ATO Interpretative Decision

ATO ID 2005/132

Income tax

• This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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.

Issue

Is the income derived in Australia by a Canadian resident company assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The income derived in Australia by a Canadian resident company is assessable under subsection 6-5(3) of the ITAA 1997 as the entity has a permanent establishment in Australia.

Facts

The taxpayer is a Canadian incorporated company and is a resident of Canada for income tax purposes.

The taxpayer leases floor space in a warehouse in Australia where it stores stock in order to have it readily available to be sold at trade shows.

The taxpayer also maintains a rented office in Australia. The office is administered by one employee on a full-time basis.

The Australian office of the taxpayer is used as a place where invoices are administered and payments from customers are received, as well as coordinating the delivery of goods and spare parts from the warehouse to customers. Customer payments are banked into the taxpayer's bank account by the employee.

The taxpayer receives income from sale of goods and spare parts.

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 or indirectly from all Australian sources during the income year.

The income from sale of goods and spare parts is ordinary income for the purpose of subsection 6-5(3) of the ITAA 1997.

In determining liability to tax on Australian sourced income received by a non resident, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one.

Schedule 3 to the Agreements Act contains the convention between Australia and Canada (the Canadian Convention). Schedule 3A to the Agreements Act contains the protocol amending the Canadian Convention (Canadian Protocol). The Canadian Convention and the Canadian Protocol operate to avoid the double taxation of income received by Australian and Canadian residents.

Article 7(1) of the Canadian Convention provides that the business profits of a Canadian enterprise shall be only taxable in Canada unless the enterprise carries on business in Australia through a permanent establishment situated in Australia. If the enterprise carries on or has carried on business through a permanent establishment, the profits of the enterprise may be taxed in Australia, but only so much of them as is attributable to that permanent establishment.

The term 'permanent establishment' is defined in Article 5(1) of the Canadian Convention as a fixed place of business through which the business of an enterprise is wholly or partly carried on.

Article 5(2) of the Canadian Convention contains a list of examples each of which can be regarded as constituting a permanent establishment such as a place of management, an office, a branch, a factory or a workshop.

Article 5(3) of the Canadian Convention provides that an enterprise shall not be deemed to have a permanent establishment merely by reason of:

(a)

the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

(b)

the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;

(c)

the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

(d)

the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; or

(e)

the maintenance of a fixed place of business solely for the purpose of activities which have a preparatory or auxiliary character for the enterprise, such as advertising or scientific research.

Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting double tax agreements. Paragraph 104 states that the Commentaries on OECD Model Tax Convention on Income and on Capital (OECD Commentary) provide important guidance on interpretation and application of the OECD Model and will often need to be considered, as a matter of practice, in interpreting double tax agreements, at least where the wording is ambiguous.

Paragraph 25 of the OECD Commentary on Article 5 of the OECD Model states that a permanent establishment could also be constituted if an enterprise maintains a fixed place of business in order to supply spare parts to customers for the machinery supplied to such customers, or to maintain or repair such machinery, as this goes beyond the pure delivery mentioned in Article 5(3).

The warehouse floor space leased where stock is stored in order to have it readily available to be sold at trade shows would not be deemed to be a permanent establishment under Article 5(3)(a) and (b) of the Canadian Agreement, if that was the only activity carried on in Australia by the taxpayer. However, the taxpayer's activities go beyond those mentioned in Article 5(3) of the Canadian Convention.

The taxpayer has a fixed place of business in Australia under Article 5(1) and 5(2) of the Canadian Convention taking into account:

(a)

the maintenance of a rented office in Australia;

(b)

the administrative functions performed by the employee on a full-time basis in Australia including administration of invoices to customers and receiving of payments from customers;

(c)

the coordination of delivery of goods and spare parts from the warehouse to customers; and

(d)

banking of customer payments into the taxpayer's bank account.

As the taxpayer has a permanent establishment in Australia, Article 7(1) of the Canadian Convention applies and the business profits of the taxpayer will be taxable in Australia, but only so much as attributable to that permanent establishment.

Accordingly, the income derived in Australia by the taxpayer is assessable under subsection 6-5(3) of the ITAA 1997.

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   subsection 6-5(3)

Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/13

Other References:
OECD Model Tax Convention on Income and Capital

Keywords
Canada
Double tax agreements
International Tax
Permanent establishment

Siebel/TDMS Reference Number:  4316833

Business Line:  Public Groups and International

Date of publication:  13 May 2005

ISSN: 1445-2782