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Ruling

Subject: Assessability of Australian sourced income

Question and answer:

Is the money paid into the Australian bank account by Australian customers for goods and services provided outside of Australia, assessable in Australia?

No.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The company is incorporated in country X. It is in the business of providing instruction in various disciplines to paying customers around the world.

The company decides what courses are run, where they are run and manages all associated activities.

The company has an Australian representative who works from home on a part-time paid basis.

The role of the company's Australian representative is to process enquiries, forward marketing material to interested students, place local advertising and liaise on the company's behalf with regard to local marketing or PR.

The company does not pay the Australian representative's home office expenses.

The company has an Australian '.com.au' website in addition to the main country X website. Both of these websites are maintained in country X and they will soon be combined into a single '.com' global version.

Most leads from Australia are generated from the Australian website, with enquiries going directly to the Australian representative as they can be processed more quickly and cheaply than if they were handled by the country X office. Some Australian clients enquire via the country X website and these enquiries are on forwarded to the Australian representative for action.

When an individual decides to participate in the course, the completed application is forwarded online to country X for processing. The contract is bound by country X law and all legal and financial matters are handled by the country X office, which decides what courses are run and where, deals with the suppliers in delivering of the courses and manages all associated activities.

To make the process easier for the Australian participants the company has opened a bank account in Australia so that the payment can be made in Australian dollars without the clients having to worry about exchange rates.

To open the Australian bank account the company applied for and was given an Australian business number (ABN) and a tax file number (TFN).

The Australian representative transfers funds as specified by the country X office to the company's foreign exchange account.

All goods and services associated with the courses are provided outside of Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2),

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

Income Tax Assessment Act 1936 Subsection 6(1),

International Tax Agreements Act 1953 Sch1-Art7, and

International Tax Agreements Act 1953 Section Sch1-Art5.

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived from all sources, whether in or out of Australia during the income year.

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a foreign resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year, and other ordinary income that a provision includes as assessable income on some basis other than having an Australian source.  

The income derived from provision of services from a company is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.  

The definition of resident for a company in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that a foreign incorporated company may be treated as an Australian resident if the company is carrying on business in Australia, and either has its central management and control in Australia or its voting power held by Australian resident shareholders.

In this case, the central management and control and voting power of the company are all outside of Australia.  

Therefore the company is not an Australian resident company as it does satisfy the definition of a resident company under subsection 6(1) of the ITAA 1936. 

In determining liability to tax on Australian sourced income derived by a foreign company, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).  

In interpreting the wording of the tax treaty, the Commissioner accepts in Taxation Ruling TR 2001/13 that it is appropriate to have reference to the OECD Commentary on the Model Tax Convention on Income and Capital (Condensed Version 2005) (the OECD Commentary). 

Schedule 1 of the Agreements Act contains the tax treaty between Australia and country X (the Convention). The Convention operates to avoid the double taxation of income received by Australian and country X residents.  

Under Article 7 of the Convention, the business profits of an enterprise of country X shall be only taxable in country X unless the enterprise carries on business in Australia through a permanent establishment (PE) situated in Australia. If so, so much of the profit of the enterprises profit attributable to the PE in Australia may be taxed in Australia. 

PE is defined in Article 5(1) of the Convention as a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes a branch or an office.

Paragraph 4 of the OECD Commentary on Article 5(1) explains that the term place of business generally covers any premises, facilities or installations used for carrying on the business of an enterprise whether or not they are used exclusively for that purpose so long as a certain amount of space is at its disposal.

Paragraph 42.2 of the OECD Commentary on Article 5 provides that an internet website which is a combination of software and electronic data does not in itself constitute tangible property. It does not have a location that can constitute a place of business as there is no facility such as premises or machinery or equipment. However, where the enterprise carries on a business through a website which has the server at its disposal, the place where the server is located can be considered a PE of the enterprise.

Article 5(5) of the Convention provides that an enterprise shall not be deemed to have a PE merely by reason of the use of a facility or the maintenance of stock solely for the purpose of storage, display or delivery. The maintenance of a fixed place solely for the purpose of carrying on activity of a preparatory or auxiliary character also does not deem the enterprise to have a PE.

Article 5(6) of the Convention provides that a PE will be deemed to exist where an enterprise carries on a business in Australia through a person (other than an independent agent) who has authority to conclude contracts on behalf of that enterprise and the dependent agent habitually exercises that authority in Australia.

From the information provided, the company itself does not have a fixed place through which it carries on its business in Australia. The company does not have the server at its disposal. Having the website for advertising and display of product information would not constitute a PE in Australia (Taxation Determination TD 2005/2).

The company has one Australian representative whose role is to process enquiries, forward marketing material, place advertisements and liaise on behalf of the company. This representative works from home. Although the home is a fixed place, the activities conducted by the Australian representative are merely of a preparatory or auxiliary character and the company does not maintain the place by contributing to the cost of the home office. The Australian representative does not conclude contracts on behalf of the company nor do they have the authority to habitually conclude contracts on behalf of the company. Therefore, the company does not have a PE in Australia through the Australian representative and the home of the Australian representative does not constitute a PE of the company. 

In conclusion, the company has no PE in Australia. Consequently, the money deposited into its bank account by its Australian customers is not assessable in Australia.

Note:

Each year the Commissioner publishes a legislative instrument that sets out the obligations of certain taxpayers to lodge returns and the date by which they must be lodged. It also identifies classes of taxpayers who are not required to lodge a return.

Based on this legislative instrument, a foreign resident company that only derives dividend, interest or royalty income from Australian sources that are subject to withholding tax in Australia are not required to lodge a return in Australia.  

Interest derived from Australian bank accounts held by foreign residents is subject to special pay as you go (PAYG) withholding tax on interest. If a foreign company only derives assessable Australian interest income it is not required to lodge a tax return in Australia.

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