Private ruling: Residency - Business income - permanent establishment
Published: April 2013
Ruling period: 1 July 2012 to 30 June 2013

Ruling: Issue 1 | Question and answer | Will the Foreign Company be deemed to have established a permanent establishment in Australia as a consequence of entering into a Sales Support Services Arrangement, or using computer server facilities that may be located in Australia? | No. | Issue 2 | Question and answer | Is GST payable on your supply of sales support services to the Foreign Company? | 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. Australian Company is registered for GST. Foreign Company intends to engage the Australian Company to perform sales services in Australian in accordance with the Sales Support Services Arrangement. At the commencement of the arrangement, the Australian company will charge the Foreign Company a service fee broadly calculated by reference to cost plus X%. The clients obtained as a result of the sales support service provided by the Australian Company will directly contract with the Foreign Company. The Australian Company will not have any authority to contract on behalf of the Foreign Company (expressly or otherwise). Point 6 of the Service Agreement between the Australian Company and the Foreign Company; Restrictions on Service Provider, 6.1 states; The parties agree that nothing in this agreement will: (a) operate to transfer to the Service provider any of the goodwill of the Company; (b) entitled the Service Provided to carry on the business of the Company; (c) restrict the Company from carrying on its business for its own benefit; (d) authorise the Service Provider to contract or enter into legal relations on behalf of the Company; or (e) authorise the Service Provider to conclude or sign any contracts with the Company's customers. In limited situations, the Australian Company contracts with its own Australian customers, and then separately contracts with the Foreign Company to obtain inputs for the Australian Company's business. In these situations, the Australian Company accepts that the ordinary good and services tax (GST) consequences arise out of the contract with the Australian customer. The Foreign Company has no physical presence in Australian. The Foreign Company may operate information technology services from an Australian based server at some time in the future. The Australian Company and the Foreign Company are related parties.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act subsection 7-1(1) | A New Tax System (Goods and Services Tax) Act section 9-5 | A New Tax System (Goods and Services Tax) Act section 9-40 | A New Tax System (Goods and Services Tax) Act section 38-190 | Income Tax Assessment Act 1997 Subsection 6-5(3)

Reasons for decision: Detailed Reasoning - Issue 1: 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. Business income is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997. To determine the tax treatment of income from international transactions involving Australia, non-residents must first determine whether the income has an Australian or foreign source. | Detailed Reasoning - Source of income: Apart from certain rules prescribed for statutory income (for example, royalties and dividends), there are no statutory guidelines in the income tax legislation for determining the source of income. In the absence of statutory source rules, reliance is placed on the general common law source rules as they relate to income. Generally, Australian courts have held that when the question of source is in issue, the weighting of the relative importance of the various factors are relevant ( Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183 at 189-190 and Federal Commissioner of Taxation v. United Aircraft Corporation (1943) 68 CLR 525; (1943) 7 ATD 318; (1943) 2 AITR 458). The courts also confirmed that it is appropriate to have regard to some of the following factors in determining the source of income: · the place of making the agreement · the place of payment of fees arising from the agreement; and · the place of performance of services under the terms of the agreement. One factor may sometimes be more important than another. In certain circumstances, the location of the business premises, where the majority of the business activities were carried out, may be the more important factor. In Watson v CT (WA) (1930) 44 CLR 94; 1 ATD 61, an accountant in private practice in Western Australia travelled to Victoria to meet with the taxation office on his client's behalf. It was held that the source of the income was Western Australia because that was where the taxpayer carried on his practice. | Detailed Reasoning - Trading profits: The source of income in the case of trading profits is usually where the business is conducted from. A permanent establishment is a fixed place of business through which the business of an enterprise is wholly or partly carried on. It includes a sales outlet, a branch, place of management, a factory, a workshop, an office or a dependent agent (who has authority to enter into contracts on behalf of the enterprise and habitually exercises that authority. If the business has a permanent establishment in Australia, the business profits that are attributable to the enterprise will be subject to income tax. Where the source of income consists of several factors, the dominant factor should be determined and the essence of the business established. In the case of the Foreign Company, the essence of the entity's business is in Indonesia. It is considered, from the facts you have provided, that the Foreign Company does not have a permanent establishment in Australia as: · the Foreign Company has no physical presence in Australia and is not registered with ASIC · the Foreign Company does not have Australian directors and only intends to engage the Australian Company to perform sales support services in Australia · the Foreign Company's essential business activities are conducted outside of Australia. The only activities that take place in Australia are clients obtained as a result of the sales support services provided by the Australian Company and those clients will directly contract with the Foreign Company. Point 6 of the Service Agreement between the Australian Company and the Foreign Company; Restrictions on Service Provider, 6.1 states; The parties agree that nothing in this agreement will: (a) operate to transfer to the Service provider any of the goodwill of the Company; (b) entitled the Service Provided to carry on the business of the Company; (c) restrict the Company from carrying on its business for its own benefit; (d) authorise the Service Provider to contract or enter into legal relations on behalf of the Company; or (e) authorise the Service Provider to conclude or sign any contracts with the Company's customers. As the Foreign Company does not have a permanent establishment in Australia, the business profits that are attributable to the enterprise are not subject to income tax in Australia. | Detailed Reasoning - Issue 2: GST is not payable on the Australian's Company supply of sales supports services to the Foreign Company because this will be a GST-free supply of services to a non-resident under section 38-190 of the GST Act. | Detailed Reasoning - Detailed reasoning: GST is payable by you where you make a taxable supply. You make a taxable supply where you satisfy the requirements of section 9-5 of the GST Act, which states: You make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with Australia; and (d) you are *registered, or *required to be registered. However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed. (*Denotes a term defined in section 195-1 of the GST Act) | Detailed Reasoning - GST-free supplies of services to non-residents: A supply of something other than goods or real property is GST-free under item 2 in the table in subsection 38-190(1) of the GST Act (item 2) where the supply is made to a non-resident who is not in Australia when the thing supplied is done; and (a) the supply is neither a supply of work physically performed on goods situated in Australia when the work is done nor a supply directly connected with real property situated in Australia; or (b) the non-resident acquires the thing in carrying on the non-resident's enterprise, but is not registered or required to be registered for GST. The Australian Company will supply something other than goods or real property to a non-resident when it supplies sales support services to the Foreign Company. Goods and Services Tax Ruling GSTR 2004/7 provides guidance on determining whether a non-resident company is in Australia. It states: 37. A non-resident company is in Australia if that company carries on business (or in the case of a company that does not carry on business, carries on its activities) in Australia: (a) at or through a fixed and definite place of its own for a sufficiently substantial period of time; or (b) through an agent at a fixed and definite place for a sufficiently substantial period of time. Paragraph 31 of GSTR 2004/7 states: 31. The requirement that the non-resident in item 2, or the recipient in item 3, is not in Australia when the thing supplied is done is a requirement, in our view, that the non-resident or recipient is not in Australia in relation to the supply when the thing supplied is done. Paragraphs 280 and 281 of GSTR 2004/7 provide guidance in determining whether a non-resident company carries on a business in Australia through an agent. They state: 280. The question of whether the agent is carrying on the non-resident company's business or doing no more than carrying on the agent's own business necessitates an investigation of the functions which the agent performs and all aspects of the relationship between the agent and the non-resident company. 281. In this regard it is necessary to weigh up various factors, including but not necessarily limited to the following, to determine whether a non-resident company can properly be regarded as carrying on business in Australia through an agent: · Was the fixed place of business from which the agent operates originally acquired for the purposes of enabling the agent to carry on the business of the non-resident company? · Does the non-resident company directly reimburse the agent for the cost of accommodation or staff at the fixed place of business? · Does the non-resident company make other contributions to the financing of the business carried on by the agent? · Is the agent remunerated by reference to transactions, for example, by commission, or by fixed regular payments or in some other way? Commission can be an indicator that the agent is carrying on its own business and not that of the non-resident. However, it is not determinative. · What degree of control does the non-resident company exercise over the running of the business conducted by the agent? · Does the agent reserve part of the agent's staff or accommodation for the conducting of business related to the non-resident company? · Does the agent display the name of the non-resident company at the agent's premises or on stationery and, if so, does it indicate that the agent is an agent of the non-resident company? · What business, if any, does the agent transact as principal exclusively on the agent's own behalf? · Does the agent make contracts with customers or other third parties in the name of the non-resident company or otherwise in such a manner so as to bind it? · If the agent does make contracts so as to bind the non-resident company, does the agent require specific authority in advance before binding that foreign company to contractual obligations? Paragraph 295 of GSTR 2004/7 discusses the situation where an agent does not have the power to bind the non-resident company without seeking the non-resident company's approval before binding the non-resident company. It states: 295. While it is also relevant to consider other factors, if an agent does not have the power to bind the non-resident company without seeking the company's approval before binding the company, there does not, apart from one case (discussed at paragraphs 302 to 310), appear to be any reported jurisdiction case where it has been held that a foreign corporation, the business of which involves making contracts for sale, lease or the like, is in the jurisdiction by means of the agent. Paragraphs 302 and 303 of GSTR 2004/7 state: 302. The World Harmony [1965] 2 All ER 139 (' The World Harmony ') is the only jurisdiction case that we have found in relation to a company the business of which involves making contracts for sale, lease or the like where an agent that has no power to make contracts without submitting the contracts to the non-resident for approval or signature was found to be carrying on the business of the foreign corporation. 303. That case involved a Liberian shipping company and a company in England that managed ships in its business as shipping brokers. The Liberian company owned various ships including The World Harmony and appointed the English shipping brokers, as subagents, to attend to the day-to-day management and operation of the ships, exclusive of operations in the United States. The shipping brokers had offices in London which they paid for themselves. The activities of the shipping brokers were not restricted to ships owned by the Liberian company, but extended to ships owned by nine or ten other corporations. Paragraph 310 of GSTR 2004/7 states: 310. Having regard to the decision in The World Harmony we consider that if, for example, a rental property managing agent attends to the day to day management and operation of a commercial rental property in Australia owned and leased by a non-resident company, the agent is carrying on the business of the non-resident company in Australia. This is the case irrespective of whether the agent has the power to conclude leasing contracts on behalf of the non-resident owner. In these circumstances, the presence of the agent makes the non-resident company in Australia. Paragraphs 374 of 375 of GSTR 2004/7 discuss the situation where an agent who carries on a business of a non-resident company in Australia supplies services to the non-resident company. They state: 374. If an agent carries on the business of a non-resident company in Australia at a fixed and definite place for a sufficiently substantial period of time, that company is in Australia. However, the supply of services by the agent to the non-resident company in the course of its own business ('agency services') may still be GST-free. 375. For supplies of agency services made by the agent to the non-resident company, the company is not in Australia in relation to the supply of those agency services. This is because the agent does not make the company in Australia in relation to supplies that it makes itself to the company. If the other requirements of item 2 are met, the supply of services and other things made by the agent in the course of its own business (agency services) to the non-resident company is a GST-free supply. The Foreign Company is a non-resident company. The Australian Company advised that the Foreign Company does not have a physical presence in Australia and is not registered with ASIC. In accordance with Taxation Determination TD 2005/2, the use of ISP type services located in Australia does not give rise to a permanent establishment in Australia. We do not consider that Foreign Company's operation of IT services from an Australian based server would amount to a permanent establishment of the Foreign Company in Australia. We do not consider that the Foreign Company carries on business in Australia through the Australian Company as agent, because: · the business of the Foreign Company involves making contracts for sale, but the Australian Company does not have the power to conclude contracts on behalf of the Foreign Company, and · the Australian Company does not attend to the day to day management and operation of the Foreign Company's business (the Australian Company merely provide sales support services). Additionally, in accordance with paragraph 375 of GSTR 2004/7, even if the Australian Company was considered to be an agent carrying on the business of the Foreign Company in Australia, the Foreign Company would not be in Australia in relation to the Australian Company supply of the sales support services. The Australian Company's supply of the sales support services is not a supply of work physically performed on goods situated in Australia when the work is done. The Australian Company's supply of the sales support services is not a supply that is directly connected with real property situated in Australia. As all of the requirements of item 2 are satisfied, the Australian Company will make GST-free supplies of services to the Foreign Company. Hence, the Australian Company will not make taxable supplies to the Foreign Company. Therefore, GST is not payable on the Australian Company's supply of the sales support services to the Foreign Company.

Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not considered the application of Part IVA to the arrangement you asked us to rule on.