ATO Interpretative Decision
ATO ID 2005/118
Income tax
Assessability of income derived before 1 July 2004 by a company resident of Australia and of the United KingdomFOI 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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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.
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 the business income derived by a company taxpayer that is incorporated in the United Kingdom (UK) and has its central management and control in Australia assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The business income derived by the company taxpayer is assessable under subsection 6-5(2) of the ITAA 1997. Article 5 of Former Schedule 1 to the International Tax Agreements Act 1953 (the Agreements Act) provides Australia the sole taxing rights over the income as Article 3 deems the company to be a resident of Australia.
Facts
The taxpayer is a company that is incorporated in UK but not in Australia.
The company is a resident of the UK for the purposes of the domestic laws of the UK.
The company carries on business in Australia and its central management and control is located in Australia. The company does not derive any business income through a permanent establishment in the UK.
All board of directors meetings are held in Australia. All strategic, investment and operational business decisions are made and implemented in Australia.
Reasons for Decision
Subsection 6-5(2) of the ITAA 1997 provides that assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Business income is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.
According to subsection 995-1(1) of the ITAA 1997, the term 'resident' has the same meaning as the definition of 'resident' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). A company is therefore a resident if it is incorporated in Australia or, if it is not so incorporated, it carries on business in Australia and has either its central management and control in Australia or its voting power is controlled by resident Australian shareholders.
In the present case, the company taxpayer is not incorporated in Australia but it does carry on business in Australia and its central management and control is located in Australia. Accordingly, it is a resident of Australia for the purposes of Australia's domestic tax law.
However, the company is also a resident of the United Kingdom (UK) for the purposes of the domestic tax laws of the UK because it is incorporated in the UK. Therefore, it is necessary to consider not only the income tax law but also the applicable double tax agreement contained in the Agreements Act.
Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).
Former Schedule 1 to the Agreements Act contained the double tax agreement between Australia and the United Kingdom of Great Britain and Northern Ireland (the 1967 UK Agreement). Former Schedule 1A to the Agreements Act contained the Protocol to the 1967 UK Agreements (the 1980 Protocol).
The 1967 UK Agreement and 1980 Protocol were replaced by the 2003 UK Convention which entered into force on 17 December 2003, and in the case of Australia, applies to income or gains for the income year beginning on 1 July 2004 and thereafter. However, the 1967 UK Agreement and the 1980 Protocol continue to operate to avoid the double taxation of income received by Australian and UK residents from income derived before 1 July 2004.
Article 5 of the 1967 UK Agreement governs taxing of business income derived by a resident of one country from sources in the other. Article 5(2) provides that business income of an Australian enterprise may be taxed in the UK only if that income is attributable to a permanent establishment in the UK. According to Article 3(5), an Australian enterprise refers to a commercial enterprise or undertaking by an Australian resident.
The definition of an 'Australia resident' within Article 3(1)(d) for the purposes of the 1967 UK Agreement includes an Australian company. Article 3(1)(a)(ii) defines an Australian company as a company which is:
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- a resident of Australia; and
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- is managed and controlled in Australia.
'Resident of Australia' for the purposes of the 1967 UK Agreement
By operation of Article 2(1)(k), a 'resident of Australia' has the same meaning which it has under Australia's domestic tax laws. Therefore, in the present case, the company is a 'resident of Australia' for the purposes of the 1967 UK Agreement because it is a 'resident of Australia' by operation of the definition of subsection 6(1) of the ITAA 1936.
Managed and controlled in Australia
The company in the present case is also is also managed and controlled in Australia for the purposes of the 1967 UK Agreement. All the board of directors meetings are held in Australia. Furthermore, all strategic, investment and operational business decisions are made and implemented in Australia.
The company is therefore an Australian company for the purposes of the 1967 UK Agreement. Accordingly, Article 5 of the 1967 UK Agreement exempts the business income of the company from tax in the UK unless it derives income through a permanent establishment in the UK. The company in the present case, however, does not have a permanent establishment in the UK.
Since Article 5 of the 1967 UK Agreement does not prohibit Australia from taxing the business income of the company, the business income is included in its assessable income under subsection 6-5(2) of the ITAA 1997.
Date of decision: 20 April 2005Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1936
subsection 6(1)
subsection 6-5(2) International Tax Agreements Act 1953
section 4
Former Schedule 1
Former Schedule 1, Article 2
Former Schedule 1, Article 3
Former Schedule 1, Article 5
Related Public Rulings (including Determinations)
Draft Taxation Ruling TR 2004/D7
ATO ID 2005/117
Other References:
Income Tax (International Agreements) Bill 1968 - Explanatory Memorandum
Keywords
Double tax agreements
Dual residence
International tax
Residence in Australia
United Kingdom
ISSN: 1445-2782
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