ATO Interpretative Decision

ATO ID 2006/198

Income Tax

Permanent Establishment: installation of plant as part of a project where the period is greater than 12 months - UK resident
FOI status: may be released

This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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

Status of this decision: Decision Current

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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Does the installation of plant as part of a project by a United Kingdom (UK) resident taxpayer constitute a 'permanent establishment' in Australia within the meaning of that term in Article 5 of Schedule 1 to the International Tax Agreements Act 1953 (the United Kingdom Convention)?

Decision

Yes. The installation of plant as part of a project by the UK resident taxpayer will constitute a 'permanent establishment' in Australia within the meaning of that term in Article 5 of the United Kingdom Convention.

Facts

The taxpayer is a foreign resident company incorporated in the UK. The taxpayer has entered into a contract with an Australian company for the installation of plant and other works as part of a project located in Australia.

The period of the contract is greater than twelve months.

The taxpayer has entered into a subcontracting agreement with an unrelated Australian company to provide for the installation of plant and other works as detailed in the subcontracting agreement.

The taxpayer will provide a UK resident project director and engineers who will to oversee the installation of the project, as required.

Reasons for Decision

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

Article 5(3)(a) of the United Kingdom Convention states that an enterprise shall be deemed to have a permanent establishment in Australia and to carry on business through that permanent establishment if it has a building site or construction or installation project in Australia, or it undertakes a supervisory or consultancy activity in Australia connected with such a site or project, but only if that site, project or activity last more than 12 months.

According to the facts, the taxpayer has entered into an agreement with an Australian company for the installation of plant as part of a larger project. Further to this the taxpayer has also entered into an agreement with an unrelated Australian company for the subcontracting of such works.

In Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4717; (1990) 21 ATR 531, the High Court accepted that the OECD Model and the Commentaries on the Articles of the OECD Model (the OECD Commentary) may be relevant to the interpretation of tax treaties based on the OECD Model. The High Court approved recourse to the OECD Model and the OECD Commentary under Article 32 of the Vienna Convention (see paragraph 102 of Taxation Ruling TR 2001/13). Unless specified otherwise, references to the OECD Model and Commentary are to the version published on 15 July 2005.

Paragraph 16 to 20 of the OECD Commentary on Article 5 of the OECD Model discusses situations where a building site or construction or installation project constitutes a permanent establishment where that building site or construction or installation project lasts more than 12 months.

Paragraph 17 of the OECD Commentary explains that the term 'installation project' is not restricted to an installation related to a construction project; it also includes the installation of new equipment, such as a complex machine, in an existing building or outdoors.

It is considered that the installation of plant and other works constitutes an installation project. The contract entered into with the subcontractor to undertake the work outlined in the agreement would not preclude it from the operation of Article 5(3)(a) of the United Kingdom Convention.

Paragraph 19 of the OECD commentary indicates that if a general contractor has undertaken the performance of a comprehensive project, subcontracts part of that project to other enterprises (subcontractors), the period spent by a subcontractor working on the building site must be considered as being time spent by the general contractor on the building project. This particular statement implies that the use of subcontractors by the taxpayer would not preclude the taxpayer from having an installation project.

Date of decision: 26 July 2006

Year of income: Year ended 30 June 2006

Legislative References:
International Tax Agreements Act 1953
Schedule 1
Schedule 1, Article 5

Case References:
Thiel v Federal Commissioner of Taxation
   (1990) 171 CLR 338
   90 ATC 4717
   (1990) 21 ATR 531

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

Related ATO Interpretative Decisions
ATO ID 2002/850

Other References:
2005 OECD Model Tax Convention on Income and on Capital

Keywords
Double tax agreements
International tax
Permanent establishment

Siebel/TDMS Reference Number: 5102601

Business Line: Public Groups and International

Date of publication: 4 August 2006

ISSN: 1445-2782

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