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Ruling

Subject: Attributable Assessable Income - Australian Company

Question 1

Will the activities of the company give rise to assessable income as a result of amounts being attributed to the company under Division 13 of Pt III of the Income Tax Assessment Act 1936?

Answer

No

Question 2

If the activities of the company give rise to assessable income as a result of amount being attributed to it under Division 13 of Pt III of the ITAA 1936, will the outgoings be deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Not applicable

Question 3

If the activities of the company give rise to assessable income as a result of amounts being attributed to it under Division 13 of Pt III of the ITAA 1936, will section 26-50 of the ITAA 1997 apply to deny deductions incurred by the company?

Answer

Not applicable

This ruling applies for the following periods:

Tax years ending

30 June 2011

30 June 2012

30 June 2013

30 June 2014

30 June 2015

30 June 2016

The scheme commences on:

1 July 2006

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

An individual who is not an Australian resident (the Ultimate Owner) owns an Australian resident company, (the Australian Company). The Ultimate Owner also owns the Operating Company which is not resident in Australia.

The Australian Company owns a vessel which will be provided free of charge for use by the Operating Company.

The Australian Company has no employees and is not be involved in the day to day running of the vessel nor in any decision making with respect to the operation of the vessel. The only activities undertaken by the Australian Company are those required to maintain the ownership and registration of the vessel and to attend to any local compliance measures.

The Australian Company will pay for the local administrative expenses, such as, the vessel registration fees and local compliance fees. The Ultimate Owner has provided the Australian Company with any funding required to acquire the vessel and to meet any local administrative expenses.

The Australian Company will not issue instructions as to the operation of the vessel. The Ultimate Owner will issue instructions to the Operating Company as to the operation and management of the vessel.

The Operating Company will pay the costs of maintaining and operating the vessel.

The Operating Company will provide the crew end will meet all the running costs and other logistical requirements for the vessel in order to make the vessel available for use by the Ultimate Owner.

The main aim of the Operating Company is to make the vessel available for use by the Ultimate Owner and not to make a profit from chartering the vessel.

The Operating Company will operate the vessel primarily for the personal use of the Ultimate Owner, but, should a suitable opportunity arise, the vessel will be hired out to third parties by the Operating Company. The Operating Company will derive charter fees from the third parties. The Operating Company plans to charge market value charter fees.

The number of days that the vessel is chartered to third parties will not exceed 10% of the total number of days that the vessel is available for use.

The charter fees will never be greater than a minor portion of the overall annual ownership and operating costs. The vessel will not be marketed as a commercial enterprise. Any charter fees that do arise will be the result of interested parties' seeking out the use of the vessel. It is not expected that any of the charter fees will arise as a result of charters within Australian territorial waters.

The Operating Company will derive the charter fees in its own right. The Operating Company will not be managing the vessel or providing services as an agent for and on behalf of the Australian Company.

The Constitution of the Australian Company clearly states that the Australian Company's sole purpose is to provide a vessel for the private use of the Ultimate Owner.

The Constitution of the Operating Company does not prohibit the Operating Company from chartering the vessel to third parties.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 136

Income Tax Assessment Act 1936 Subsection 136AD(1)

Income Tax Assessment Act 1936 Subsection 136AD(2)

Reasons for decision

Question 1

Division 13 of Part Ill of the Income Tax Assessment Act 1936 (ITAA 1936) provides a legislative framework for dealing with arrangements under which profits are shifted out of Australia, primarily through the mechanism of transfer pricing.

The operative provision of Division 13 of the ITAA 1936 is Section 136AD.

Section 136AD(1) of the ITAA 1936 allows the Commissioner to substitute an arm's length consideration for the supply or acquisition of property where the following conditions are satisfied:

· there is a supply of property under an international agreement;

· the Commissioner is satisfied that any two or more parties to the international agreement were not dealing with each other at arm's length In relation to the supply (having regard to any connection between the parties or any other relevant circumstances);

· the consideration received by the Australian party for the supply of the property is less than the arm's length consideration; and

· the Commissioner determines that the transfer pricing provisions should apply.

Section 136AD(2) of the ITAA 1936 applies in a similar manner to section 136AD(1), but in circumstances where there is no consideration received or receivable in respect of the supply.

The Commissioner has issued a large number of public rulings regarding the operation of Division 13 of the ITAA 1936. Taxation Ruling TR 94/14 provides a commentary on the legislative purpose behind Division 13 of the ITAA 1936 and the adoption within it of the arm's length principle.

Paragraph 10 of Taxation Ruling TR 94/14 states that:

The legislative purpose behind Division 13 is to ensure Australia can counter 'non arm's length transfer pricing' or 'international profit shifting' arrangements in order to protect the Australian revenue. It provides a mechanism by which Australia adopts the internationally accepted arm's length principle' for taxation purposes as the basis for ensuring that Australia receives its fair share of tax by adjusting profits by reference to the conditions which would have existed between independent parties under comparable circumstances (paragraphs 154- 157).

The following concerning the 'arm's length principle' is from paragraph 157 of Taxation Ruling TR 94/14:

The 'arms length principle' is stated in Article 9(1) of the 1977 Organisation for Economic Co-operation and Development ("OECD") Model Double Taxation Convention on Income and on Capital and more recently in Article 9(I) of the 1992 OECD Model Tax Convention on Income and Capital. It provides:

"When conditions are made or imposed between (associated) enterprises in their commercial or financial relations (emphasis added) which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly."

Taxation Ruling TR 94/14 supports the view that, by its adoption of the arm's length principle and reliance on the definition contained in Article 9(1) of the 1992 OECD Model Tax Convention on Income and Capital, the intention of Division 13 of the ITAA 1936 is to apply to commercial arrangements. TR 94/14 provides no support for the view that Division 13 is intended to apply to private arrangements.

In the present case, the activities of the Australian Company and that of the Operating Company will not be undertaken as a commercial enterprise but rather as a private arrangement which will be a reflection of the Ultimate Owner's passion. There will be no discernible trading pattern by the Operating Company. Any charter fees received will be random and incidental to the private and non-commercial purpose of the arrangement. The constitutional document of the Australian Company supports the fact that the arrangement is essentially private in nature. It is considered that in view of the essentially private nature of the arrangement and in view of the fact that the main objective of Division 13 of the ITAA 1936 is to provide a legislative framework for dealing with arrangements under which profits are shifted out of Australia, Division 13 should not apply in the present case.

The activities of the Australian Company under the arrangement described above will not give rise to any assessable income as a result of amounts being attributed to it under Division 13 of the ITAA 1936.

Question 2

As the activities of the Australian Company under the arrangement described above will not give rise to any assessable income as a result of amounts being attributed to it under Division 13 of the ITAA 1936, it is not considered necessary to address the deductibility of outgoings under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Question 3

As the activities of the Australian Company under the arrangement described above will not give rise to any assessable income as a result of amounts being attributed to it under Division 13 of the ITRA 1938, it is not considered necessary to address the deductibility of outgoings under section 26-50 of the Income Tax Assessment Act 1997 (ITAA 1997).