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Edited version of private ruling
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Ruling
Subject: Assessable income
1. Is Q, a resident of Country X, subject to Australian income tax in terms of subsection 6-5(3) or 6-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of its share of profits from the production?
No.
2. Is Q, an agent or trustee for the non-resident investors in the production required to withhold any tax on behalf of the non-resident investors in terms of section 254 of the Income Tax Assessment Act 1936 (ITAA 1936)?
No.
3. Is Q, required to pay the tax due and payable by the non-resident investors in the production in terms of section 255 of the ITAA 1936?
No.
Relevant facts
Q (the Producer), a company incorporated and tax resident in Country X, is the producer of the production to be performed in Australia. This is as per the Investment Agreements between the Producer and its Investors, separate similar agreements being entered into between the Producer and each investor (the agreements).
The agreements were signed outside Australia.
The Producer is a wholly owned subsidiary of a Country X company and is entirely Country X owned and managed.
It is stated that the Producer will not have a permanent base in Australia, or any employees based in Australia. It will have staff flying into Australia for visits in connection with making arrangements for the production but these visits will be very brief, ranging from days to a few weeks. The staff will stay in hotels and will not have any office or other premises permanently available for their use. Their work will be done from their hotel accommodation, from the offices of R (the Co-Producer) and/or at the venue at which the production is running from time to time.
To date there has been one Country X based contractor who has visited Australia on behalf of the Producer. That person provided services to the production for a period of less than a month.
To assist with the production and management activities locally a Co-Producer has been engaged. The Co-Producer and the Producer act at arm's length and the Co-Producer is remunerated in accordance with market standards. The Co-Producer conducts an independent business of providing production management and other support for Australian productions for various parties and its role is outlined in the Management Agreement.
As per the Investment Agreements, profits derived from the production will be apportioned to the Producer and Co-Producer and to the Investors in the production.
The relevant non-resident Investors in the production consist of Country X and Country Y based individuals and corporate entities. It is stated that the non-resident Investors in the production have no offices, dependent agents or other permanent establishments in Australia. The Investors merely contribute agreed capital amounts to the production and are not required to contribute any further capital over and above the agreed subscription amounts.
The Producer and Co-Producer are not subject to direction by the Investors concerning the staging of the production. The Producer and Co-Producer cannot bind the Investors or otherwise act on their behalf except in accordance with the Investment Agreement.
The production is planned for a period of less than one calendar year and is not based in any one place or any one venue for an extended period of time.
The non-resident Investors' funds are deposited into the Country X bank account of the Producer and it is from this account that investor distributions will be made.
Investment Agreements
The Investment Agreements between the Producer and the non-resident Investors are similar.
The terms of the Investment Agreement include that 'The Production' means the Producer's proposed production in Australia.
A bank account is to be opened and controlled by the Producer (Production Account).
All subscriptions and additional money paid to the Producer shall be paid initially into the Production Account and then into local accounts. All receipts and payments relating to the production shall ultimately be credited and debited to the Production Account except that in most instances all deposits and payments shall be made through local bank accounts in Australia. All monies retained in the Production Account shall only be used in respect of liabilities arising in respect of the Production and will not be available for set-off against any other liabilities of the Producer.
The Producer will have the necessary rights to be able to mount the production as proposed.
Management Agreement
The Management Agreement between the Producer and the Co-Producer is for the provision of management and co-production services regarding the production in various venues throughout Australia.
In terms of the Management Agreement, R:
· is appointed Co-producer
· agrees that all major decisions concerning the production shall be mutually agreed and that in the event of any disagreement the decision of the Producer shall prevail
· is authorised to negotiate for the hire of venues in which the production is intended to be presented but the Producer has the right of final approval of the terms and conditions of all venue hire agreements
· is responsible for the marketing, advertising and publicity of all productions.
Relevant legislative provisions
Income Tax Assessment Act 1936 Part lll Division 6
Income Tax Assessment Act 1936 Section 254
Income Tax Assessment Act 1936 Section 255
Income Tax Assessment Act 1997 Subsection 6-5(3)
Income Tax Assessment Act 1997 Subsection 6-10(5)
International Tax Agreements Act 1953
Reasons for decision
Issue 1
Question 1
Summary
Income derived from the business activity constituted by the production in Australia will only be taxable in Australia if the activity is carried on in Australia through a permanent establishment.
If a permanent establishment exists the business profits will be deemed to have an Australian source in the hands of the non-resident by operation of the source of income article of the Country X Agreement to the International Tax Agreements Act 1953 (Agreements Act).
It is necessary to consider the application of provisions of the ITAA 1936, ITAA 1997 and the interaction of that legislation with the Country X Agreement.
Relevant provisions of the ITAA 1997 are subsections 6-5(3) and 6-10(5).
Detailed reasoning
Application of the double tax agreement between Australia and Country X
The Country X Agreement applies because the Producer is a resident of Country X.
The business profits article of the Country X Agreement provides that the business profits of an enterprise shall be taxable only in the country of residence unless the enterprise carries on a business through a permanent establishment in Australia, in which case Australia can tax the profits that are attributable to the permanent establishment. In order for the business profits article to apply to the income derived by the non-resident Producer, it is necessary to show that the non-resident Producer has an enterprise that carries on a business through a permanent establishment in Australia.
By producing the production in Australia the non-resident Producer has an enterprise within the meaning of that term as considered by the High Court in Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4717; (1990) 21 ATR 531 (Thiel).
Thus having determined that the non-resident Producer has an enterprise it is necessary to ascertain whether the enterprise is carrying on a business in Australia through a permanent establishment.
The application of the business profits article of the Country X Agreement to the income derived by the non-resident Producer turns on the way in which the business is carried on by the Producer in Australia.
Whether that business is carried on through a 'permanent establishment' requires consideration of that term as defined in the permanent establishment article of the Country X Agreement.
Each venue in which the production is performed is a place of business yet it needs to be determined whether it constitutes a permanent establishment as defined. When interpreting the meaning of 'permanent establishment' in the Country X Agreement reference has been made to the commentary to the July 2008 OECD Model Tax Convention on Income and on Capital regarding the permanent establishment article. In that commentary it is stated that it is a condition of a permanent establishment that the place of business must be 'fixed', that is, it must be established at a distinct place with a certain degree of permanence.
Taxation Ruling TR 2002/5 considers what is a place at or through which a person carries on any business for the purpose of the permanent establishment definition in subsection 6(1) of the ITAA 1936. The discussion in TR 2002/5 applies equally to the meaning under the permanent establishment article of the Country X Agreement because the definition in subsection 6(1) of the ITAA 1936 is based on the concept of permanent establishment used in Australia's tax treaties.
The concepts of temporal and geographic permanence of a permanent establishment are examined in TR 2002/5 and their application is illustrated in Example 3 by the situation of Plays & Co, a foreign theatrical company touring in Australia for 4 months with 'one off' performances at different locations. There it is said that where a tour lasted more than 6 months there would be temporal permanence but because of the itinerant nature of the activity in Australia, Plays & Co does not satisfy the geographic permanence requirement and so does not have a place at or through which it carries on its business.
As the tour of the production is for more than six months there is temporal permanence. However, given the period each venue is occupied this does not meet the geographic permanence requirement and thus the Producer does not have a place at or through which it carries on its business. In other words the Producer does not have a permanent establishment in Australia in view of these facts.
However, it is also necessary to consider the role of the Co-Producer in Australia.
This is required in respect of the permanent establishment article of the Country X Agreement which may operate to deem an enterprise to have a permanent establishment. That paragraph relates to a person acting as a dependent agent who has the authority to conclude contracts on behalf of the enterprise and the authority is habitually exercised. If this were the case for the Co-Producer it would lead to a deemed permanent establishment of the enterprise of the Producer.
On the other hand the permanent establishment article also deals with an independent agent and provides that where the enterprise carries on business through that independent agent it will not be deemed to have a permanent establishment.
The authority to conclude contracts is an integral part of the role of the Co-Producer of the tour of the production. Further, given the scale and duration of the tour it is an authority which would be exercised repeatedly.
However, the Co-Producer is a locally owned and operated business which conducts an independent business of providing production management and other support for Australian productions.
Further, the Management Agreement with the Co-Producer provides remuneration in accordance with normal commercial terms and conditions appropriate to an independent agent.
Accordingly, it is contended that the role of the Co-Producer in the execution of contracts relating to the production was done:
· as an agent who was independent of the Producer both legally and economically, and
· acting in the ordinary course of the business of the Co-Producer when acting on behalf of the Producer.
A sample of the contracts entered into in connection with the tour of the production has been provided.
Having considered the above facts, the terms of the Management Agreement and the execution of the sample of contracts it is accepted that the Co-Producer is an independent agent in terms of the permanent establishment article of the Country X Agreement. Therefore, the Producer is not deemed to have a permanent establishment in Australia by the operation of the permanent establishment article.
Returning to the business profits article of the Country X Agreement, in order for that article to apply so that the business income of the Producer may be taxed in Australia it is necessary that the business be carried on though a permanent establishment in Australia. It has been found that there is no permanent establishment of the Producer in Australia in terms of the permanent establishment article so the business profits are not taxable in Australia under the Country X Agreement.
Therefore the Producer is not subject to tax in Australia on its share of the profits from the production.
Question 2
Summary
An examination of when the Producer, as an agent or trustee for the non-resident Investors in the production is required to withhold tax on behalf of those investors in terms of section 254 of the ITAA 1936.
Detailed reasoning
Section 254 of the ITAA 1936 applies to an entity that is an agent or trustee for the purposes of the ITAA 1936 and the ITAA 1997. Section 254 contains provisions which describe the duties and obligations of persons who act as the agents or trustees of taxpayers.
The term 'trustee' is defined in subsection 6(1) of the ITAA 1936 to include an executor or administrator, guardian, committee, receiver or liquidator and every person having the administration or control of income affected by any express or implied trust.
Section 254 of the ITAA 1936 requires an agent to lodge an income tax return on behalf of the principal, whether the principal is a resident of Australia or a non-resident, disclosing the total income derived by the agent in a representative capacity.
Agents and trustees are answerable as taxpayers in respect of the payment of tax. Section 960-105 of the ITAA 1997 specifically provides that the income tax law applies to an entity in Australia as if it were an agent of a principal outside Australia where the agent holds money of the principal or has control, receipt or disposal of money of the principal.
Liability extends to making the necessary returns and retaining out of any money held in the representative capacity, an amount sufficient to pay tax becoming due. The liability does not exceed the amount that has been retained or should have been retained, but the agent or trustee is personally liable up to that limit.
In order to determine whether the Producer is a trustee it is necessary to consider the provisions discussed below.
Assessment under the ITAA 1936
The non-resident investors are respectively residents of Country X and Country Y. Each non-resident investor derives income as a result of having entered into an Investment Agreement with the Producer of the production. The Producer is a company incorporated and tax resident in Country X. The production is to show in Australia.
It is contended that no amount of the income derived under the Investment Agreement is assessable in Australia because:
(i) the income does not have a source in Australia; and
(ii) the non-resident is not carrying on a business through a permanent establishment in Australia.
Further, it is contended that the contractual relationship between the Producer and the non-resident investor does not constitute the Producer being a trustee or dependent agent of the non-resident investor.
We have found that a trust exists. The reasons for our finding are set out below.
It is accepted that the Producer is not carrying on the business of producing the production as an agent of the non-resident investor. This view has been formed having regard to the fact that the Producer does not take instruction from the investor nor can the Producer legally bind the non-resident investor. The Producer carries on the business as principal for the benefit of the trust (Construction Engineering (AUST) Pty Limited v Hexyl Pty Limited & Ors (1985) 155 CLR 541).
Trust Relationship
HAJ Ford & WA Lee 3rd edition at paragraph [1000] of Principles of the Law of Trusts describe a trust as:
...an obligation enforceable in equity which rests on a person (the trustee) as owner of some specific property (the trust property) to deal with that property for the benefit of another person (the beneficiary) or for the advancement of certain purposes.
French J in Harmer & Ors v. FC of T 89 ATC 5180; (1989) 20 ATR 1461 stated that a trust 'is notably a definition of a relationship by reference to obligations'. He went on to state that the four essential elements of a trust are:
· the trustee who holds a legal or equitable interest in the trust property
· the trust property which must be property capable of being held on trust and which includes a chose in action
· one or more beneficiaries other than the trustee, and
· a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries which obligation is also annexed to the property.
Having regard to the Investment Agreement, it is considered that all four elements are present so as to give rise to a trust relationship between the Producer and the non-resident investor. These elements are discussed in detail below.
Trustee
It is required that there is a person upon whom there is an obligation to deal with the trust property in terms of the trust: Jacob's Law of Trusts in Australia 7th edition at paragraph [105]. In this case the Producer is the trustee because, as discussed below, the Producer is the legal owner of the relevant trust property and has the relevant trust obligation.
The Producer also satisfies the definition of a trustee in subsection 6(1) of the ITAA 1936 because it is acting under an implied trust or alternately, is acting in a fiduciary capacity (see discussion below).
Subsection 6(1) provides of the ITAA 1936:
trustee in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes:
(a) …
(b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability.
Trust property
The corpus of the trust consists of the following:
· the necessary rights to be able to mount the production
· subscription monies received from the Investor, and
· gross weekly receipts.
The above property is used by the Producer in staging the production. Accordingly, the business of producing the production is subject to a trust. The reasoning for this view is set out below.
Rights
The rights that the Producer holds to produce the production are held subject to a trust because:
· The use of the rights produces the gross weekly receipts which are subject to the trust for the benefit of the investors.
· The royalty payable for the use of the rights is paid out of the gross weekly receipts being monies which are subject to the trust.
It is noted that if the rights were not subject to the trust, the Producer could not lawfully pay the royalty out of the receipts, which are also subject to the trust. Therefore, the rights held by the Producer are necessarily subject to the same trust as the receipts. It is recognised that without the rights, the production could not be in Australia.
Subscription monies
The amount subscribed was obtained under the Investment Agreement entered into by the Producer with the non-resident investor. The terms of the Investment Agreement indicate that the parties intended that the amount subscribed be used for the purpose of mounting the production and for no other purpose.
The Investment Agreement shows that the subscriptions were given to the Producer for a specific purpose, being the staging of the production. The Producer can not apply them against any other liabilities of the Producer because they are not the Producer's own funds but funds held in trust.
The subscription monies must also be kept separate to the Producer's other funds. In this case the Producer has accounted for the subscription monies separately in the Production Account which is exclusively for the production.
According to Jacobs Law of Trusts (7th edition) this treatment of the subscription monies is an indicator of a trust:
The courts have stressed the importance of various indicia. In other cases, it depends upon the terms of the agency whether the agent is bound to keep the money separate or is entitled to mix it with the agent's own money. In the former case, the agent is a trustee of the money and in the latter case, the agent is a debtor to the principal, unless there nevertheless is an intention to create a trust pursuant to which trust moneys and the moneys of the agent may be mixed. (paragraph 211).
Gross proceeds from ticket sales
The proceeds from ticket sales are deposited to the Production Account or to local accounts and are thereby kept separate from any other funds of the Producer. The Producer is the legal owner of those monies because the account is in its name, but the monies are not available to the Producer for its general use. The Producer is obliged to deal with the monies in accordance with the terms of the Investment Agreement.
Accordingly, the Investment Agreement clearly shows the intention to create a trust in relation to the proceeds from ticket sales. Ford & Lee (cited above) in Principles of the Law of Trusts state (at page 2040):
Where a party to a transaction does not show an explicit intention to create a trust and makes an enforceable promise that money they receive will be kept in a separate account and that they will pay the money to the person entitled to it, there is a strong indication that they intended to make themselves trustee of that money.
Fiduciary obligation
The obligation that the Producer has under the Investment Agreement is a fiduciary obligation because it is obliged to separately account for and act for the benefit of the investor. Mason J in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at pages 96-97 describes a fiduciary relationship as follows:
The critical feature of [fiduciary relationships] is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense.
The terms of the Investment Agreement impose specific obligations upon the Producer to deal with the rights to the production, the subscription monies and the proceeds of ticket sales for the benefit of others. As the High Court in The Registrar of the Accident Compensation Tribunal (Vic) v FC of T 93 ATC 4835 stated at 4842:
A trust may be created without the use of the word 'trust'. And, unless there is something in the circumstances of the case to indicate otherwise, a person who has 'the custody and administration of property on behalf of others' or who has 'received, as and for the beneficial property of another, something which he is to hold, apply or account for specifically for his benefit' is a trustee in the ordinary sense.
The obligations of the Producer which arise under the Investment Agreement in relation to the right to produce the production, the subscriptions, and the ticket sale proceeds constitute a fiduciary obligation.
Beneficiary
As a result of the Producer holding the right to produce the production, the subscriptions, and the ticket sale proceeds on trust and subject to the duties and obligations as trustee in favour of the non-resident investor, the non-resident investor has a beneficial interest represented by its subscription and entitlement to a share of the net surplus.
Application of Division 6 in Part lll of the ITAA 1936
The non-resident investor, which is a beneficiary of the trust described above, is presently entitled to the trust income when it has the right to receive an amount under the Investment Agreement.
Section 97 of the ITAA 1936 applies to a beneficiary who is not under a legal disability and presently entitled to a share of trust estate income. The non-resident investor, which is a beneficiary, fits this description. However, paragraph 97(2)(b) excludes income from a trust estate to which a beneficiary is presently entitled where the beneficiary is a non-resident. Instead, the Producer as trustee is liable to be taxed upon the non-resident beneficiary's share of trust income that is attributable to sources in Australia. This is in terms of subsections 98(2A) and 98(3) of the ITAA 1936.
As noted above the non-resident investors are respectively residents of Country X and Country Y. Australia has a double tax agreement with each country. Accordingly, where the respective agreement gives Australia the right to tax the income it will also deem the income to have an Australian source for the purposes of the ITAA 1936 and ITAA 1997.
On the other hand section 4 of the Agreements Act provides that the ITAA 1936 and ITAA 1997 will not apply if Australia does not have taxing rights under the relevant double tax agreement.
Accordingly, it is necessary to consider the application of Country X agreement and the Country Y Agreement and each is dealt with separately below.
Application of the double tax agreement between Australia and Country X
Country X Agreement applies because a non-resident investor is a resident of Country X.
The business profits article of the Country X Agreement provides that the business profits of an enterprise shall be taxable only in the country of residence unless the enterprise carries on a business through a permanent establishment in Australia, in which case Australia can tax the profits that are attributable to the permanent establishment. In order for the business profits article to apply to the income derived by the non-resident investor, it is necessary to show that the non-resident investor has an enterprise that carries on a business through a permanent establishment in Australia.
By entering into the Investment Agreement to invest in the production, the non-resident investor has an enterprise within the meaning of that term as considered by the High Court in Thiel.
Thus having determined that the non-resident investor has an enterprise it is necessary to ascertain whether the enterprise is carrying on a business in Australia through a permanent establishment.
For this purpose, the Agreements Act which deals with foreign beneficiaries of Australian business trusts must be considered. That subsection provides that:
Where:
(a) a beneficiary of a trust estate (not being a prescribed trust estate) who is a resident of a country with which, or with the government of which, Australia, or the Government of Australia, has made an agreement before the commencement of this subsection is presently entitled, either directly or through one or more interposed trust estates, to a share of the income of the trust estate derived from the carrying on by the trustee in Australia of a business through a permanent establishment in Australia; and
(b) under the agreement, the income to be dealt with in accordance with the article (in this section referred to as the 'business profits article') of the agreement relating to the taxing of income of an enterprise of a Contracting State where the enterprise carries on a business in the other Contracting State through a permanent establishment in the other Contracting State;
for the purpose of determining whether the beneficiary's share of the income may be taxed in Australia in accordance with the business profits article:
(c) the beneficiary shall be deemed to carry on in Australia, through a permanent establishment in Australia, the business carried on in Australia by the trustee; and
(d) the beneficiary's share of the income shall be deemed to be attributable to that permanent establishment.
In determining the application of the Agreements Act to the income derived by the non-resident investor the following is considered relevant:
The non-resident investor is a resident of Country X. Australia had a double tax agreement with Country X before the commencement of the act.
The non-resident investor is a beneficiary of a trust of which the Producer is the trustee.
The non-resident investor will be presently entitled to a share of the trust income, when an amount is capable of being ascertained and paid under the Investment Agreement.
The trust income is derived by the Producer as a trustee from the carrying on of a business in Australia. Whether that business is carried on through a 'permanent establishment' requires consideration of that term as defined in the permanent establishment article of the Country X Agreement. Each venue in which the production is performed is a place of business yet it needs to be determined whether it constitutes a permanent establishment. When interpreting the meaning of 'permanent establishment' in the Country X Agreement reference has been made to the commentary to the July 2008 OECD Model Tax Convention on Income and on Capital regarding the permanent establishment article. In that commentary it is stated that it is a condition of a permanent establishment that the place of business must be 'fixed', that is, it must be established at a distinct place with a certain degree of permanence.
Taxation Ruling TR 2002/5 considers what is a place at or through which a person carries on any business for the purpose of the permanent establishment definition in subsection 6(1) of the ITAA 1936. The discussion in TR 2002/5 applies equally to the meaning under the permanent establishment article of the Country X Agreement because the subsection 6(1) definition is based on the concept of permanent establishment used in Australia's tax treaties. The concepts of temporal and geographic permanence of a permanent establishment are examined in TR 2002/ 5 and their application is illustrated in Example 3 by the situation of Plays & Co, a foreign theatrical company touring in Australia for four months with 'one off' performances at different locations. There it is said that where a tour lasted more than six months there would be temporal permanence but because of the itinerant nature of the activity in Australia, Plays & Co does not satisfy the geographic permanence requirement and so does not have a place at or through which it carries on its business. The facts of this case are similar. Therefore, as the show is for more than six months there is temporal permanence. However, given the period each venue is occupied on the tour this does not meet the geographic permanence requirement and thus the Producer does not have a place at or through which it carries on its business. In other words the Producer does not have a permanent establishment in Australia.
Application of the double tax agreement between Australia and Country Y
The Country Y Agreement applies because a non-resident investor is a resident of Country Y.
The business profits article of the Country Y Agreement provides that the business profits of an enterprise shall be taxable only in the country of residence unless the enterprise carries on a business through a permanent establishment in Australia, in which case Australia can tax the profits that are attributable to the permanent establishment. In order for the business profits article to apply to the income derived by the non-resident investor, it is necessary to show that the non-resident investor has an enterprise that carries on a business through a permanent establishment in Australia.
By entering into the Investment Agreement to invest in the production, the non-resident investor has an enterprise within the meaning of that term as considered by the High Court in Thiel.
Thus having determined that the non-resident investor has an enterprise it is necessary to ascertain whether the enterprise is carrying on a business in Australia through a permanent establishment.
For this purpose subsection 3(11) of the Agreements Act which deals with foreign beneficiaries of Australian business trusts must be considered. That subsection provides that:
Where:
(a) a beneficiary of a trust estate (not being a prescribed trust estate) who is a resident of a country with which, or with the government of which, Australia, or the Government of Australia, has made an agreement before the commencement of this subsection is presently entitled, either directly or through one or more interposed trust estates, to a share of the income of the trust estate derived from the carrying on by the trustee in Australia of a business through a permanent establishment in Australia; and
(b) under the agreement, the income to be dealt with in accordance with the article (in this section referred to as the 'business profits article') of the agreement relating to the taxing of income of an enterprise of a Contracting State where the enterprise carries on a business in the other Contracting State through a permanent establishment in the other Contracting State;
for the purpose of determining whether the beneficiary's share of the income may be taxed in Australia in accordance with the business profits article:
(c) the beneficiary shall be deemed to carry on in Australia, through a permanent establishment in Australia, the business carried on in Australia by the trustee; and
(d) the beneficiary's share of the income shall be deemed to be attributable to that permanent establishment.
In determining the application of the Agreements Act to the income derived by the non-resident investor the following is considered relevant:
The non-resident investor is a resident of Country Y. Australia had a double tax agreement with Country Y before the commencement of the act.
The non-resident investor is a beneficiary of a trust of which the Producer is the trustee.
The non-resident investor will be presently entitled to a share of the trust income, when an amount is capable of being ascertained and paid under the Investment Agreement.
The trust income is derived by the Producer as a trustee from the carrying on of a business in Australia. Whether that business is carried on through a 'permanent establishment' requires consideration of that term as defined in the permanent establishment article of the Country Y Agreement. Each venue in which the production is performed is a place of business yet it needs to be determined whether it constitutes a permanent establishment. When interpreting the meaning of 'permanent establishment' in the Country Y Agreement reference has been made to the commentary to the July 2008 OECD Model Tax Convention on Income and on Capital regarding the permanent establishment article. In that commentary it is stated that it is a condition of a permanent establishment that the place of business must be 'fixed', that is, it must be established at a distinct place with a certain degree of permanence.
Taxation Ruling TR 2002/5 considers what is a place at or through which a person carries on any business for the purpose of the permanent establishment definition in subsection 6(1) of the ITAA 1936. The discussion in TR 2002/5 applies equally to the meaning under the permanent establishment article of the Country Y Agreement because the subsection 6(1) definition is based on the concept of permanent establishment used in Australia's tax treaties. The concepts of temporal and geographic permanence of a permanent establishment are examined in TR 2002/ 5 and their application is illustrated in Example 3 by the situation of Plays & Co, a foreign theatrical company touring in Australia for four months with 'one off' performances at different locations. There it is said that where a tour lasted more than six months there would be temporal permanence but because of the itinerant nature of the activity in Australia, Plays & Co does not satisfy the geographic permanence requirement and so does not have a place at or through which it carries on its business. The facts of this case are similar. Therefore as the tour is for more than six months there is temporal permanence. However, given the period each venue is occupied on the tour this does not meet the geographic permanence requirement and thus the Producer does not have a place at or through which it carries on its business. In other words the Producer does not have a permanent establishment in Australia.
Conclusion
The Producer is a trustee of a trust in relation to the income from the production which is distributed to the non-resident investors.
Section 254 of the ITAA 1936 will apply to the Producer where the Producer has a permanent establishment in Australia. This is because the Producer's permanent establishment would be deemed to be the permanent establishment of the non-resident investors in terms of the relevant double tax agreement.
However, it has been found above that the Producer does not have a permanent establishment in Australia and thus section 254 of the ITAA 1936 does not apply. Accordingly, the Producer is not required to withhold tax on behalf of the non-resident investors.
Question 3
Summary
An examination of the circumstances in which the Producer will be required to pay the tax due and payable by the non-resident investors in the production in terms of section 255 of the ITAA 1936.
Detailed reasoning
Section 255 of the ITAA 1936 provides that the Commissioner may serve a notice upon a person who has the receipt, control or disposal of money belonging to a foreign resident who is liable to pay Australian income tax requiring that person to pay the amount of any tax due and payable.
Section 255 of the ITAA 1936 also requires (and authorises) a person having the receipt, control or disposal of money belonging to a foreign resident to retain out of any money that comes to that person on behalf of the foreign resident an amount sufficient to pay the tax that is, or will become due by the foreign resident.
A person having receipt, control or disposal of money belonging to a foreign resident is liable for the tax payable on behalf of the foreign resident, but only to the extent of any amount that has been retained, or should have been retained. This person is also indemnified for all payments made on behalf of the foreign resident.
For the purposes of the provision every person who is liable to pay money to a foreign resident is deemed to be a person having the control of money belonging to the foreign resident. Further, all money due by that person to the foreign resident is deemed to be money that comes to that person on behalf of the foreign resident.
The Producer is liable to pay the share of income from the production to the non-resident investors and therefore is deemed to be a person having the control of money belonging to those foreign residents.
However, it has been found above that the non-resident investors do not have a permanent establishment in Australia so that the share of trust income from the production is not taxable in Australia. Accordingly, as the non-resident investors do not pay tax in Australia on the share of trust income section 255 of the ITAA 1936 does not apply to the Producer as trustee for the non-resident investors.
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