ATO Interpretative Decision
ATO ID 2005/24
Income Tax
Permanent Establishment of a non-resident entity with employees in AustraliaFOI status: may be released
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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is income derived in Australia by a Singapore resident company assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997).
Decision
No. The income of a Singapore resident company derived in Australia is not assessable under subsection 6-5(3) of the ITAA 1997 in the absence of a permanent establishment of the company in Australia.
Facts
The taxpayer company is a resident of Singapore for taxation purposes.
The company rents space in a warehouse facility in Australia. The facility is used solely to store spare equipment used when undertaking the operations of the entity.
This facility is not used as an office to conduct normal business activities such as administration, marketing or design.
The entity has one employee in Australia. That employee does not have the authority to enter into contracts on behalf of the Singaporean company, does not have an office and performs work solely at client's premises.
The Australian employee and other employees from Singapore spend between two and eight weeks at the offices of clients undertaking installation projects and move between sites within the offices of clients.
Reasons for Decision
Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly and indirectly from all Australian sources during the income year.
The International Tax Agreements Act 1953 (Agreements Act) must be considered to determine whether Australia has a taxing right in respect of the income derived in Australia by the non-resident company. Subsection 4(1) of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 and the ITAA 1997 so that those Acts are read as one. The Agreements Act gives the relevant double tax agreement, contained in a Schedule to the Agreement Act, the force of law in Australia.
Schedule 5 to the Agreements Act contains the double tax agreement between Singapore and Australia (the Singapore Agreement). Schedule 5A to the Agreements Act contains the protocol amending the Singapore Agreement (the Singapore Protocol). The Singapore Agreement and the Singapore Protocol operate to avoid the double taxation of income received by Australian and Singaporean residents.
In Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4717; (1990) 21 ATR 531 (Theil), the High Court accepted that the OECD Model Taxation Convention's official Commentaries (the OECD Commentary) may be relevant to the interpretation of Double Tax Agreements based on the OECD Model Tax Convention on Income and on Capital (the OECD Model). In Theil the High Court approved recourse to the OECD Model and Commentaries under Article 32 of the Vienna Convention (see paragraph 90 of Taxation Ruling TR 2001/13).
Under Article 5 of the Singapore Agreement, the profits of a Singaporean resident entity shall be taxable only in Singapore unless the enterprise carries on a business in Australia through a permanent establishment situated in Australia.
The term 'permanent establishment' is defined in Article 4(1) of the Singapore Agreement as a 'fixed place of business through which the business of an enterprise is wholly or partly carried on'.
Article 4(4)(a) of the Singapore Agreement states that an enterprise shall not be deemed to have a permanent establishment merely by reason of the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise. Article 4(4)(b) of the Singapore Agreement states that an enterprise shall not be deemed to have a permanent establishment merely by reason of maintaining a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display.
The taxpayer rents space in a warehousing facility solely for the storage of equipment to support activities undertaken in Australia. The warehousing facility does not constitute a permanent establishment as it is maintained merely for the storage of a stock of goods belonging to the Singaporean resident.
Article 4(5) of the Singapore Agreement provides that a permanent establishment may exist where a Singaporean enterprise carries on a business in Australia through a person (other than an independent agent) who has authority to conclude contracts on behalf of that enterprise and habitually exercise that authority in Australia.
The non-resident entity has an employee based in Australia. The functions undertaken by the employee are to support project implementation and marketing. The employee of the enterprise in Australia does not have the authority to enter into contracts on behalf of the non-resident entity. The employee does not perform any work from the warehouse or other facilities provided by the non-resident entity. Projects are undertaken from the premises of clients. The employee is providing dependent personal services to the Singaporean entity in Australia. As such the employee does not constitute a permanent establishment of the Singaporean entity in Australia.
Paragraphs 4.2 to 4.5 of the OECD Commentary on Article 5 of the OECD Model, on which Article 5 of the Singapore Agreement is based, discuss situations in which the premises of a third party enterprise can constitute a permanent establishment due to the presence of a representative of a non-resident enterprise at those premises. The examples provided include the long term provision of office space to employees of one entity in the headquarters of another or a painter spending the majority of time in the same building undertaking the most important functions of the painting business.
The employees of the non-resident entity visit the offices of the clients and spend between two and eight weeks at those premises. The employee moves around within the premises to undertake the installation projects on different equipment. They are not identified with any particular location within the premises. The Singaporean entity does not have a permanent establishment in the premises of their clients as the employees do not spend sufficient time in a specific geographic location to constitute a permanent establishment.
Due to the application of Article 5 of the Singapore Agreement, in the absence of a permanent establishment of the Singaporean company in Australia, Australia does not have a taxing right over the income received by the Singaporean entity from the operations of the company in Australia. As such that income is not assessable in Australia under section 6-5(3) of the ITAA 1997.
Date of decision: 17 December 2004Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
subsection 6-5(3)
the Act International Tax Agreements Act 1953
section 4(1)
Schedule 5
Schedule 5A
Schedule 5 Article 4
Schedule 5 Article 4(1)
Schedule 5 Article 4(4)
Schedule 5 Article 4(4)(a)
Schedule 5 Article 4(4)(b)
Schedule 5 Article 4(5)
Schedule 5 Article 5
Case References:
Thiel v. Federal Commissioner of Taxation
(1990) 171 CLR 338
90 ATC 4717
(1990) 21 ATR 531
Other References:
OECD Model Tax Convention on Income and on Capital
OECD Commentary on the Model Tax Convention on Income and on Capital
Keywords
Double tax agreements
Permanent establishment
Singapore
International tax
ISSN: 1445-2782