Edited version of your written advice

Authorisation Number: 1051449306553

Date of advice: 31 October 2018

Ruling

Subject: International issues - non-resident Australian income - business/other

Question 1

Are the registration fees received by Foreign Company from events held in Australia assessable income in Australia under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following periods:

Particular income years

Relevant facts and circumstances

1. Foreign Company is a non-profit company incorporated, managed, controlled and tax resident in a Foreign Country.

2. Foreign Company is registered as a charity and treated as a tax exempt entity in the Foreign Country. Prior to registration as a charity, Foreign Company was taxed in the Foreign Country on its worldwide income.

3. The activities of Foreign Company include providing seminars and workshops (events).

4. Foreign Company holds in Australia 10-15 events per income year, each usually running 1-3 days at different venues.

5. The venues for the events will generally be made available for use by Foreign Company by its members, either complimentary or for minimal cost.

6. The events will be organised by staff of Foreign Company working in the Foreign Country.

7. These events are open to members of Foreign Company and also to non-members.

8. Foreign Company will receive fees (the registration fees) from participants for the events. Participants generally register and pay online. The online registration portal is maintained from outside of Australia.

9. Foreign Company does not have any presence in Australia other than through conducting the above events. In particular, Foreign Company does not maintain any premises, including an office, in Australia, and does not have any employees working for it in Australia.

10. The equipment used at the venues will be minimal, such as laptops and overhead projectors.

11. Foreign Company does not sell goods, services or merchandise at the events.

Relevant legislative provisions

International Tax Agreements Act 1953 subsection 3(2)

International Tax Agreements Act 1953 section 4

Income Tax Assessment Act 1936 subsection 6(1)

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

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Legislative references in this Ruling are to provisions of the Income Tax Assessment Act 1936 (ITAA 1936), or to provisions of the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated.

Question 1

Are the registration fees received by the Foreign Company from events held in Australia assessable income in Australia under subsection 6-5(3)?

Summary

The registration fees are not assessable in Australia under subsection 6-5(3).

Detailed reasoning

Foreign Company is a non-profit company incorporated, managed, controlled and tax resident in a Foreign Country, and is therefore a ‘foreign resident’ (see subsection 995-1(1) and subsection 6(1)). Accordingly, under Australian domestic law, Foreign Company is taxed in accordance with subsection 6-5(3), which reads:

6-5(3)

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

(a) the * ordinary income you * derived 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.

However, in determining the liability to tax on Australian sourced income that a foreign resident receives, it is necessary to also consider any applicable tax treaty.

Article 5(1) (the business profits article) of the Double Tax Agreement between Australian and the Foreign Country (the Double Tax Agreement) states:

Article 5

1. The profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State 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 State but only so much of them as is attributable to that permanent establishment.

Therefore, for the business profits article to apply, there must be an ‘enterprise of one of the Contracting State’ and ‘profits’ of that enterprise. Where these elements are satisfied, the effect of the business profits article will depend on the residency and location of any permanent establishment of that enterprise.

Is there an ‘enterprise of one of the Contracting States’ in respect of the events of Foreign Company?

An ‘enterprise of one of the Contracting States’ is defined in Article 3(5) as follows:

Article 3

5. In this Agreement, the term "[Foreign Country] enterprise" and the term "Australian enterprise" mean an industrial or commercial enterprise (including a mining, agricultural, pastoral, forestry or plantation enterprise) carried on by a [Foreign Country] resident or by an Australian resident respectively, and the term "enterprise of one of the Contracting States" and the term "enterprise of the other Contracting State" mean an Australian enterprise or a [Foreign Country] enterprise, as the context requires.

‘Enterprise’ is defined non-exhaustively to include ‘any undertaking’ (Article 2(1)(h) of the Double Tax Agreement). Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements at paragraphs 101 to 105 provides the Commissioner's view that the OECD Model Tax Convention and Commentaries are relevant in interpreting Australia's tax treaties. In seeking a more comprehensive meaning of ‘enterprise,’ paragraph 4 of the 2017 OECD Commentary on the OECD’s general definition article states that ‘the term “enterprise” applies to the carrying on of any business.’ Paragraph 10.2 elaborates further by stating that the term ‘business’ should generally have the meaning which it has under the domestic law of the State that applies the treaty.

In Article 3(5), the term ‘enterprise’ is also qualified by the expression ‘industrial or commercial.’ We consider that the intent of the parties to the Double Tax Agreement could not have been for an entity that conducts business and derives profits in a commercial-like manner to not be subject to the business profits article simply because it operates as a non-profit organisation. In our view, the expression ‘industrial or commercial’ should be read as characterising the manner in which the activities are carried out.

We consider that Foreign Company carries on a business of conducting events in Australia, and it does so in a commercial-like manner, especially having regard to the following:

1. Foreign Company charges members and non-members registration fees for providing the events;

2. These events are run on an ongoing, rather than one-off, basis; and

3. Foreign Company accounts for the revenue and expenses it makes from each event, and according to the events list we were provided, it consistently makes a net revenue margin.

Accordingly, our view is that Foreign Company is an ‘industrial or commercial enterprise’ – and therefore, ‘an enterprise of one of the Contracting States’ – even if it applies the net revenue to charitable or non-profit purposes.

Moreover, Foreign Company is a resident of the Foreign Country as per Article 3(1) of the Double Tax Agreement, as it is a company incorporated, managed and controlled in the Foreign Country, and so is specifically a ‘[Foreign Country] enterprise’ as defined in Article 3(5) above.

Are the registration fees included in the ‘profits’ of the enterprise?

Article 2(k) of the Double Tax Agreement defines the terms ‘profits of a [Foreign Country] enterprise’ to mean ‘profits’ of the Foreign Country enterprise, subject to a number of exclusions.

Before addressing the exclusions, the registration fees must firstly fall within the term ‘profits’ within the meaning of Article 2(k).

‘Profits’ are not defined in the Double Tax Agreement. A provision of the International Tax Agreements Act 1953 (ITAA 1953) may specify how a term of a double tax agreement is to be defined as it applies in our domestic tax law: see TR 2001/13, paragraph 62. In this regard, subsection 3(2) of the ITAA 1953 states that, for the purposes of the ITAA 1953, ITAA 1936 and ITAA 1997, ‘a reference in an agreement to profits of an activity or business shall, in relation to Australian tax, be read, where the context so permits, as a reference to taxable income derived from that activity or business.’ Under Australian domestic law, the registration fees derived by Foreign Company are assessable as ordinary business income under subsection 6-5(3). The relevant ‘taxable income’ – and therefore, the ‘profits’ that are prima facie subject to the business profits article – are Foreign Company’s assessable income (including the registration fees) minus any allowable deductions from the carrying out of the events in Australia.

For the purposes of this ruling, the relevant categories of excluded profits under Article 2(1)(k) of the Double Tax Agreement are:

● Royalties, including those payments which come within the meaning of ‘royalties’ for the purposes of Article 10 (Article 2(1)(k)(i)). The term ‘royalties’ under Article 10(3)(b), subject to certain exceptions, includes the supply of scientific, industrial or commercial knowledge or information; and

● Payments to the extent to which they are received as consideration for the supply of scientific, technical, industrial or commercial knowledge, information or assistance (other than those payments which come within the meaning of ‘royalties’ for the purposes of Article 10).

We consider that the registration fees are a payment for the supply of seminar services, rather than a payment for a ‘product,’ being the supply of knowledge or information. In particular, the registration fees do not reflect the value of the knowledge or information presented, and the knowledge or information presented is not tailored to the needs of a particular business. Further, based on the facts provided, the participants are not subject to any confidentiality obligations in respect of that knowledge or information. Therefore, we do not consider the registration fees to be ‘royalties’ or ‘consideration for the supply of scientific, technical, industrial or commercial knowledge, information or assistance.’ None of the other categories of excluded profit under Article 2(1)(k) apply to the registration fees.

Accordingly, the registration fees are included in the ‘profits’ of an enterprise for the purposes of the business profits article.

Does Foreign Company have a ‘permanent establishment’ in Australia?

The term ‘permanent establishment’ is defined in Article 4(1) of the Double Tax Agreement (the permanent establishment article) as ‘a fixed place of business through which the business of the enterprise is wholly or partly carried on.’

Paragraph 6 of the 2017 OECD Commentary on the permanent establishment article explains that the general definition of a permanent establishment contains the following conditions:

● the existence of a 'place of business' i.e. a facility such as premises or, in certain instances, machinery or equipment;

● this place of business must be 'fixed', i.e. 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 persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.

In respect of the first condition, paragraphs 10, 11 and 12 of the 2017 OECD Commentary on the OECD’s permanent establishment article explain the term “place of business” as follows:

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. It is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. Again the place of business may be situated in the business facilities of another enterprise…This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise.

As noted above, the mere fact that an enterprise has a certain amount of space at its disposal which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is therefore required.

…

Whether a location may be considered to be at the disposal of an enterprise in such a way that it may constitute a “place of business through which the business of [that] enterprise is wholly or partly carried on” will depend on that enterprise having the effective power to use that location as well as the extent of the presence of the presence of the enterprise at that location and the activities that it performs there.

The second condition for a permanent establishment is that the place of business must be fixed – that is, its existence is not of a purely temporary nature. There must be a link to a ‘specific geographical point’ (paragraph 21 of the 2017 OECD Commentary on the OECD’s permanent establishment article). A single place of business may exist where ‘a particular location within which the activities are moved may be identified as constituting a coherent whole commercially and geographically with respect to that business’ (paragraph 22 of the 2017 OECD Commentary on the OECD’s permanent establishment article). Paragraph 28 of the 2017 OECD Commentary provides that ‘…experience has shown 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…’ However, the exception is where the activities are of a recurrent nature; in such cases, each period of time the place is used needs to be considered in combination with the number of times during which the place is used (which may extend over a number of years).

The third condition for a place of business to constitute a permanent establishment is that the enterprise using it must carry on its business wholly or partly through it. The expression ‘through which’ in Article 4(1) must be given a wide meaning so as to apply to any situation where business activities are carried on at a particular location that is at the disposal of the enterprise for that purpose (paragraph 20 of the 2017 OECD Commentary on the OECD’s permanent establishment article).

Foreign Company conducts its business of providing events through venues in Australia made available to Foreign Company by its members. Accordingly, Foreign Company has in Australia ‘at its disposal’ a number of places to conduct its business. However, we do not consider that Foreign Company will have a ‘fixed’ place of business in Australia. Foreign Company holds in Australia 10-15 events per income year, each usually running 1-3 days at different venues.

Even if Foreign Company had spent more than six months in Australia within a 1 year period, it would still unlikely have a ‘fixed’ place of business, as it conducts its events from various different venues across Australia. These venues are spread across various states and regions in Australia, and so the events are not carried on within a particular location that may constitute a coherent whole commercially or geographically with respect to the business.

Other than the events, Foreign Company does not have any other presence in Australia. The events will be organised by staff of Foreign Company working in the Foreign Country. Participants register online for the events. Equipment used at the venues are minimal, such as laptops and overhead projectors. Foreign Company does not sell goods, services or merchandise at the events.

None of the other paragraphs in the permanent establishment article apply to deem Foreign Company to have a permanent establishment in Australia. While a ‘workshop’ is listed under Article 4(2)(f) of the Double Tax Agreement as an example of what may be a permanent establishment, it must meet the conditions of Article 4(1) in order to be considered a ‘permanent establishment’ (paragraph 45 of the 2017 OECD Commentary on the OECD’s permanent establishment article).

Accordingly, Foreign Company does not have a ‘permanent establishment’ in Australia for the purposes of the business profits article.

Effect of Business Profits Article

Under the business profits article, the registration fees are included in the ‘profits’ of Foreign Company, a resident of the Foreign Country. As Foreign Company is not considered to have a permanent establishment in Australia, the resident country has exclusive taxing rights over the registration fees, and so the fees are not taxable in Australia. The ITAA 1936 and the ITAA 1997 are incorporated and shall be read as one with the ITAA 1953 (subsection 4(1) of the ITAA 1953). The provisions of the ITAA 1953 have effect notwithstanding anything inconsistent with those provisions contained in the ITAA 1936 and the ITAA 1997 (other than Part IVA of the ITAA 1936) or in an Act imposing Australian tax (subsection 4(2) of the ITAA 1953). Consequently, the registration fees would not be assessable in Australia under subsection 6-5(3).

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