Edited version of private ruling

Authorisation Number: 1011816980641

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Ruling

Subject: Lodging returns in Australia - foreign company

Question

Is a foreign company with an office in Australia required to lodge income tax returns in Australia?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2011

The scheme commences on

1 July 2010

Relevant facts and circumstances

The company is an overseas company.

The company has leased an office in Australia for several years.

There are a number of staff in Australia.

The staff are paid from overseas.

The company's accounting functions are undertaken overseas.

The company pays GST in Australia, and lodges Business Activity Statements and pays PAYG for its staff.

Relevant legislative provisions

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

International Tax Agreements Act 1953 Section Sch4-Art7

International Tax Agreements Act 1953 Section Sch4-Art5(1)

Income Tax Assessment Act 1936 Subsection 161(1)

Reasons for decision

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a foreign resident includes ordinary income derived directly or indirectly from all Australian sources during the income year and other ordinary income that a provision includes as assessable income on some basis other than having an Australian source.

The income derived from the sale of company products is ordinary income for the purposes of subsection 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).

Schedule X of the Agreements Act contains the tax treaty between Australia and country X (the country X Agreement). The country X Agreement operates to avoid the double taxation of income received by Australian and country X residents.

Under Article Y of the country X Agreement, the business profits of an enterprise of country X shall be taxable only 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.

The term "permanent establishment" is defined in Article Z of the country X DTA to include a fixed place of business through which the business of an enterprise is wholly or partly carried on. It includes:

· a place of management

· an office

· a branch

· a building site, construction, installation or assembly project if it lasts for more than 6 months

· substantial equipment is being used in Australia by, for or under contract with the enterprise or

· an agent who has the power to enter into contracts on behalf of the company

An enterprise of country X shall not be deemed to have a permanent establishment in Australia merely because it carries on business in Australia through a person who is a broker, general commission agent or any other agent of an independent status and is acting in the ordinary course of the person's business as such a broker or agent.

In your case, the company has a permanent establishment in Australia as defined in an Article of the country X Agreement. The company has leased an office in Australia for several years. There are a number of staff. The company pays GST in Australia, and lodges Business Activity Statements and pays PAYG for its staff.

Consequently, the business profit of the company attributable to the PE in Australia is taxable in Australia under Article Y of the country X Agreement, and is therefore assessable in Australia under subsection 6-5(3) of the ITAA 1997.

Lodgment requirement

Subsection 161(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that every person if required to do so by the Commissioner must furnish an annual return within the time specified in the notice (legislative instrument) published by the Commissioner.

The legislative instrument sets out the obligations of certain taxpayers to lodge returns and the date by which they must be lodged. It also identifies classes of taxpayers who are not required to lodge a return.

Based on the legislative instrument for the lodgement of returns for previous income years, a foreign resident company that derives income that is assessable in Australia, apart from dividend, interest or royalty income from Australian sources subject to withholding tax in Australia, is required to lodge a return in Australia.

Therefore, since your company is carrying on a business in Australia through a permanent establishment and derives assessable income, it is required to lodge a tax return in Australia for the 2010-11 income year.