Edited version of private ruling

Authorisation Number: 1011847263242

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Ruling

Subject: Assessability of business profit

Question

Is the business profit of a foreign resident from Australia sources, assessable in Australia?

Answer

No.

This ruling applies for the following period

Income year ending 30 June 2011

Relevant facts

You are a foreign resident for income tax purposes.

You are self employ and operate a business in foreign country X.

You have recently expanded your business to Australia.

You visit Australia, occasionally for one to one and half week at a time.

When visiting Australia you usually stay in a hotel or serviced apartments and you do not see clients at your hotel or apartment.

You do not have an office premises available to you in Australia.

You do not have an agent in Australia with power to enter into contracts on your behalf.

You communicate with your Australian client by emails or telephone from foreign country X.

Relevant legislative provisions

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

International Tax Agreements Act 1953 Schedule 4

International Tax Agreements Act 1953 Schedule 4 Article 7

International Tax Agreements Act 1953 Schedule 4 Article 5(1)

Reasons for decision

Assessability of the foreign resident's business profits from Australian contracts

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, and other ordinary income that a provision includes as assessable income on some basis other than having an Australian source.

The income derived from provision of services from a company is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

Australia has a tax treaty with the foreign country X (the foreign country X Agreement). The foreign country X Agreement operates to avoid the double taxation of income received by Australian and foreign country X residents.

Under Article A of the foreign country X Agreement, the business profits of an enterprise of foreign country X shall be only taxable in the foreign country X unless the enterprise carries on business in Australia through a permanent establishment situated in Australia.

The term 'permanent establishment' PE is defined in Article 5(1) of the New Zealand Agreement as a fixed place of business through which the business of an enterprise is wholly or partly carried on.

In interpreting the terms used in the treaty, the general rule is to give words their meaning under domestic tax law where the term is not specifically defined under the treaty.  In Thiel v. Federal Commissioner of Taxation (1990) 90 ATC 4717; 171 CLR 338, the Full High Court held that it was also proper to have regard to any supplementary means of interpretation where the expressions used in the treaty are ambiguous.  The supplementary means of interpretation were the OECD Model Convention (OECD Convention) and commentaries (OECD commentaries) thereon.  The Commissioner has also confirmed this approach in Taxation Ruling TR 2001/13 at paragraph 104.

According to the OECD commentaries the three important elements in Article 5(1) of are:

(a) the existence of a place of business;

(b) the fact that this place must be fixed; and

(c) business must be carried on through this fixed place of business.

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.

'Existence of a fixed place of business'

In this regard, paragraphs 4, 4.1 and 4.3 of the OECD Commentary states that:

4. It is immaterial whether the premises, facilities or installations are owned or rented by or is otherwise at the disposal of the enterprise. A place of business may be situated in the business facilities of another enterprise.

4.1 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.

4.3 A second example is that of an employee of a company who, for a long period of time, is allowed to use an office in the headquarters of another company in order to ensure that the latter company complies with its obligations under the contracts concluded with the former company. In that case, the employee is carrying on activities related to the business of the former company and the office that is at his disposal at the headquarters of the other company will constitute a permanent establishment of his employer, provided that office is at his disposal for a sufficient long period of time so as to constitute a 'fixed place of business' and that the activities that are performed there go beyond the activities referred to in paragraph 4 of the article'

Paragraph 4 of Article 5 refers to facilities that are maintained solely for storage, display, for purchasing or for activities that are preparatory or auxiliary characters.

Based on paragraph 4 of the OECD Commentary, a place of business can still arise even if there are no physical premises, which are owned or rented by you in Australia, provided the space is at your disposal for a sufficiently long period of time so as to constitute a 'fixed place of business' and the activities carried on in the place of business are not preparatory or auxiliary in characters.

Paragraph 6 of the OECD Model commentary provides that since the place of business must be fixed, it also follows that a PE can be deemed to exist only if the place of business has a certain degree of permanency. That is, if it is not of a purely temporary nature. A PE is not normally deemed to have existed in a situation where a business had been carried on in a country through a place of business that is maintained for less than six months. However, the exception is where the activities were of a recurrent nature; in such cases, each period of time during which the place is used needs to be considered in combination with the number of times during which that place is used.

Paragraph 6.1 of the OECD Model Commentary provides that:

Where a particular place of business is used for only short periods of time but such usage takes place regularly over long periods of time, the place of business should not be considered to be of a purely temporary nature.

In this case, you visit Australia usually Melbourne or Sydney for one or one and half week at a time for approximately six times a year to provide the services of your business. You do not have office premises. You visit client at their premises. You are accommodated in a hotel or service apartments and you do not meet clients at your place of accommodation.

Based on the information provided, your business is not carry on sufficiently long period at each location nor are your services provided at the same place to constitute a fixed place of business in Australia.

However, if the facts are substantially changed in future income years, for example, if the services provided in Australia become more frequent at regular fixed places of the client for longer period it may constitute a fixed place of business through which your business is carry on therefore a PE may be found to exist in Australia based on the change in facts.

Since, it is a question of facts that have not yet taken place we are not able to provide a ruling for the future income years.

For the current income years, based on the facts provided, we do not consider that you have a fixed place of business through which you carry out your business in Australia. Therefore, you do not have a PE in Australia.

As you do not have a PE in Australia, your business profit as a foreign country resident is not assessable in Australia under subsection 6-5(3) of the ITAA 1997.