Edited version of private ruling

Authorisation Number: 1011547189063

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Ruling

Subject: Assessable income

Question 1

Is a non-resident Investor who is a resident of Country Y subject to Australian income tax in terms of subsection 6-5(3) or 6-10(5) of the Income Tax Assessment Act 1997 in respect of a share of any distribution from the stage production derived pursuant to an Investment Agreement with Q Limited?

Answer

No.

Relevant facts

Q Limited (the Producer), a company incorporated and tax resident in Country X is the producer of the stage production to be performed in Australia. This is as per the standard 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 stage 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 Pty Limited (the Co-Producer) and/or at the venue in 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 25 days.

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 stage productions for various parties and its role is outlined in the Management Agreement.

As per the Investment Agreements, profits derived from the stage production will be apportioned as to the Producer and Co-Producer and the Investors in the stage production.

The relevant non-resident Investors in the stage production consist of Country X and Country Y based individuals and corporate entities. It is stated that the non-resident Investors in the stage production have no offices, dependent agents or other permanent establishments in Australia. The Investors merely contribute agreed capital amounts to the stage 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 stage production is planned to tour 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 the following:

'The Production' means the Producer's proposed stage production on tour 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 stage 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 stage 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 stage production as proposed.

Relevant legislative provisions

Income Tax Assessment Act 1936 Part lll Division 6

Income Tax Assessment Act 1997 Subsection 6-5(3)

Income Tax Assessment Act 1997 Subsection 6-10(5)

International Tax Agreements Act 1953 Subsection 3(11)

International Tax Agreements Act 1953 Section 4

Reasons for decision

Question 1

Summary

Income derived from the business activity constituted by the performance of the stage 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 Y Agreement to the International Tax Agreements Act 1953 (Agreements Act) and subsection 3(11) of the Agreements Act.

It is necessary to consider the application of provisions of the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997) as well as the interaction of those provisions with the Country Y Agreement. Section 4 of the Agreements Act incorporates the ITAA 1936 and the ITAA 1997 with the Agreements Act which are read as one with the Agreements Act.

Relevant provisions of the ITAA 1997 are subsections 6-5(3) and 6-10(5)

Detailed reasoning

Assessment under the ITAA 1936

The non-resident investor is a resident of Country Y. The non-resident investor derives income as a result of having entered into an Investment Agreement with the Producer of the stage production. The Producer is a company incorporated and tax resident in Country X. The stage production is to tour Australia.

It is contended that no amount of the income derived under the Investment Agreement is assessable in Australia because:

· the income does not have a source in Australia; and

· 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.

However, 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 stage 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 3^rd 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. Federal Commissioner of Taxation 89 ATC 5180 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 7^th 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).

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 box office receipts.

The above property is used by the Producer in staging the Production. Accordingly, the business of staging 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 stage production are held subject to a trust because:

The use of the rights produces the gross weekly box office 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 box office 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 box office receipts, which are also subject to the trust. Therefore the rights held by the Producer are necessarily subject to the same trust as the box office receipts. It is recognised that without the rights, the stage production could not be produced 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 stage 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 stage production.

According to Jacobs Law of Trusts (7^th 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 stage 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 casse 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 stage 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 stage 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 investor is a resident of Country Y with which Australia has a double tax agreement. Accordingly, where the 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.

Application of the double tax agreement between Australia and Country Y

The Country Y Agreement applies because the 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 stage production, the non-resident investor has an enterprise within the meaning of that term as considered by the High Court in Thiel v FC of T (1990) 171 CLR 338; (1990) 64 ALJR 516; (1990) 94 ALR 647; (1990) 21 ATR 531; 90 ATC 4717.

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 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

· 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:

· 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

· the beneficiary's share of the income shall be deemed to be attributable to that permanent establishment.

In determining the application of subsection 3(11) 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 subsection 3(11).

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 stage 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 2008 OECD Model Convention 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 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. The facts of this case are similar. As the tour is for more than 6 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.

Therefore, because the Producer who is the trustee of the trust does not have a permanent establishment in Australia section 3(11) of the Agreements Act does not apply.

This absence of a permanent establishment means that the business profits article of the relevant agreement cannot apply in terms of paragraph 3(11)(b) of the Agreements Act. Further, paragraphs 3(11)(c) and (d) which would otherwise deem the beneficiary to have carried on business through the permanent establishment in Australia and for the share of trust income to be attributable to that permanent establishment do not apply.

Subsections 6-5(3) and 6-10(5) of the ITAA 1997 do not apply because the trust income does not have an Australian source.

Therefore the non-resident investor who is a resident of Country Y is not subject to tax in Australia on the share of income from the stage production.

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