Edited version of your written advice

Authorisation Number: 5010050611820

Date of advice: 25 June 2018

Ruling

Subject: Residency

Question 1

Is the company a resident of Australia for taxation purposes?

Answer

No.

Question 2

Does the company have a permanent establishment in Australia?

Answer

No.

Question 3

If the company is a non-resident, does the income derived from Australian clients have a non-Australian source?

Answer

Yes.

Question 4

Is the company’s income received from Australian clients assessable in Australia?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The company is a company incorporated under the laws of Country X.

Under Country X law, the company is considered to be a Country X tax resident.

The company has a sole director.

The director and shareholders of the company all reside in Country X.

The company operates one office located in Country X. The company has 1 employee based in Australia whose duties are limited to packing and dispatching the product.

The company is an internet based company.

The Australian based dispatcher has no authorisation to enter into any agreement on behalf of the company and as a matter of practice the Australian based dispatcher does not negotiate or sign any contracts. All contracts entered into by the company are negotiated and agreed to by the director in Country X.

The Australian based dispatcher does not provide any service directly to the client and the dispatcher does not provide an after sales care role.

Stock of the product is stored prior to delivery in an Australian storage yard. The Australian based activity holds no intellectual property and commercial risk(s), including but not limited to stock risk and general commercial risk, is borne by the head office in Country X.

All of the director's design work is completed in the Country X office. The company is controlled and managed by the director in the Country X office. The director also attends to all of the general management duties, order processing, strategy, pricing management, stock control and purchase, product management, invoicing and bookkeeping within the Company X office.

The director travels to Australia every couple of months. Whilst in Australia, the director's activities are primarily related to the checking of stock to ensure that it matches computer generated reports produced in Country X.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1936 Section 6(1)

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 5

Reasons for decision

Residency

There are three tests to determine residency for the purposes of income tax law under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

A company will be a resident if:

● it is incorporated in Australia, or

● if the company is not incorporated in Australia, but it is either:

● carrying on a business in Australia and its central management and control is in Australia, or

● carrying on a business in Australia and its voting power is controlled by shareholders who are Australian residents.

A company will only need to satisfy one of the tests to be a resident of Australia for tax purposes.

The company is not incorporated in Australia, so it is necessary to consider if the company is carrying on a business in Australia with further consideration to whether that business’ central control and management is in Australia; or whether the voting power is controlled by shareholders who are Australian residents.

Carries on a business in Australia

The question of where business is carried on is one of fact requires consideration of where the activities of the company are carried on and is dependent on the facts and circumstances of a case. A company whose income earning outcomes are largely dependent on the investment decision made in respect of its assets, carries on its business where these decisions are made.

The business activities of the company are carried out in Country X.

The company has its head office in Country X.

The company has one director who lives and works in Country X.

The director controls and manages the company from Country X.

There is only one employee in Australia for the purposes of packing and dispatching products.

The company is therefore not carrying on a business in Australia. Accordingly, it is not necessary to consider if central control and management is in Australia, or if the voting power is controlled by shareholders who are Australian residents.

The company is not incorporated in Australia and it is not considered to be carrying on business in Australia, it is a non-resident of Australia as it does not meet any of the three statutory tests.

Assessable income and Permanent establishment

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year.

The income derived from sales of goods is ordinary income for the purposes of subsections 6-5(3) of the ITAA 1997.

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

Section 4 of the International Tax Agreements Act 1953 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 Country X Agreement (the Agreement) is listed in section 5 of the Agreements Act. The Agreement operates to avoid the double taxation of income received by residents of Australia and Country X.

Under Article a of the Agreement, 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 b(c) of the Agreement 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.

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 (the OECD Model Commentary). Paragraph 4 of the OECD Model 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.

In your case, the company does not have an office, a branch, a factory or a workshop in Australia. Therefore, the company does not have a fixed place of business in Australia under Article b(c) of the Agreement.

Article b(d) of the Agreement provides that an enterprise shall be deemed to have a permanent establishment in Australia where an enterprise of Country X:

a) performs services in Australia

(i) through an individual who is present in Australia for a period or periods exceeding in the aggregate 183 days in any twelve month period, and more than 50 per cent of the gross revenues attributable to active business activities of the enterprise during the period or periods are derived from the services performed in Australia through that individual, or

(ii) for a period or periods exceeding in the aggregate 183 days in any twelve month period, and these services are performed for the same project or for connected projects through one or more individuals who are present and performing such services in Australia.

The company is present and performs duties in Australia in accordance with article b(d) of the Agreement.

Such activities shall be deemed to be carried on through a permanent establishment of the enterprise situated in Australia, unless the activities are limited to those mentioned in paragraph e of Article b of the Agreement which, if exercised through a fixed place of business, would not make this place of business a permanent establishment under the provisions of that paragraph.

Article b(x) of the Agreement provides that notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include:

● the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; and

● provided that such activities are, in relation to the enterprise, of a preparatory or auxiliary character.

The Australian warehouse is only used to store the products for dispatching.

The activities carried out in the warehouse are considered to be of preparatory or auxiliary character under b() of the agreement.

That enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph e which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.

In your case, the company only uses the Australian premises for packing and dispatching. The employee does not do any negotiation with clients and does not enter into contracts with clients on behalf of the company.

The Australian based dispatcher does not provide any service directly to the client and the dispatcher does not provide an after sales care role. All contracts and negotiation with clients is carried out in Country X. Therefore in accordance with article b(e) of the Agreement, there is no PE in Australia. As business is conducted in Country X and contracts are made in Country X it follows that income received from Australian clients is not Australian source income, it is sourced in Country X.

In accordance with article b of the Agreement, the company does not have a PE in Australia.

Accordingly, the income derived by the company from sales made in Australia is not assessable, under subsection 6-5(3) of the ITAA 1997 by virtue of the overriding effect of Article a of the Agreement.

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