Private ruling: Residency and permanent establishment
Published: October 2014
Ruling period: Year ended 31 March 2014 | Year ending 31 March 2015 | Year ending 31 March 2016 | Year ending 31 March 2017 | Year ending 31 March 2018
Date scheme commenced: 1 April 2013

Ruling: Questions and answers | 1. Is the company a resident of Australia under the tie breaker test of the DTA between Australia and Country Y? | No. | 2. Is the company required to pay tax in Australia? | Yes.

Relevant facts and circumstances: You are a resident for tax purposes of both Australia and Country Y. You are taxed on your worldwide income under the domestic tax laws of both Australia and country Y. You are a company incorporated in Australia. You are a wholly owned subsidiary of a company, incorporated in Country Y. The substituted accounting period for you is year ending 31 March. You carry on a business in Australia. You have an office in Australia. You have X employees. You have X directors, X reside in Country Y and W reside in Australia. All your management and control is done in Country Y. All contracts, negotiations and decisions are done in Country Y. All meetings of the directors and special meetings of shareholders are done in country Y with the Australian director dialling in to participate. Decisions relating to the day to day running of the Australian office are done in Australia, such as paying bills associated with the office etc. You carry out the day to day work from the Australian office which includes liaising with clients.

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. 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). 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 Y Agreement is listed in section 5 of the Agreements Act. The Country y agreement operates to avoid the double taxation of income received by residents of Australia and Country Y. 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). Article X (4) of Country Y convention provides that: (4) Where by reason of the preceding provisions of this Article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated. The OECD commentary states at paragraph 24 on article 4 that: As a result these considerations that the '"place of effective management "has been adopted as the preference criterion for persons other than individuals. The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entities business as a whole are in substance made. All relevant facts and circumstance must be examined to determine the place of effective management.an entity may have more than one place of management, but it can only have one place of effective management at any one time. You are managed from Country Y. All major decision and contract signing and negotiations are done in country y. You are responsible for the day to day running of the office in Australia which involves running the Australian office and paying bills associated with the Australian office. X out of the X directors reside in country Y and X director resides in Australia. All meetings of directors and special meetings of the shareholders are done in Country Y. You are therefore a resident of Country Y under Article X of the DTA as the effective place of management is in Country Y. Under Article X of the country Y Convention, the business profits of an enterprise of country y shall be only taxable in Country Y 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. PE is defined in Article X (1) of the Country Y Convention as a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes a branch or an office. Paragraph 4 of the OECD Model Commentary on Article X(1) explains that the term place of business generally covers any premises, facilities or installations used for carrying on the business of an enterprise whether or not they are used exclusively for that purpose so long as a certain amount of space is at its disposal. In your case you have an office in Australia and carry on business in Australia. You have a PE in Australia. You are required to pay tax on the income derived in Australia as you are carrying on a business through a PE in Australia and the income is assessable in Australia.