). TR 2004/15 further states that a company may be carrying on a business even if its only activity is the management of its investment assets. (paragraph 12 of TR 2004/15). C Limited is a carries on all business activities in Australia. With any contracts settled and signed in Australia. The sole director resides in Australia and all decisions are made in Australia. All shares are owned by the Australian director. There is no-one located outside Australia with any involvement in the management decisions or the day-to-day running of C Ltd. As all the shares in C Limited are held by the director who is located in Australia, the voting power in C Limited is controlled by Australian resident shareholders. Accordingly C Limited is a resident of Australia for tax purposes because it is carrying on a business in Australia and its central management and control is in Australia. | Detailed Reasoning - Foreign Income Tax Offset (FITO): You can claim a tax offset for the foreign tax you have paid on income, profits or gains (including gains of a capital nature) that are included in your Australian assessable income. To be entitled to a foreign income tax offset (FITO): · you must have actually paid, or be deemed to have paid, an amount of foreign income tax · the income or gain on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes | Detailed Reasoning - Exception for certain residence-based foreign income taxes: Section 770-10(3) of the Income Tax Assessment Act 1997 states that an amount of foreign income tax you paid does not count towards the tax offset for the year if your paid it: · to a foreign country because you are a resident of that country for the purposes of a law relating to the foreign income tax; and · in respect of an amount derived from a source outside that country. C Limited is a resident of the overseas country for their taxation purposes, accordingly taxation paid in the overseas country on income derived from a source outside of the overseas country will not count towards a tax offset on Australian tax paid. | Detailed Reasoning - Source of income: There are limited statutory source rules, reliance must be placed on common law rules. When determining source, the general principal is to consider where the place at which the substantial elements of production of income occurs. Factors commonly considered when determining the source of business income is; · where the contract is negotiated and made, · where the contract is performed, · where the payment flowing from it is made, and · the residence of the taxpayer. As per ATO ID 2004/904, several factors are considered when determining the source of business income, however several cases have agreed that the predominant factor is where the contract is concluded. The Company has limited contracts: 1 Contract with an Australian based company: it is a verbal agreement that is subject to Australian jurisdiction; 2 Contract with an overseas company: written agreement subject to another overseas jurisdiction. C Limited's contracts are concluded outside of the overseas country, in Australia and another overseas country, accordingly the source is outside the overseas country. Based on C Limited current contracts, they will not be entitled to a FITO for the tax paid in the overseas country which relates to income sourced outside the overseas country.

Relevant facts: The Company was incorporated overseas. | C Limited had assessable income in the overseas country and paid income tax there. | An overseas country treats C Limited as a resident taxpayer. | There is no double tax agreement with the overseas country. | All the ordinary shares in the Company are owned by the director, an Australian resident individual. | The director lives in Australian address, which is their main residence. | The sole director operates the Company from their home office. | The sole director does not travel regularly overseas. | The decisions are made by the sole director in Australia. | There are no directors meetings as the company has only one director. | The accounts are prepared in Australia. As at today the Company has not prepared a formal set of financial statements. | The director has been maintaining records of the transactions occurred. An accounting firm have been engaged for the preparation of financial statements for the year ended 30 June 2013 in Australia. | The company's registered office is located at the business premises of the agent that is responsible to advise on the tax affairs of the Company in relation overseas tax administration law. | The agent located overseas lodges the annual company statement with the local authority. No other decisions are made by this agent. | The Company does not have business premises overseas or any other offshore location. | The Company does not have any employees, either in Australia or in any other offshore location (other than the director). | All business related decision making for the Company occurs in Australia. | All the business operations are directly undertaken by the sole director and shareholder from Australia. | The company does not have an Australian tax file number yet. Application is subject to the result of this private ruling. The director has engaged an Australian accounting firm as the director's tax agent and they are providing taxation advice in relation to the Company as well. Provided that the Company is regarded as an Australian resident company, the Australian accounting firm will act as tax agent for the company. | 2 Contract with an overseas company: written agreement subject to an overseas jurisdiction. | The contracts were negotiated over the phone and via email by the director from his home office in Australia. | The contract with the overseas company was received via email and signed with electronic signature in Australia. | The company owns licenses obtained from an overseas official commission. | The licenses were obtained for a nominal fee paid to the overseas government. These licenses represent major assets of the company. | All the bank accounts of the Company are in Australia, one denominated in Overseas Dollars, the others denominated in Australian Dollars. | Between incorporation and XX, the Company did not earn any income. | During this time, the Company applied for the licenses and carried out procurement activities to secure contracts with suppliers and customers. | The Company plans to work with other organizations that offer service similar to that of a current contracting company. | All the activities in relation to the application of the licenses, procurement of contracts and relationship with suppliers and customers, are undertaken by the director on behalf of the Company from Australia. | All the income receipts mid expenses at received or paid through the Australian bank account of the Company denominated in overseas dollars.