Private ruling: International Corporate Tax and PAYG Withholding Tax
Published: March 2015
Ruling period: 1 January 2015 to 31 December 2015

Ruling: Questions and answers | 1. Is the charter hire income, derived by you under the contract, with an Australian charterer subject to income tax, in Australia? | No. | 2. Is the charter hire income subject to withhold tax? | No

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The company is incorporated and a tax resident of an overseas country. The company has entered into agreements with an Australian charterer. The company will time charter two vessels to the Australian charterer. The details of the time charter are summarised as follows; Charter of Vessel: vessel Place of delivery: overseas port Date of delivery: 2015 Period of hire: X days Ext. of period of hire: Y days options Scope of work: delivery of vessels to Australian company at overseas port. the Australian charterer will employ Vessels to move from an from the overseas port to an Australian port. Day 29 - Day 35 - upon arrival at the Australian port the vessels will perform tasks The principle activities of the company are those relating to chartering of ships, barges and boats with crew (freight). The charter hire revenue received by the company for the first period is in relation to the transportation an item from the overseas port to the Australian location. The charter hire revenue received by the company for the last period is ancillary to the company's operation of ships. During these days, the vessels will be stationed at the Australian location. As the charterer will be installing an item at the Australian location the vessels may be used to position/manoeuvre the item, until the time when the item is installed. Contained in the agreement between the company and the Charterer, it states the following; • All activities during the first operation are executed strictly under the Australian Charterer's command Under the agreement, it states; • During the offshore campaign the OWNERs shall be responsible for executing the operations as per CHARTER'S instructions to the satisfaction of the CHARTERER. Under the agreement, it states; • OWNER shall provide maritime crewing for its VESSEL that support this scope of work…...along with details of personnel to fulfil the maritime classifications for its VESSELs for CHARTERER approval. Further, under 'VESSEL crew requirements' it is stated; • OWNER to provide Australian crew acceptable to the Maritime Union of Australia For the entire charter hire period, there will be/are Australian crew on board the Vessel. The company has engaged an Australian manning agent to provide the Australian crew. The company pays a fee to the Australian manning agent. The Australian manning agent pays wages to the Australian crew. The company has not carried on any operations in Australia previously and does not have any permanent establishment in Australia.

Relevant legislative provisions: Agreement between the Government of the Commonwealth of Australia and an overseas country | Taxation Administration Act 1953 section 10-5 of Schedule 1 | Taxation Administration Act 1953 subsection 12-190(4) of Schedule 1 | Income Tax Assessment Act 1997 subsection 6-5(3)

Reasons for decision: Detailed Reasoning - Permanent Establishment: Under the Agreement between the Government of the Commonwealth of Australia and the overseas country (Double Tax Agreement); the term permanent establishment (PE) is defined as a fixed place of business through which the business of the enterprise is wholly or partly carried on. Under the Double Tax Agreement it states the following; An enterprise of one of the Contracting States shall be deemed to have a permanent establishment in the other Contracting State and to carry on trade or business through that permanent establishment if- (a) it carries on supervisory activities in that other Contracting State for more than six months in connection with a building site, or a construction, installation or assembly project which is being undertaken, in that other Contracting State; or (b) substantial equipment is in that other Contracting State being used or installed by, for or under contract with the enterprise. You have stated the item will arrive at the Australian location on day P and remain to day S, carrying out activities under the instruction of the Charterer. The length of your stay is less than 6 months and not in a supervisory capacity. Therefore we are satisfied you will not have a permanent establishment under (a) of the Double Tax Agreement. The term "substantial equipment" is considered in Taxation Ruling TR 2007/10 in relation to the provisions in the United States Convention and the United Kingdom Convention corresponding to Article 5(4)(b). The Commissioner makes the following comments in Taxation Ruling TR 2007/10: 24. Whether an item is 'substantial equipment' for the purposes of Article 5(4)(b) of the US Convention and Article 5.3(b) of the UK Convention is a question of fact and degree to be determined on balance according to the facts and circumstances of each particular case. Equipment can be substantial in either: • an absolute sense, that is, when viewed independently; not in comparison with something else; or • a relative sense, that is, by comparing it to something else. 25. Given the ships and types of aircraft that are the subject of leases to which this Ruling applies, the Commissioner considers that it would be extremely rare for such ships or aircraft not to be substantial equipment for the purposes of Article 5(4)(b) of the US Convention and Article 5.3(b) of the UK Convention. By reason of their size alone, these ships or aircraft would be expected to constitute substantial equipment in an absolute sense. The term "substantial equipment" is not defined. The Explanatory Memorandum to Act No 111 of 2008, which inserted the 2008 Protocol substituting Article 5 of the South African Agreement (EM) states: 1.41 Subparagraphs 4(b) and (c) together reflect Australia's reservation to the OECD Model concerning the use of substantial equipment. Australia's experience is that the permanent establishment provision in the OECD Model may be inadequate to deal with high value mobile activities involving the use of such equipment. 1.44 The meaning of the term 'substantial' depends on the relevant facts and circumstances of each individual case. Factors such as size, quantity, or value of the equipment, or the role of the equipment in income producing activities are relevant in determining whether the equipment is substantial. However, some examples of substantial equipment would include: • large industrial earthmoving equipment or construction equipment used in road building, dam building or powerhouse construction; • manufacturing or processing equipment used in a factory; or • grain harvesters and other large agricultural machinery. In respect of the term "operation" and "operates", the EM also states: 1.42 The terms 'operation' and 'operates' have been included to clarify that only Active use of substantial equipment assets will be captured by subparagraphs 4(b) and (c). This means an enterprise that merely leases substantial equipment to another person for that other person's own use in a country, would not be deemed to have a permanent establishment in that country under these provisions. Contained in the agreement between the company and the Charterer, it states the following; • All activities during the tow operation are executed strictly under the Australian Charterer's command • All activities during the operation are executed strictly under the Australian Charterer's command. Accordingly, we are satisfied you will not have a PE under (b) of the Double Tax Agreement. | Detailed Reasoning - Assessability of income derived under a contract: Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a foreign resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year, and other ordinary income that a provision includes as assessable income on some basis other than having an Australian source. In determining liability to tax on Australian sourced income, it is necessary to consider not only the income tax laws but also the Double Tax Agreement. The Double Tax Agreement provides that the profits of an enterprise will be taxable only in the overseas country unless the enterprise carries on business in Australia through a PE situated in Australia. If it carries on business through a PE in Australia, only so much of the profit of the Singapore enterprise attributable to the Australian PE will be taxable in Australia. The income derived by you under the contract is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997. The payments received by you are considered under the Double Tax Agreement and as there is no PE in Australia, it is not assessable in Australia under the Double Tax Agreement. Under the Double Tax Agreement, if the profit, income or gains of an overseas country enterprise is taxable Australia income under an article of this agreement, then the income, profit or gains of the overseas enterprise will be deemed to be sourced in Australia. As your income under the contract is not assessable in Australia under the Double Tax Agreement, such income will not be deemed to be sourced in Australia under the Double Tax Agreement. Consequently, income derived by you will not be assessable in Australia under subsection 6-5(3) of the ITAA 1997. | Detailed Reasoning - Withholding Tax: Section 10-5 in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) provides a summary of payments and other transactions covered by Pay As You Go (PAYG). Under subsection 12-190(4)(a) of Schedule 1 to the TAA 1953, if a supplier is not carrying on an enterprise in Australia, they will not need an Australian Business Number and you will not need to withhold from payments you make to them. In general, Australia does not tax the profits of an enterprise resident in a country with which it has a double tax agreement unless the enterprise carries on business in Australia via a PE. For a non-resident enterprise to be deemed to have a PE in Australia, under the PE a Double Tax Agreement the following conditions must be satisfied; • there is a person acting on behalf of the non-resident enterprise in Australia • that person is not an agent of independent status to whom a subsequent • paragraph of the Article applies • the person has authority to conclude contracts on behalf of the non-resident enterprise, and • the authority is habitually exercised. You do not have any PE in Australia. There is a contract between you and the Australian Charterer; although all activities during the operation are strictly executed under the Australian Charterer's instruction and command, they do not satisfy the conditions under Article 4(5) of the double tax agreement. Therefore, the payments fall within an exception to the withholding payments rules and there is no obligation for you to deduct withholding amounts from the payments.