Edited version of private ruling

Authorisation Number: 1011700720008

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Ruling

Subject: Pay As You Go (PAYG) withholding

Question 1

Is the Company required by section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to withhold tax from the salaries it pays to its Australian resident employees for the work they perform overseas?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The Company was incorporated in Country A and is a subsidiary of another company.

Company A's parent company is a mineral resources company incorporated in Australia. Through its subsidiaries it is engaged in the exploration for and the development and mining of minerals offshore. It has an office in Australia but no longer conducts operations here.

The Company operates as a vehicle for investment in mineral exploration and the mining industry in Country B.

The Company employs staff to continue exploration and work at its mining concession in Country B. Some of the Company's employees are Australian residents for tax purposes.

The Company conducts all its operations outside Australia. The Company does not generate any income in Australia. The Company does not have an office in Australia. All of the Company's statutory records are maintained in Country A. The Company's year end financial reports are prepared and audited in Country A. The Company's board and general meetings are held annually in Country A.

The Company has two Country A resident directors and four Australian resident directors. The Australian directors carry out their Company duties from Australia mostly by means of resolutions executed in writing.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 Section 12-35.

Question 1

Summary

The Company is not required by section 12-35 of Schedule 1 to the TAA to withhold tax from the salaries it pays to its Australian resident employees for the work they perform overseas.

Detailed reasoning

Section 12-35 of Schedule 1 to the TAA provides that an entity must withhold tax from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

Taxation Determination TD 2011/1 provides the Commissioner's view on whether a non-resident entity is required by section 12-35 of Schedule 1 to the TAA to withhold tax from the salaries and wages it pays to its Australian resident employees for the work they perform overseas.

TD 2011/1 provides that:

· A non-resident entity must withhold tax under section 12-35 of Schedule 1 to the TAA from the salaries and wages it pays to its Australian resident employees for the work they perform overseas if the entity has a sufficient connection with Australia.

· The non-resident entity will have a sufficient connection with Australia if it has a physical business presence in Australia.

· The non-resident entity will have a physical business presence in Australia if it carries on an enterprise or income producing activities (or part of such enterprise or activities) in Australia and has a physical presence in Australia.

· The non-resident entity will have a physical business presence in Australia if it has an office, business operations, trading presence and / or employees in Australia.

· The fact that the non-resident entity has a parent company in Australia will not in itself mean that the non-resident entity has a physical business presence in Australia except in the situation where the parent company carries on the Australian business of the non-resident entity or is the common law agent of the non-resident entity.

TD 2011/1 also provides that 'enterprise' has the meaning given by section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Section 9-20 of the GST Act provides that an enterprise is an activity or series of activities done in the form of a business.

Therefore, a company will carry on an enterprise in Australia if it carries on business in Australia.

Taxation Ruling TR 2004/15 is of relevance in determining whether a company carries on business in Australia.

TR 2004/15 provides guidelines for determining whether a company which is not incorporated in Australia is a resident of Australia under the second statutory test in paragraph (b) of the definition of resident or resident of Australia in subsection 6(1) of the Income Tax Assessment Act 1936. Under this test, a company is a resident of Australia if 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.

TR 2004/15 indicates that:

· Where a company carries on business depends on where the company carries on its activities.

· A company that has major operational activities relative to the whole of its business carries on business wherever those activities take place and not necessarily where its central management and control is located. Operational activities include major trading, service provision, manufacturing or mining activities.

· Whether a company carries on business where its central management and control is located depends on the nature of its directors' involvement in its activities.

Goods and Services Tax Ruling GSTR 2004/7 is of relevance in determining whether a company has a physical presence in Australia.

GSTR 2004/7 provides guidelines for determining whether a non-resident company is in Australia for the purposes of section 38-190 of the GST Act.

GSTR 2004/7 indicates that a non-resident company is in Australia if it carries on business in Australia:

· at or through a fixed and definite place of its own for a sufficiently substantial period of time; or

· through an agent at a fixed and definite place for a sufficiently substantial period of time.

Application to your circumstances

The Company is a mining company. It undertakes its activities in Country A and Country B. It undertakes major operational (mining) activities in Country B. The nature of its activities indicates that the involvement of its directors in its activities is minimal. Hence, we consider that it does not carry on business (or an enterprise) or income producing activities in Australia despite the fact that some of its directors reside here and carry out their Company duties here. TR 2004/15 supports this view.

As indicated above, we consider that the Company does not carry on business in Australia. Hence, we consider that it does not have a physical presence in Australia. GSTR 2004/7 supports this view.

The Company does not have an office or any operations in Australia. The Company's parent company has an office in Australia but does not carry on the Company's business here.

For the above reasons, the Company does not have a physical business presence in Australia. Therefore, it does not have a sufficient connection with Australia and is not required by section 12-35 of Schedule 1 to the TAA to withhold tax from the salaries it pays to its Australian resident employees for the work they perform overseas.