Edited version of your written advice

Authorisation Number: 1051415973035

Date of advice: 7 September 2018

Ruling

Subject: - Capital Gains Tax – Taxable Australian Property

Question

Is the Licence for a fishing quota held by or on behalf of Fishing Limited Partnership ‘taxable Australian property’ for the purpose of section 855-15 of the Income Tax Assessment Act 1997?

Answer

No

This ruling applies for the following period:

The scheme commences on:

Relevant facts and circumstances

1. Fishing Limited Partnership (Fishing LP) is a tax resident of Country A comprising limited partners who are also residents of Country A.

2. Fishing LP owns licences for fishing quota (Licences) issued by Australian fishing authorities.

3. Fishing LP is managed by a general partner, General Partner Ltd, which is also a resident of Country A.

4. Fishing LP does not have a physical presence in Australia.

5. Fishing LP entered into a trust arrangement with an Australian resident company, Aus Trustee Co, which holds the licences on behalf of, and for the sole benefit of, Fishing LP and the limited partners.

6. Fishing LP is absolutely entitled to the licences and Aus Trustee Co only acts as a bare trustee for Fishing LP. Aus Trustee Co is required to hand over the licenses to Fishing LP whenever called upon to do so.

7. The Licences are held in this way to satisfy various government requirements in relation the legal ownership and for administrative ease so that all of the names of the limited partners do not need to appear on the Licences, and therefore need not be altered should a partner leave or a new one be admitted.

8. Under a lease agreement, Fishing LP leases the licences to Aus Co in return for annual lease payments.

9. License LP lodges an income tax return as a foreign resident corporate limited partnership and returns income in Australia from the leasing of the licenses to Aus Co.

10. Aus Co on-leases the licences to fishermen in return for lease payments.

11. The directors of General Partner Ltd who are all residents of Country A carry on all relevant activities in Country A in regard to the leasing of the licences.

12. Aus Trustee Co does not carry on business nor does it have a place of business in Australia, nor engage any employees or contractors. It has no other business or activities, and it does not have any decision making role in the structure as all decisions and management of Fishing LP are made by General Partner Ltd in Country A.

13. General Partner Ltd is ultimately responsible in ensuring the terms of the licences are complied with, and will be responsible for any breaches. General Partner Ltd is also responsible for approving the setting of the annual lease fee with Aus Co. General Partner Ltd approves the annual lease fee based on the assessment of independent brokers.

14. The directors of General Partner Ltd perform all the activities on behalf of Fishing LP and are generally not required to be present in Australia in order to carry out these duties. Where the directors are required to be present in Australia, any activities carried on in Australia by the directors on behalf of Fishing LP are minimal, infrequent and temporary.

15. The Australian resident directors of Aus Trustee Co do not perform any of these activities in relation to Fishing LP.

16. There is no relevant place(s) in Australia (such as a branch, factory, construction site etc) where any business of Fishing LP is carried on.

17. There are no requisite activities that are being carried on in Australia by Fishing LP such as the operation of substantial equipment or activities for or exploitation of natural resources.

18. There is common ownership between Fishing LP and Aus Co but no common control and the two entities deal with each other on an arm’s length basis.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 108-5(1)

Income Tax Assessment Act 1997 Division 855

International Tax Agreements Act 1953 Section 4

Reasons for decision

Question 1

Is the licence for a fishing quota held by or on behalf of Fishing LP ‘taxable Australian property’ for the purpose of section 855-15 of the Income Tax Assessment Act 1997?

Summary

The licence for a fishing quota held by or on behalf of Fishing LP is not ‘taxable Australian property’ for the purpose of section 855-15 of the Income Tax Assessment Act 1997?

Detailed reasoning

1. Division 855 provides that a foreign resident can disregard a capital gain or capital loss from a CGT event happening unless the event relates to a CGT asset that is a 'taxable Australian property'.

2. Section 855-15 sets out five categories of CGT assets that are ‘taxable Australian property’. For the purposes of the ruling the relevant items are item 1 and 3 in the table in section 855-15, being a CGT asset that is taxable Australian real property or a CGT asset used in a business carried on by the foreign resident through a permanent establishment in Australia.

3. The License is a CGT asset under section 108-5 (1) as it is any kind of property or a legal or equitable right that is not property.

Item 1 of the table and real property

4. Taxable Australian real property, item 1 in the table, is further defined in section 855-20 and relevantly, is a CGT asset that is ‘real property situated in Australia (including a lease of land, if the land is situated in Australia)’.

5. Paragraph 4 of Taxation Determination 2009/18: Income tax: does the term 'real property' in paragraph 855-20(a) of the Income Tax Assessment Act 1997 include a leasehold interest in land? (TD 2009/18) states that when a term used in legislation had acquired an established legal meaning, the term will be interpreted in accordance with that meaning unless its context indicates a contrary intention.

6. Because ‘real property’ is not defined in either the ITAA 1997 or Income Tax Assessment Act 1936 (ITAA1936) (Tax Acts), it will take its ordinary meaning based on well-established Australian case law which generally refers to interest in or over land, including fixtures attached to land such as buildings or items of plant.

7. Fishing LP beneficially owns and is absolutely entitled to the rights under the licences granted by the relevant Australian state fishing authorities which allows it to fish based on a given quota. The licence granted also allows Fishing LP to lease it to another entity.

8. The relevant Article in the Convention between Australia and Country A (the Convention) defines ‘real property’ for the purposes of other Articles to include fish.

9. Section 4 of the International Tax Agreements Act 1953 (ITAA 1953) states:

4(1)

Subject to subsection (2), the Assessment Act is incorporated and shall be read as one with this Act.

Note:

An effect of this provision is that people who acquire information under this Act are subject to the confidentiality obligations and exceptions in Division 355 in Schedule 1 to the Taxation Administration Act 1953.

4(2)

The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than Part IVA of the Income Tax Assessment Act 1936) or in an Act imposing Australian tax.

10. In GE Capital Finance Pty Ltd (as trustee for the Highland Finance Unit Trust) v. Commissioner of Taxation 2007 ATC 4487, Middleton J at paragraph 40 discusses how section 4 of the ITAA 1953 works as follows:

40. In view of the respondent's submissions, it is necessary to consider the effect of s 4(1). By the operation of s 4(1), the Agreements Act incorporates the Assessment Act subject to s 4(2). However, each Act retains its own identity and the imposition of the relevant tax is still imposed by and at the rates declared by the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 (Cth) and the Income Tax Rates Act 1986 (Cth) by reference to the Assessment Act. The incorporation has the consequence, as a matter of a drafting technique, of incorporating the text of the Assessment Act into the Agreements Act… [Emphasis added]

11. Therefore, the effect of subsection 4(1) of the ITAA 1953 does not mean that the words in the treaty are transposed into the domestic law. The Australian domestic laws concerning the taxation of CGT are still prescribed in Parts 3-1 and 3-5 and Division 855 of ITAA 1997, and the Convention merely allocates the taxing rights between the two jurisdictions and aims to avoid double taxation between the two countries.

12. Because the Convention does not expand the definition of ‘real property’ in Division 855 and the term is not defined in the Tax Acts, it will take its ordinary meaning which is based on well-established Australian case law which generally refers to interest in or over land, including fixtures attached to land such as buildings or items of plant. As a Licence for fishing quota is not an interest in land or over land or fixtures or an item of plant it is not a CGT asset which is ‘real property’.

13. Therefore, a Licence for a fishing quota held by or on behalf of Fishing LP is a CGT asset that is not taxable Australian property under item 1 of the table in section 855-15.

Item 3 of the table and Permanent Establishment

14. Taxable Australian property under Item 3 in the table in section 855-15 is a CGT asset that a foreign resident has used at any time in carrying on a business through a permanent establishment (PE). For residents of a country that has entered into an international agreement with Australia containing a PE article, it will be a PE within the relevant international agreement or otherwise a PE in Australia within the meaning of section 6(1) of the ITAA1936.

15. Fishing LP and all its limited partners are tax residents of Country A, therefore paragraph a(i) of item 3 in the table in section 855-15 applies and the Convention is the relevant international tax agreement.

16. The relevant Article in the Convention (hereafter all references to an Article of a tax treaty is in respect of the Convention) defines ‘permanent establishment’ as a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes the places listed in the relevant paragraphs in that Article.

17. Under the Convention, permanent establishment also include activities carried on in the exploration for or exploitation of fish; performance of services; operation of substantial equipment, subject to the relevant period as well as the exclusions. It also includes circumstances where activities are carried on by agents (which meet the criteria) on behalf of enterprise, subject to the exclusions.

18. Taxation Ruling TR 2002/5 Income tax: Permanent establishment - What is 'a place at or through which [a] person carries on any business' in the definition of permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936? (TR 2002/5) outlines the ATO view in relation to permanent establishments that the relevant place must have an element of permanence, both geographic and temporal, and that the place must be judged in the context of the particular business.

19. TR 2002/5 states that the place contemplated must be ‘geographically permanent’ such that ‘any area, viewed commercially and as a whole, may, in relation to the business concerned, be a place’. However, the ‘business must operate at that place for a period of time’, and the ‘business presence must not be of a purely temporary nature’.

20. Therefore on the facts it is necessary to determine whether there is any business being carried out through a PE in Australia within the meaning of PE in the Convention.

21. The lease agreement in respect of the licences for fishing quota was entered into by Fishing LP (as the lessee) and Aus Co (as the lessor) in return for an annual lease fee. Fishing LP returns income from leasing in Australia.

22. Fishing LP’s leasing of licences consists of functions that are carried on in Country A, on its behalf, by General Partner Ltd and its directors who all are residents of Country A.

23. Fishing LP and Aus Trustee Co entered into a bare trust agreement where Aus Trustee Co will only hold the legal title to the licences for fishing quota under its name. Aus Trustee Co will act as a bare trustee and is required to transfer the legal title to Fishing LP whenever called upon to do so.

24. Aus Trustee Co holds all licences for the benefit of the limited partners of Fishing LP. This structure is used to satisfy various government requirements in relation the legal ownership of the fishing quota. It was also for administrative ease so that all of the names of the limited partners do not need to appear on the licences, and therefore need not be altered should one leave or a new one be admitted.

25. Aus Trustee Co does not carry on business nor does it have a place of business in Australia, nor engage any employees or contractors. It has no other business or activities, and it does not have any decision making role in the structure as all decisions and management of Fishing LP are made by General Partner Ltd.

26. General Partner Ltd is ultimately responsible for ensuring the terms of the licences are complied with, and will be responsible for any breaches.

27. General Partner Ltd is also responsible for approving the setting of the annual lease fee with Aus Co. This fee is supported by the lease assessment of independent brokers and General Partner Ltd approves the annual lease fee based on the assessment of independent brokers.

19. The directors of General Partner Ltd perform all the activities abovementioned on behalf of Fishing LP and are generally not required to be present in Australia in order to carry out these duties. Where the directors are required to be present in Australia, any activities carried on in Australia by the directors on behalf of Fishing LP are minimal, infrequent and temporary.

20. The Australian resident directors of Aus Trustee Co do not perform any of the abovementioned activities.

28. On the facts we accept that Aus Trustee Co (and the Australian directors) acts as a bare trustee of Fishing LP. Furthermore, we accept that Fishing LP is the sole beneficiary of the trust property under the trust deed and is absolutely entitled to that trust property.

29. On the facts we also accept that Fishing LP is not carrying on a business at or through a permanent establishment in Australia as:

a. there is no relevant place(s) in Australia (such as a branch, factory, construction site etc) where such business of Fishing LP are carried on,

b. there are no requisite activities that are being carried on in Australia such as the operation of substantial equipment or activities for or exploitation of fish,

c. all the relevant activities of Fishing LP are carried on in Country A by residents of Country A.,

d. the only activities that may be carried out in Australia are minimal infrequent and temporary and

e. the Australian resident directors of Aus Trustee Co do not perform any of the relevant activities.

30. As Fishing LP is not carrying on a business at or through a permanent establishment in Australia the licence for the fishing quota is not taxable Australian property under item 3 of the table in section 855-15.

Conclusion

31. The licence for a fishing quota held by or on behalf of Fishing LP is not ‘taxable Australian property’ for the purpose of section 855-15 of the ITAA 1997.

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