Edited version of your written advice

Authorisation Number: 1012696876270

Ruling

Subject: residency, permanent establishment, source and assessability of income and withholding obligations

Question 1

Is E Co a foreign resident for the purposes of section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is E Co a resident of an overseas country for the purposes of that country's Double Tax Agreement (DTA)?

Answer

Yes.

Question 3

Does E Co have a permanent establishment in Australia for the purposes of the overseas country's DTA?

Answer

Yes.

Question 4

Does E Co's assessable income include only its ordinary and statutory income derived indirectly or directly from all Australian sources and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source in accordance with subsections 6-5(3) and 6-10(5) of the ITAA 1997?

Answer

Yes.

Question 5

Is the income derived by E Co under the E Co Agreement with Overseas Co, Australian sourced in accordance with section 6C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 6

Does the exclusion to the royalty article in the overseas country's DTA apply to E Co such that the business profits article of the overseas country's DTA applies to E Co's receipts under the E Co Agreement?

Answer

Yes.

Question 7

Is E Co a foreign resident for the purposes of the foreign resident withholding provisions under paragraph 12-315(2)(a) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Answer

Yes.

This ruling applies for the following period:

A number of income years.

The scheme commenced:

During the 2013 income year.

Relevant facts and circumstances

E Co

1. E Co is treated as a tax resident of an overseas country.

2. E Co is a member of Overseas Group.

3. E Co owns substantial equipment (the E Co Equipment) and leases the E Co Equipment to members of Overseas Group.

4. Other than the physical presence of the E Co Equipment in Australia for more than 12 months, E Co has no other presence in Australia.

Overseas Co

5. Overseas Co is the operating entity of Overseas Group.

6. Overseas Co is treated as a tax resident of an overseas country and its effective place of management in respect of its business activities is in that overseas country.

7. The Commissioner has ruled that, for Australian tax purposes, Overseas Co carries on a business in Australia at or through a permanent establishment in Australia.

The E Co Agreement

8. As stated above, in order to undertake work in Australia, Overseas Co entered into the E Co Agreement with E Co to lease the E Co Equipment from E Co.

9. The E Co Agreement was negotiated and executed in the overseas country.

10. The Commissioner has ruled that, for Australian tax purposes, the payments made by Overseas Co to E Co under the E Co Agreement will be incurred in carrying on Overseas Co's business at or through a permanent establishment in Australia.

11. The E Co Equipment will be in Australia for more than 12 months.

12. During this time, Overseas Co will be responsible for any maintenance activities in respect of the E Co Equipment.

Relevant legislative provisions

Subsection 6(1) of the ITAA 1936.

Subsection 6C(1) of the ITAA 1936.

Subsection 128B(2) of the ITAA 1936.

Subsection 6-5(3) of the ITAA 1997.

Subsection 6-10(5) of the ITAA 1997.

Section 995-1 of the ITAA 1997.

Section 12-300 of Schedule 1 to the TAA 1953.

Section 12-315 of Schedule 1 to the TAA 1953.

Reasons for decision

Question 1

Is E Co a foreign resident for the purposes of section 995-1 of the ITAA 1997?

Summary

Yes. E Co is a foreign resident for the purposes of section 995-1 of the ITAA 1997.

Detailed reasoning

Subsection 995-1(1) of the ITAA 1997 provides that 'foreign resident' means a person who is not a resident of Australia for the purposes of the ITAA 1936.

For the purposes of the ITAA 1936, paragraph 6(1)(b) of the ITAA 1936 defines a 'resident of Australia', in respect of a company, as a company which is incorporated in Australia, or which, not being incorporated in Australia carries on a 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.

E Co is a company incorporated in an overseas country. Furthermore, E Co's effective place of control and its business is carried on in that overseas country, and it is wholly owned by a resident company of that overseas country.

E Co does not therefore meet the definition of 'resident of Australia' under paragraph 6(1)(b) of the ITAA 1936, and as such, is a 'foreign resident' for the purposes of section 995-1 of the ITAA 1997.

Question 2

Is E Co a resident of an overseas country for the purposes of that country's DTA?

Summary

Yes. E Co is a resident of an overseas country for the purposes of that country's DTA.

Detailed reasoning

Question 1 above confirms that E Co is not a resident of Australia for Australian tax purposes and that it is in fact a foreign resident for Australian tax purposes.

As such, E Co does not satisfy the definition of a resident of Australia for the purposes of the overseas country's DTA.

As the overseas country's DTA provides that a person is a resident of the overseas country, if the person is a resident of that overseas country for the purposes of its tax, E Co is treated as a tax resident of that overseas country for the purposes of its DTA.

Question 3

Does E Co have a permanent establishment in Australia for the purposes of the overseas country's DTA?

Summary

Yes. E Co has a permanent establishment in Australia for the purposes of the overseas country's DTA.

Detailed reasoning

An entity can be deemed to have a permanent establishment under the overseas country's DTA.

E Co meets the criteria to have a deemed permanent establishment in Australia.

E Co therefore has a permanent establishment in Australia for the purposes of the overseas country's DTA.

Question 4

Does E Co's assessable income include only its ordinary and statutory income derived indirectly or directly from all Australian sources and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source in accordance with subsections 6-5(3) and 6-10(5) of the ITAA 1997?

Summary

Yes. E Co's assessable income only includes its ordinary and statutory income derived indirectly or directly from all Australian sources and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source in accordance with subsections 6-5(3) and 6-10(5) of the ITAA 1997.

Detailed reasoning

Subsection 6-5(3) of the ITAA 1997 provides that:

If you are a foreign resident, your assessable income includes:

(a) the ordinary income you derive directly or indirectly from all Australian sources during the income year; and

(b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source.

Subsection 6-10(5) of the ITAA 1997 further provides that:

If you are a foreign resident, your assessable income includes:

(a) your statutory income from all Australian sources; and

(b) other statutory income that a provision includes in your assessable income on some basis other than having an Australian source.

Question 1 above confirms that E Co is a foreign resident for Australian tax purposes. As such, subsections 6-5(3) and 6-10(5) of the ITAA 1997 apply to E Co such that its assessable income only includes its ordinary and statutory income derived indirectly or directly from all Australian sources and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source in accordance with subsections 6-5(3) and 6-10(5) of the ITAA 1997.

Question 5

Is the income derived by E Co under the E Co Agreement with Overseas Co, Australian sourced in accordance with section 6C of the ITAA 1936?

Summary

Yes. The income derived by E Co under the E Co Agreement with Overseas Co is Australian sourced in accordance with section 6C of the ITAA 1936.

Detailed reasoning

Section 6C of the ITAA 1936 deals with the source of royalty income derived by a non-resident.

Under subsection 6C(2) of the ITAA 1936, for the purposes of sections 6-5 and 6-10 of the ITAA 1997, royalties are deemed to have been derived from a source in Australia, if the royalties constitute income to which section 6C applies.

Paragraph 6C(1)(b) of the ITAA 1936 provides that section 6C applies to income derived on or after 1 July 1968 by a non-resident and consists of royalty that:

…is paid or credited to the non-resident by a person who is…a non-resident and is, or is in part, an outgoing incurred by that person…in carrying on a business in Australia at or through a permanent establishment of that person…in Australia.

Non-resident payer and payee

Subsection 6(1) of the ITAA 1936 defines 'non-resident' as a person who is not a resident of Australia. The Commissioner has ruled that Overseas Co (the payer) is a foreign resident for Australian tax purposes, this includes for the purposes of being a 'non-resident' under section 6C of the ITAA 1936.

Question 1 above confirms that E Co (the payee) is also a foreign resident for Australian tax purposes, including for the purposes of being a 'non-resident' under section 6C of the ITAA 1936.

Royalty

According to subsection 6(1) of the ITAA 1936, 'royalties' include any amount paid or credited, however described or computed, and whether the payment or credit is periodical or not, to the extent to which it is paid or credited, as consideration for (inter alia):

…

(a) the use of, or the right to use, any industrial, commercial or scientific equipment;

(b) the supply of scientific, technical , industrial or commercial knowledge or information; and

(c) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of,…any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);…

Taxation Ruling IT 2660 (IT 2660) provides the Commissioner's views on the definition of 'royalty' and 'royalties' in subsection 6(1) of the ITAA 1936.

The payments made by Overseas Co to E Co under the E Co Agreement are consideration for use of the E Co Equipment, which constitutes industrial, commercial or scientific equipment.

As such, the payments made by Overseas Co to E Co under the E Co Agreement constitute royalties for Australian tax purposes. This income will also be derived by E Co after 1 July 1968.

Incurred in carrying on a business in Australia at or through a permanent establishment in Australia

As stated above, the Commissioner has ruled that Overseas Co, for Australian tax purposes, carries on a business in Australia at or through a permanent establishment and that the payments made by Overseas Co to E Co under the E Co Agreement will be incurred in carrying on Overseas Co's business through that permanent establishment.

Conclusion

As all elements of paragraph 6C(1)(b) of the ITAA 1936 are satisfied, subsection 6C(2) of the ITAA 1936 will deem the payments made by Overseas Co to E Co under the E Co Agreement to be Australian sourced for the purposes of sections 6-5 and 6-10 of the ITAA 1997.

Question 6

Does the exclusion to the royalty article in the overseas country's DTA apply to E Co such that the business profits article of the overseas country's DTA applies to E Co's receipts under the E Co Agreement?

Summary

Yes. The exclusion to the royalty article in the overseas country's DTA applies to E Co such that the business profits article of the overseas country's DTA applies to E Co's receipts under the E Co Agreement.

Detailed reasoning

The overseas country's DTA allows for particular royalties to be excluded from the ambit of the DTA's royalty article if:

• the person beneficially entitled to the royalties carries on a business through a permanent establishment in Australia;

• the payments arise in Australia; and

• the asset giving rise to the royalties is effectivelE Connected to the payee's permanent establishment.

Question 3 above confirms that E Co has a permanent establishment in Australia and is deemed to be carrying on a business through that permanent establishment for the overseas country's DTA purposes.

Question 5 above also confirms that the royalty payments received by E Co under the E Co Agreement are Australian sourced - and therefore arise in Australia.

The asset giving rise to the royalties paid is also effectivelE Connected to E Co's deemed permanent establishment in Australia.

As such, the payments from Overseas Co to E Co under the E Co Agreement are 'excluded royalties'.

As the payments received by E Co under the E Co Agreement constitute business profits, the business profits article of the overseas country's DTA will apply to E Co in respect of those payments, thereby attributing taxing rights to Australia on such payments to the extent that they are attributable to E Co's permanent establishment in Australia.

Question 7

Is E Co a foreign resident for the purposes of the foreign resident withholding provisions under paragraph 12-315(2)(a) of Schedule 1 to the TAA 1953?

Summary

Yes. E Co is a foreign resident for the purposes of the foreign resident withholding provisions under paragraph 12-315(2)(a) of Schedule 1 to the TAA 1953.

Detailed reasoning

Question 1 above confirms that E Co is a foreign resident for Australian tax purposes, including for the purposes of paragraph 12-315(2)(a) of Schedule 1 to the TAA 1953. As such, E Co is a foreign resident for the purposes of the foreign resident withholding provisions under paragraph 12-315(2)(a) of Schedule 1 to the TAA 1953.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).