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Ruling

Subject: Permanent Establishment

Question 1

Do your operations in Australia constitute a permanent establishment in Australia?

Answer

No.

Question 2

Is the income derived by you from providing consultancy and design services in Australia assessable?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are a resident of the Country X.

You are not a resident of Australia for income tax purposes of Income Tax Assessment Act 1997 (ITAA 1997).

You have proposed to enter into a sub-consultancy agreement contract with an Australian company to provide services.

These services will be done in Australia.

You have provided the Sub-Consultancy Agreement which has been signed between you and company. This shows that your intention of the proposal is serious and the project is likely to happen.

This project begins during 2010 and is expected to end during 2012.

This means the project will be in 2010-11 and 2011-12 income years.

You proposed that your temporary office facilities will be in Australia for a few months.

Three employees from your company will be expected to make multiple short visits to Australia to provide service. These visits are limited to X days.

The rest of your service will be done in your offices in Country X.

Your income is sourced in Australia.

Your income will be solely from providing services to an Australian company. Apart from this arrangement; there is no other business arrangement in Australia.

You do not have a fixed base in Australia.

You do not have any employees, offices, factories or workshops in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

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

Income Tax Assessment Act 1936 Subsection 6(1)

International Tax Agreements Act 1953

A New Tax System (Australian Business Number) Act 1999 Section 8

Taxation Administration Act 1953 Subdivision 12-E Section 12-190

Taxation Administration Act 1953 Subdivision 12-FB Section 12-319

Reasons for decision

Permanent establishment in Australia

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived from all sources, whether in or out of Australia during the income year.

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a foreign 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 definition of resident for a company in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that a foreign incorporated company may be treated as an Australian resident if the company is carrying on business in Australia, and either has its central management and control in Australia or its voting power held by Australian resident shareholders.

In this case, the central management and control of the company is outside of Australia.

Therefore the company is not an Australian resident company as it does satisfy of the definition of a resident company under subsection 6(1) of the ITAA 1936

In determining the liability to Australian tax on the income received by a non-resident, it is necessary to consider any applicable tax treaty.

Australia has a tax treaty with Country X (Country X Convention).

In an Article of Country X Convention, "permanent establishment" includes a place of management, a branch, an office, a factory, a workshop, a mine and natural resources working site or an agricultural property.

There is no definite rule as to what constitute a length of time in order to be constituted a "permanent establishment", however, according to the Taxation Ruling 2002/5 paragraph 33, the "rule of thumb" is six months for the required level of permanence. This means that even if a place is temporary or rented and it exceeds six months, it is deemed to be a "permanent establishment".

In an Article of Country X Convention, it is stated that an entity is deemed to have "permanent establishment" in Australia if it has a building site, construction or installation project in Australia or it undertakes supervisory or consultancy activity in Australia connected with the site or project if the site, project or activity lasts more than twelve months.

In your case, you have a fixed base in Country X from where you operate a company. You do not have any distinct place of management, branch, offices or employees in Australia.

Your proposed arrangement will last from 2010 to 2012.

You proposed that your employees will be in Australia physically for less than six months by making multiple short visits to carry out services to an Australian company.

The remaining length of your services will be done in your offices in Country X.

While your employees are in Australia for few months, you proposed that your employees will stay in temporary office facilities stationed in Australia.

You are paid by an Australian resident company. You do not have a fixed base in Australia due to the nature of your arrangement, office facilities placement and the period of your physical presence in Australia.

Your project is an activity which lasts X months but the length of your activity based in Australia lasts X months while the remaining activity is in Country X.

All of these factors indicated that your company is not deemed to have a permanent establishment in Australia.

Assessability of Australian income from providing services

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

In your case, you are a foreign resident. Your income from the sale of providing services to an Australian resident is Australian source of ordinary income.

In determining the liability of Australian tax on income received by a non resident, it is necessary to consider not only the Australian income tax laws but also any applicable double tax agreement contained in the ITAA 1953. A Schedule of ITAA 1953 contains the tax treaty between Australia and Country X (Country X Convention).

An Article of Country X Convention governs the taxation of business profits derived by a Country X resident from Australian sources. Under this article, it exempts business profits/income of a Country X enterprise from Australian tax unless that Country X enterprise has a "permanent establishment" in Australia. If the entity has a "permanent establishment", Australia has the right to tax the income connected to the Country X resident's enterprise.

This means Australia cannot tax the profit of a Country X enterprise that has no "permanent establishment" due to the tax treaty between Australia and Country X.

It has been established that you do not have a "permanent residence" in Australia in accordance to question one. Thus, your income is considered to be foreign sourced income and is an exempt income in accordance with an Article of Country X Convention. Subsequently, it cannot be accessed and taxed on.

Articles of Country X Convention effectively overrides the ITAA 1997 where there are inconsistent provisions and similar taxes such as the income tax, corporation tax and capital gains tax (except in some limited provisions). It also operates to avoid the double taxation of income received by Australian and Country X residents.

Accordingly, income of your company is not assessable income in Australia
So you are not required to register for Australian tax as your income is considered to be exempt income.

NOTE

Australian Business Number (ABN) Eligibility

Under section 8(1) and (2), Australian Business Number Act 1999 (ABN Act 1999), an entity will be eligible to an ABN if the entity is carrying on an enterprise in Australia or during the course of carrying on an enterprise, is making supplies that are connected with Australia.

According to Tax Ruling 2002/9, for the "no ABN withholding provision" to apply, the requirements of paragraph 12-190(1)(a) of Schedule 1 Taxation Administration Act 1953 (TAA 1953) must be satisfied as below;

- there must be a supply

- the supply must be made by an entity carrying on an enterprise in Australia

In your case, you are deemed not to be carrying an enterprise in Australia due to the fact that you do not have a "permanent establishment". Therefore, you do not need to register for an ABN and quote an ABN to an Australian company.

Section 12-1, Schedule 1, TAA 1953 states that if the ABN is not supplied, there will be no withholding requirement when the income is exempt.

As per Paragraph 101(viii) of Tax Ruling 2002/9, income will be considered to be exempt when it is not taxable due to the provision of the International Treaties.

In your case, it will be an Article of Country X Covenant that makes your income exempt.

Therefore, your income will not be affected by the ABN Withholding Tax but your income may be subjected to Foreign Resident Withholding Tax.