Edited version of your private ruling

Authorisation Number: 1012561406497

Ruling

Subject: Assessability of income

Question and answer

Will the income of the company be assessable in Australia during the period its directors and shareholders are living in Country X?

Yes.

This ruling applies for the following periods

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on

1 July 2013

Relevant facts and circumstances

The company is an Australian incorporated company.

The company has directors who are also the only shareholders.

The directors are the only employees of the company.

The business is totally electronic with sales being generated through the company website and correspondence being undertaken by email.

The directors/employees of the company do not require an office and work from home.

The nature of the business allows the directors/employees to work from anywhere in the world.

The majority of the clients of the business are Australian.

The company pays the directors a salary in their capacity as employees.

The company does not pay the directors any remuneration in their capacity as directors.

The directors/employees of the company intend to live in country X for a period of approximately a couple of years; however, this may be extended by another year. They will then return to Australia to live.

The directors/employees will carry on the business activities of the company in country X in the same fashion as they did in Australia.

The directors/employees will live in a house they own and carry out the business activities of the company from this house during the period they are in country X.

The company will not have any other employees or agents in the future.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1997 Section 6-5

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 5

Reasons for decision

Residency

Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) states that a company is a resident of Australia for taxation purposes if:

· it is incorporated in Australia, or

· although not incorporated in Australia it carries on business in Australia and has either:

· its central management and control in Australia, or

· its voting power controlled by shareholders who are residents of Australia.

Accordingly, where a company is incorporated in Australia it will remain a resident of Australia even if its directors or shareholders become foreign residents or if its business activities are carried on wholly overseas.

In your case, as the company is incorporated in Australia, it will remain a resident of Australia regardless of any changes that may occur to the residency of its directors or shareholders or where its business activities are carried on.

Therefore, the company will remain a resident of Australia during the period the directors/shareholders are overseas.

Assessability of income and permanent establishment

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. 

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The agreement with country X is listed in section 5 of the Agreements Act.

The agreement between Australia and country X operates to avoid the double taxation of income received by residents of Australia and country X.

An article of the agreement specifies that the business profits of an enterprise of one of the countries will be taxable only in that country unless the enterprise carries on business in the other country through a 'permanent establishment' situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other country, but only so much of them as is attributable to that permanent establishment.

Therefore, the profits of the company may be taxed in country X if the company is considered to be carrying on business through a permanent establishment during the period the directors/employees are living in country X.

An article of the country X agreement defines a 'permanent establishment' as being a fixed place of business in which the business of the enterprise is wholly or partly carried on. The article also states that a permanent establishment may include a place of management, a branch or an office.

The OECD Model Tax Convention on Income and on Capital (OECD commentary) provides a commentary on the articles, terms and definitions contained in double tax agreements.

Item 2 of the OECD commentary relating to permanent establishment explains that the definition of 'permanent establishment' gives rise to the following conditions:

· the existence of a 'place of business', that is, a facility such as premises or, in certain instances, machinery or equipment;

· this place of business must be 'fixed', that is, it must be established at a distinct place with a certain degree of permanence;

· the carrying on of the business of the enterprise through this fixed place of business. This means usually that the people who, in one way or another, are dependent on the enterprise conduct the business of the enterprise in the country in which the fixed place is situated.

Item 4 of the OECD commentary on permanent establishment states that the term 'place of business' covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal.

Item 5 of the OECD commentary states that the place of business has to be a 'fixed' one; thus in the normal way there has to be a link between the place of business and a specific geographical point.

Item 6 of the OECD commentary states that since the place of business must be fixed, it also follows that a permanent establishment can be deemed to exist only if the place of business has a certain degree of permanency, that is, if it is not of a purely temporary nature. A place of business may, however, constitute a permanent establishment even though it exists, in practice, only for a very short period of time because the nature of the business is such that it will only be carried on for that short period of time. It is further stated that permanent establishments normally have not been considered to exist in situations where a business had been carried on in a country through a place of business that was maintained for less than six months. Conversely, it has been shown that there have been many cases where a permanent establishment had been considered to exist where the place of business was maintained for a period of longer than six months.

In your case, the directors of the company, who are also the only employees of the company, intend to live in country X for a period of at least a couple of years. During this period, they will live in a house they own in country X and conduct the business of the company from this house in the same fashion as they currently do in Australia.

Accordingly, it is evident that the business of the company will be carried on in a 'fixed place of business' as its business activities will be carried out by the employees of the company from the house in country X. The place of business will also be considered to be 'permanent' as the business will be carried on for an expected period of at least a couple of years which is significantly longer than the general minimum period of six months as mentioned in the OECD commentary.

Therefore, the company will be carrying on business through a permanent establishment in country X and its profits may be taxed in country X.

The term 'may be taxed' in the context of the country X agreement will not prevent Australia from taxing the profits of the company. As stated above, the income of the company will continue to be taxed in Australia; however, country X will also have the right to tax the income of the company. Enquiries should be made with the income tax authorities in country X in this regard.

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