Private ruling: Australian income tax obligations of SubCo
Date of advice: 30 April 2020
Published: June 2020
Ruling period: Year ended 31 March 2019 | Year ended 31 March 2020 | Year ended 31 March 2021 | Year ended 31 March 2022 | Year ended 31 March 2023
Date scheme commenced: Year ended 31 March 2019

Ruling: Q1: Will SubCo have a permanent establishment (PE) in Australia under Article 5 of the Convention between the Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains [2003] ATS 22 ( the Convention )? | A1: No | Q2: If the answer to Question 1 is 'no', will Article 7 of the Convention apply such that the profits of SubCo will not be taxable in Australia? | A2: Yes | Q3: If the answer to Question 2 is 'yes', will SubCo have to lodge annual income tax returns as required by section 161 of the Income Tax Assessment Act 1936 (ITAA 1936)? | A3: No

Relevant facts and circumstances: SubCo was incorporated in Australia and is a member of a group of companies that are wholly-owned subsidiaries of ForeignCo (the Group). SubCo is deemed to be resident only in the United Kingdom for the purposes of the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains ( the Convention ) as modified by paragraph 1 of Article 4 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ( the MLI ). SubCo was authorised by an Australian regulator to import and distribute its products in Australia. SubCo has engaged FileCo to perform company secretarial services in Australia. FileCo does not have any authority to enter into contracts on behalf of SubCo. SubCo has a distribution agreement with third party Australian resident distribution companies (the Distributors), to distribute its products in Australia and to the UK. The distribution agreements set the services to be provided by the Distributors in respect of SubCo's compliance to Australian regulations, and to act as exclusive distributors for SubCo's products. There is no common ownership between the Distributors and SubCo and the Distributors are not financially dependent on the income they derive from the services they provide to SubCo. No director of the Distributors is a director or employee of SubCo. The Distributors do not provide the distribution services to SubCo exclusively as they also distribute other non-SubCo products to the Australian market. The Distributors do not, and have no authority to conclude contracts on behalf of SubCo.


Reasons for decision: Summary: SubCo will not have a PE in Australia under Article 5 of the Convention. | Detailed Reasoning - Residency and taxation under Australian tax laws: Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997) discusses what assessable income is, and what it includes and excludes. Generally speaking, where a company is an Australian resident for Australian tax purpose, its assessable income consists of amounts of ordinary income (see section 6-5 of the ITAA 1997) and statutory income (see section 6-10 of the ITAA 1997) it derives during an income year directly or indirectly from all sources, whether in or out of Australia. In other words, a company that is an Australian resident for Australian tax purpose is subject to Australian taxation on its worldwide income. A company is an Australian resident for tax purpose under section 6(1) of the ITAA 1936 if it is incorporated in Australia. In this case, SubCo is a company incorporated in Australia, therefore it is an Australian resident for Australian tax purposes and subject to Australian taxation on its worldwide income. | Detailed Reasoning - Residency and taxation under the UK tax laws: SubCo is also considered a resident in the UK for UK tax purposes and also for the purposes of the Convention (Article 4(1)(a)) and accordingly, Article 4(4) of the Convention provides a measure to determine the residence of non-individual persons who are considered to be a resident of both the UK and Australia for the purposes of the Convention. As a result of the application of Article 4(4) as modified by paragraph 1 of Article 4 of theMLI SubCo is deemed to be a resident only in the UK for the purposes of the Convention. Therefore, under UK taxation laws, a company that is based in the UK is generally required to pay Corporation Tax (which is a tax covered by the Convention) on all its profits from the UK and abroad. | Detailed Reasoning - Taxation of a non-resident under the Convention: Subsection 5(1) of the International Tax Agreements Act 1953 (Agreements Act) gives the Convention the force of law in Australia. The effect of subsection 4(1) of the Agreements Act is that the DTAs are to be interpreted and read as one with the ITAA 1997 and/or ITAA 1936. Generally, subsection 4(2) of the Agreements Act provides that the terms of the DTAs override those of the ITAA 1997 and/or ITAA 1936 (except for Part IVA of the ITAA 1936 which is a general anti-avoidance provision), and an Act imposing Australian tax such as the Rates Acts, in the event of any inconsistency. Article 7 - business profits Article 7 provides how business profits of SubCo should be taxed under Australian and UK taxation laws. Particularly, Articles 7(1) and 7(2) of the Convention provide the following: 1 The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated in that other State. If the enterprise carries on business in that manner, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment (emphasis added). 2 Subject to the provisions of paragraph 3 of this Article, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated in that other State, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment or with other enterprises. As SubCo is deemed to be resident only in the UK for the purposes of the Convention, its business profits may be taxed in Australia under the Convention only if it is carrying on a business at or through a 'permanent establishment' (PE) in Australia, and then only to the extent that it's profits are attributable to that Australian PE. Article 5 - fixed place PE The term permanent establishment is defined in Article 5(1) as a fixed place of business through which the business of an enterprise is wholly or partly carried on. Article 5(2) provides that the term 'permanent establishment' (PE) also includes a place of management, a branch, an office, a factory, a workshop etc. insofar as the requirements in Article 5(1) are also met. Paragraph 104 of TR 2001/13 provides for the use of, in the interpretation of DTAs, guidance and supplementary, aid such as the OECD, 2017, Model Tax Convention On Income and On Capital , 21 November 2017, OECD Publishing, Paris (OECD Model Convention). Commentary on Article 5 Concerning the Definition of Permanent Establishment of theOECD Model Convention(Article 5 Commentary) provides further guidance as to what constitutes a PE. In paragraph 6 of the Article 5 Commentary, it says that the definition of PE in Article 5(1) "contains the following conditions": · the existence of a "place of business", i.e. a facility such as premises, · this place of business is 'fixed", i.e., it must be established at a distinct place with a certain degree of permanence, and · 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. The Article 5 Commentary provides guidance on how these conditions can be satisfied and some of which are as follows: · the term 'place of business' covers any premises and may exist where 'it simply has a certain amount of space at its disposal' (paragraph 10), · the mere fact that an enterprise has a certain amount of space at its disposal which is used for business activities is sufficient to constitute a place of business. No formal legal rights to use that place is required (paragraph 11), and · where an enterprise has an exclusive legal right to use a particular location which is used only for carrying on that enterprise's own business activities (e.g. where it has legal possession of that location), that location is clearly at the disposal of the enterprise (paragraph 12). In this case, the Group which has presence in Australia through SubCo, operates its global business of selling, marketing and distributing its products. To facilitate the conduct of its business in Australia, the Group incorporated SubCo to act as the legal entity to obtain and hold the necessary regulatory approvals. Based on the foregoing considerations and the information provided by SubCo, the arrangements that SubCo has entered into with FileCo and the Distributors do not give rise to SubCo having a fixed place PE in Australia. This is because the premises of these entities are not considered to be at the disposal of SubCo in the manner articulated in the Article 5 Commentary. Article 5 - deemed PE Articles 5(3) to 5(8) provide further conditions (or exceptions) to the general definition of PE where in certain circumstances there is considered to be a deemed PE (or exceptions to what constitute a PE) for the non-resident. Of relevance are Articles 5(6) and 5(7), however, for completeness, Article 5(5) is also discussed below. Articles 5(6) and 5(7) provides as follows: 6 Notwithstanding the provisions of paragraphs 1 and 2 of this Article, where a person - other than an agent of an independent status to whom paragraph 7 of this Article applies - is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts on behalf of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for that enterprise unless the activities of such person are limited to those mentioned in paragraph 5 of this Article which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph. 7 An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such brokers or agents are acting in the ordinary course of their business as such. Article 5(6) is concerned with activities of persons who are considered to be dependent agents i.e., persons, whether or not employees of the enterprise, who are not independent agents falling under Article 5(7). For Article 5(6) to apply, all the following conditions must be met: · a person acts in a Contracting State on behalf of an enterprise, · in doing so, that person habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and · these contracts are either in the name of the enterprise or for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use, or for the provision of services by that enterprise (paragraph 84 of the Article 5 Commentary). Article 5(7) provides certain criteria in determining whether a person will not come within the scope of a dependent agent PE under Article 5(6) (i.e:, the agent will not constitute a PE of the enterprise whose behalf the person acts) and these include as follows: (a) whether the person's commercial activities for the enterprise are subject to detailed instructions or to comprehensive control by it, such person cannot be regarded as independent of the enterprise, (b) whether the entrepreneurial risk has to be borne by the person or by the enterprise the person represents (paragraph 104 of the Article 5 Commentary). When considering criterion (a), regard is to be given to the following: · the fact that the principal is relying on the special skill and knowledge of the agent is an indication of independence (paragraph 106 of the Article 5 Commentary), and · it may be a feature of the operation of an agreement that an agent will provide substantial information to a principal in connection with the business conducted under the agreement. This is not in itself a sufficient criterion for determination that the agent is dependent unless the information is provided in the course of seeking approval from the principal for the manner in which the business is to be conducted. The provision of information which is simply intended to ensure the smooth running of the agreement and continued good relations with the principal is not a sign of dependence (paragraph 108 of the Article 5 Commentary). When considering criterion (b), independent status is less likely if the activities of the agent are performed wholly or almost wholly on behalf of only one enterprise over the lifetime of the business or a long period of time. However, this fact is not by itself determinative. All the facts and circumstances must be taken into account to determine whether the agent's activities constitute an autonomous business conducted by him in which he bears risk and receives reward through the use of his entrepreneurial skills and knowledge (paragraph 109 of the Article 5 Commentary). Based on the foregoing considerations and the information provided by SubCo, the arrangements that SubCo has entered into with FileCo and the Distributors do not give rise to SubCo having a dependent agent PE in Australia. | Detailed Reasoning - Article 5(5) - PE exceptions: Because SubCo does not have a fixed place or dependent agent PE in Australia in accordance with the operation of Article 5(1) & (2), and Article 5(6) & (7), respectively, it is not necessary to consider the application of Article 5(5) as modified by the MLI. | Summary: The profits of SubCo are not taxable in Australia in accordance with Article 7 of the Convention. | Detailed Reasoning - Detailed reasoning: Because SubCo does not have a PE in Australia in accordance with Article 5 of the Convention, its profits shall be taxable only in the UK in accordance with Article 7(1) of the Convention. | Summary: Because the profits of SubCo are not taxable in Australia in accordance with Article 7 of the Convention, SubCo will not have to lodge annual income tax returns as required by section 161 of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Section 161 of the ITAA 1936 states that every person must, if required by the Commissioner by notice published in the Gazette , give to the Commissioner a return for a year of income within the period specified in the notice. Law Administration Practice Statement PS LA 2011/15 Lodgment obligations, due dates and deferrals outlines that the Commissioner satisfies the requirement to publish a Gazette notice by registering a legislative instrument on the Federal Register of Legislative Instruments. On 13 May 2019, the Commissioner issued the following legislative instrument in respect of the 2019 income year: · Lodgment of returns for the year of income ended 30 June 2019 in accordance with the Income Tax Assessment Act 1936, Income Tax Assessment Act 1997, Income Tax (Transitional Provisions) Act 1997, Taxation Administration Act 1953, Superannuation Industry (Supervision) Act 1993, Higher Education Support Act 2003, Trade Support Loans Act 2014 ( LODGE 2019/1 ) This instrument outlines the entities that are required to lodge a return of income for the specified period. Table C of the legislative instrument states the following taxpayers are required to lodge an income tax return: Table C Every *full self-assessment taxpayer (excluding trustees of superannuation funds, approved deposit funds and pooled superannuation trusts) not covered by Table L or Table M that during the *income year was: (1) An Australian resident, and derived income (including capital gains) from sources in or outside *Australia; or (2)a non-resident of *Australia, and derived income (including capital gains) that is taxable in Australia, other than payments listed in Table A(1)(a)(ii), or Table A(1)(a)(vi) or Table A(1)(a)(vii). Paragraph 2 of Table C identifies that non-resident taxpayers that derive income that is taxable in Australia are required to lodge an income tax return. SubCo is a non-resident of Australia and is receiving income sourced from carrying on a business in Australia. However, because its business is not carried on through a PE in Australia, its profits shall be taxable only in the UK in accordance with Article 7 of the Convention. Accordingly, SubCo is not required to lodge an income tax return as it is a non-resident of Australia and is not deriving profits that are taxable in Australia.