Private ruling: Residency
Published: September 2013
Ruling period: Year ended 30 June 2012.
Date scheme commenced: You are a company incorporated in, and a tax resident of an overseas country.

Ruling: Questions and answers: | 1. Will you be treated as carrying on a business through a permanent establishment in Australia? | No. | 2. Will any income derived by you through activities in Australia be assessable in Australia? | No.


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

Reasons for decision: Summary: Subsection 6-5(3) of the Income Tax Assessment Act 1997 (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. Under the definition in section 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), a company is resident in Australia if; Under the first statutory test a company is incorporated in Australia, as such place of incorporation is a question of fact, ascertained by searching the company register maintained by the Australian Securities and Investment Commission (ASIC). Under the second statutory test a company not incorporated in Australia but which carries on business in Australia will be a resident if satisfies central management and control and or voting power control. The place of carrying on business is a question of fact. Business can include active and passive operations, however the mere fact that central management and control is in Australia is not sufficient to establish the carrying on of a business in Australia (Taxation Ruling TR 2004/15 Income tax: residence of companies not incorporated in Australia - carrying on business in Australia and central management and control ). Where a company carries on business in Australia and its central management and control is in Australia, demonstrated by when and where are the company's strategic decision-making done of the highest level (Koitaki Para Rubber Estates Limited v. FCT (1941) 2 AITR 167 (Full High Court)), or where its voting power is controlled by shareholders who are Australian residents, it will be a resident. For example, a change of shareholder residence may trigger a change of residence for the companies they control. 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 International Tax Agreements Act 1953 incorporates that Act with the Income Tax Assessment Act 1936 (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). Under Article 5 of the Agreement between the Government of the Commonwealth of Australia and the country X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, the business profits of an enterprise of Overseas country shall only be taxable in Overseas country unless the enterprise carries on business in Australia through a permanent establishment (PE) 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. | Detailed Reasoning - Permanent Establishment: PE is defined in the treaty "a fixed place of trade or business in which the trade or business of the enterprise is wholly or partly carried on." Article 4(2) specifies that a PE includes a management, branch, office, factory, workshop and a building sit or construction, installation or assembly project which exists for more than 6 months. Article 4 (3) states that a PE does not include: · the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; · the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; · the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; · the maintenance of a fixed place of trade or business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; or · the maintenance of a fixed place of trade or business solely for the purpose of activities which have a preparatory or auxiliary character for the enterprise, such as advertising or scientific research. In interpreting the wording of the tax treaty, the Commissioner accepts in Taxation Ruling TR 2001/13 that it is appropriate to have reference to the OECD Commentary on the Model Tax Convention on Income and Capital (the OECD Model Commentary). Paragraph 12 of the Commentary contains a list, by no means exhaustive, of examples, each of which can be regarded, prima facie, as constituting a permanent establishment. As these examples are to be seen against the background of the general definition given in paragraph 1, it is assumed that the Contracting States interpret the terms listed, "a place of management", "a branch", "an office", etc. in such a way that such places of business constitute permanent establishments only if they meet the requirements of paragraph 1 of the Commentary. Paragraph 1 of the Commentary gives a general definition of the term "permanent establishment" which brings out its essential characteristics of a permanent establishment in the sense of the Convention, i.e. a distinct "situs", a "fixed place of business". The paragraph defines the term "permanent establishment" as a fixed place of business, through which the business of an enterprise is wholly or partly carried on. This definition, therefore, contains the following conditions: · the existence of a "place of business", i.e. a facility such as premises or, in certain instances, machinery or equipment; · this place of business must be "fixed", i.e. it must be established at a distinct place with a certain degree of permanence; · the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated. Paragraph 6 of the Commentary says since the place of business must be fixed, it also follows that a permanent establishment can be deemed to exist only if the place of business has a certain degree of permanency, i.e. if it is not of a purely temporary nature. A place of business may, however, constitute a permanent establishment even though it exists, in practice, only for a very short period of time because the nature of the business is such that it will only be carried on for that short period of time. | Detailed Reasoning - Supervisory activities by an Enterprise: Article 4(4) deems a PE where supervisory activities are carried on for more than six months in connection with "a building site, or a construction, installation or assembly project which is being undertaken or substantial equipment is in that other Contracting State being used or installed by, for or under contract with the enterprise." | Detailed Reasoning - Persons acting on behalf of an enterprise: Article 4(5) states that a PE can exist where a person acting on behalf of an enterprise can be deemed a PE of the enterprise where they have and habitually exercise an authority to conclude contracts and their activities are not limited solely to the purchase of goods or merchandise for the enterprise. A PE may also be deemed where there is a maintained stock of goods or merchandise from which orders are regularly filled on behalf of the enterprise, or the individual manufactures or processes any goods for the enterprise. Article 4 (6) excludes independent agents such as brokers, commission based agent, where the individual is acting in the ordinary course of their business as an independent agent. | Detailed Reasoning - Conclusion: In your case, you have an employee conducting work in Australia and nearby overseas locations in the nature of: · advertising, · market research, and · customer support and education of products. This employee cannot execute or conclude contracts, nor do they have a stock of good or merchandise at their private residence or anywhere else in Australia. You do not have a PE in Australia in accordance with section 6(1) of the ITAA 1936 or the Overseas country Agreement. Accordingly, the income derived by you in Australia is not assessable, under subsection 6-5(3) of the ITAA 1997.

The scheme commenced on: 1 July 2011. | Your central management and control is located overseas. | You are the regional trading company of a global group and distribute products. The head company of the group is located overseas. | You commenced operations in Australia and have been registered as a foreign company with the Australian Securities and Investments Commission with effect from 20XX. | You have an Australian Registered Body Number and have been registered for Goods and Services Tax. | You made an election for and obtained a Substituted Accounting Period (SAP). | You have an employee residing in Australia whose remuneration is paid for by you. | The employee is undertaking activities on behalf of you from his private residence in Australia. The cost of living at this residence is paid for by the employee. | The employees residence does not have business facilities such as machinery or equipment. | The employee travels outside of Australia on a frequent basis. | Whilst in Australia, the employee is undertaking activities related to advertising and supply of information to potential customers. In particular: | · Support existing customers with technical expertise and new product information, | · Understand existing customers' needs for products and provide feedback to head company in relation to this, | · Undertake general market research into the Australian market that is relevant to head company product offerings, | · Identify and liaise with potential clients and introduce head company products to them, and | · Circulate marketing material to potential customers, including supply of products and marketing of specific catalogues and product service literature and videos. | Your employees do not have authority to execute or conclude contracts in Australia. | No stock of goods or merchandise are being stored or displayed at the employee's residence or any other physical location in Australia.