Private ruling: Permanent establishment
Published: August 2013
Ruling period: Year ending 30 June 2010 | Year ending 30 June 2011 | Year ending 30 June 2012
Date scheme commenced: 1 July 2009

Ruling: Questions and answers | 1. Is the company a resident of Australia for taxation purposes? | No. | 2. Is the company carrying on a business in Australia? | No. | 3. Does the company have a permanent establishment in Australia? | No. | 4. Is the company's Australian source income assessable in Australia? | No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(3) | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1936 Section 6(1) | International Tax Agreements Act 1953

Reasons for decision: Summary: There are three tests to determine residency for the purposes of income tax law: refer to subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). A company will be a resident if: · it is incorporated in Australia, or · if the company is not incorporated in Australia, but it is either: - carrying on a business in Australia and its central management and control is in Australia, or - carrying on a business in Australia and its voting power is controlled by shareholders who are Australian residents. A company will only need to satisfy one of the tests to be a resident of Australia for tax purposes. The company is not incorporated in Australia, so it is necessary to consider if the company is carrying on a business in Australia with further consideration to whether that business' central control and management is in Australia; or whether the voting power is controlled by shareholders who are Australian residents. | Detailed Reasoning - Carries on a business in Australia: The question of where a business is carried on is one of fact and requires consideration of where the activities of the company are carried on and is dependent on the facts and circumstances of a case. A company, whose income earning outcomes are largely dependent on the investment decision made in respect of its assets, carries on its business where these decisions are made. In your situation: · The business activities of the company are carried out in Country Y. · The company has its head office in Country Y. · The company has one director who lives and works in Country Y. · The director controls and manages the company from Country Y. The company is therefore not carrying on a business in Australia. As the company is located in Country Y and it is not considered to be carrying on business in Australia, it is a non-resident of Australia and does not meet any of the three statutory tests. | Detailed Reasoning - Permanent establishment and assessability of Australian source income: 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. The income derived from sales of goods is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997. 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 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). Under Article Y of the Country Y agreement, 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 of the Country Y agreement 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 Z of the OECD Model Commentary on Article X 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 this case, the company does not have an office, a branch, a factory or a workshop in Australia. Therefore, the company does not have a fixed place of business in Australia under Article X of the Country Y Agreement. Article A of the Country Y agreement provides that an enterprise shall be deemed to have a permanent establishment in Australia where an enterprise of Country Y: a) performs services in Australia (i) through an individual who is present in Australia for a period or periods exceeding in the aggregate 183 days in any twelve month period, and more than 50 per cent of the gross revenues attributable to active business activities of the enterprise during the period or periods are derived from the services performed in Australia through that individual, or (ii) for a period or periods exceeding in the aggregate 183 days in any twelve month period, and these services are performed for the same project or for connected projects through one or more individuals who are present and performing such services in Australia. The company would not perform services for more than three days in anyone financial year and contacts with agents are usually through e-mail and phone from Country Y. The company is not present and does not perform duties in Australia in accordance with Article A of the agreement. | Detailed Reasoning - Agents: Article B in the Country Y agreement states that notwithstanding the provisions of other paragraphs, where a person, is acting on behalf of an enterprise and: a) has, and habitually exercises, in a Contracting State an authority to substantially negotiate or conclude contracts on behalf of the enterprise; or b) manufactures or processes in a Contracting State for the enterprise goods or merchandise belonging to 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 the enterprise, unless the activities of such person are limited to those mentioned in Article X 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. Paragraph Q of the OECD Model Commentary provides that the agent will not constitute a PE of the enterprise on whose behalf he acts only if: · the agent is independent of the enterprise both legally and economically , and · the agent acts in the course of his business when acting on behalf of the enterprise. Furthermore, paragraphs R and S of the OECD Model commentary provide that independent agent status is less likely if the activities of the agent are performed wholly or almost wholly on behalf of only one enterprise or where the commission agent not only sells the goods or merchandise of the enterprise, but as a permanent agent having authority to conclude contracts, he would be deemed in respect of this activity to be a PE. The company does not have an agent in Australia in accordance with Article B of the Country Y Agreement. All contracts and negotiation with clients is carried out in Country Y. The independent agents who sell the company's product do not have any authority to conclude contracts in relation to the product. The independent agents are independent legally and economically of the company. Therefore, the company does not have a PE in Australia under article B of Country Y Agreement. Accordingly, as the company does not have a PE in Australia, the income derived by the company from sales made in Australia is not assessable under subsection 6-5(3) of the ITAA 1997 by virtue of the overriding effect of Article Y of the Country Y agreement.

The company is a Country Y resident company which is wholly owned by Country Y resident shareholders. | The company is registered in Country Y. | The company's centre of management is in Country Y. | The company's head office is based in Country Y. | The company's owner and director is a Country Y resident individual. | The company designs and manufactures products for sale in Country Y and Australia. | The company distributes the products through independent agents in Australia. | Each agent looks after at least X other brands and they are not dependent on the company economically or financially. | A transport company manages the shipping requirements and act as the company's duty agent into Australia. | The products are sold to independent retail outlets via the respective agents. | In addition, the products are sold via online shopping through a Country Y based server. The products are despatched via the transport company and delivered direct to the customer. | The company would not perform services for more than a small number of days in any one financial year and contacts with agents are usually through e-mail and phone from Country Y. | The company is registered for GST in Australia and its GST returns are filed from Country Y.