Edited version of your private ruling

Authorisation Number: 1012580833667

Ruling

Subject: Your residency

Question 1

Do you have a permanent establishment in Australia under Article X of the Double Tax Agreement?

Answer

No

Question 2

Are the payments you receive from the Lessee royalty payments that are subject to Australian withholding tax and is the rate of withholding tax reduced to 10% under Article X of the Double Tax Agreement?

Answer

Yes.

Question 3

If the payments received are royalties subject to Australian withholding tax, are they not assessable and not exempt under section 128D of the ITAA 1936?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013,

Year ended 30 June 2014,

Year ended 30 June 2015.

The scheme commences on

1 July 2012.

Relevant facts and circumstances

You were incorporated overseas.

You are a tax resident overseas.

You do not have any employees or offices in Australia.

You lease equipment to a variety of industries worldwide.

You have leased several items of equipment to companies in Australia.

You have provided a copy of the applicable agreements.

The agreements were negotiated and signed overseas.

As per the agreements none of your staff accompany or run the equipment in Australia.

The equipment was built overseas.

Each agreement is for several years.

The agreements specify:

the areas in which the equipment can be used.

· The place of delivery and redelivery.

· Payment terms i.e. in overseas currency to an overseas bank account.

· The equipment is at the disposal of the lessee and under their complete control.

· The equipment must be insured and maintained by lessee.

A description of the Lessee's Business

The Lessee is an Australian incorporated company and operates a similar business to you.

You understand that the Lessee had a shortage of equipment to supply to its customers in Australia and hence contracted with you to obtain suitable equipment to use in its business.

You do not undertake activities in connection with the business of exploration or exploitation of natural resources.

Relevant legislative provisions

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

International Tax Agreements Act 1953 Section 4.

Income Tax Assessment Act 1936 Section 128B(2B).

Income Tax Assessment Act 1936 Section 6(1).

Income Tax Assessment Act 1936 Section 128D.

Reasons for decision

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.

The income derived from leasing equipment in Australia is ordinary income for the purposes of subsections 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).

Section 4 of the International Tax Agreements Act 1953 incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Agreement is listed in section 5 of the Agreements Act.

The Agreement operates to avoid the double taxation of income received by residents of Australia and the overseas country.

Under an Article of the Agreement, the business profits of an enterprise of overseas shall be only taxable overseas 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.

Article X of the Agreement contains the general definition of a PE which is as follows:

"for the purposes of this agreement, the term "permanent establishment" means a fixed place of business in which the business of an enterprise is wholly or partly carried on."

Taxation Ruling TR 2001/13 at paragraphs 101 to 105 explains the Commissioner's view that the OECD Model Tax Convention and Commentaries are relevant to interpreting Australia's tax treaties. Paragraph 1 of the OECD Commentary on Article 5 of the OECD Model Tax Convention explains that the general definition of a PE contains the following conditions:

1. the existence of a 'place of business', i.e. a facility such as premises or in certain instances, machinery or equipment;

2. this place of business must be 'fixed', i.e. must be established at a distinct place with a certain degree of permanence;

3. the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.

The Commentaries explain that a 'place of business' covers any premises, facilities or installations used for carrying on the business. It is also immaterial if a business is actually carried on in the premises and whether the premises is owned or rented. The important consideration is that the space must be at the disposal of the entity.

Article XY of the Agreement further illustrates the general definition by providing listed facilities that are included in the definition:

"(a) a place of management;

(b) a branch;

(c) an office;

(d) a factory;

(e) a workshop;

(f) a mine, quarry or any other place of extraction of natural resources;

(g) an agricultural, pastoral or forestry property;

(h) a building site or construction, installation or assembly project which lasts for more than twelve months."

The Commentaries at paragraph 2 note that the list is not exhaustive and should only be considered in light of paragraph 1.

In your case, you are in the business of leasing equipment to various businesses around the world. You have described your business activities in Australia as leasing equipment without any staff. You do not a fixed place of business in Australia as per Article X and Article XY.

Article XZ of the Agreement states that an entity will have a PE carrying on a business if substantial equipment is being used for more than 12 months by, for or under contract with the entity in exploration for, or the exploitation of, natural resources, or in activities connected with such exploration or exploitation.

The Commentaries contain "Reservation on the Article" which at Paragraph 1 states that Australia reserves the right to treat an entity as having a PE if it carries on activities relating to natural resources or operates substantial equipment with a certain degree of continuity.

Substantial equipment

Substantial equipment is not defined in the Agreement or Commentaries. Taxation Ruling TR 2007/10 deals with the treatment of specific equipment leasing profits of some overseas enterprises and explains that by reason of their size alone, the equipment would be expected to constitute substantial equipment.

TR 2007/10 followed the Full Federal Court decision in McDermott Industries (Aust) P/L v FC of T 2005 ATC 4398. It was found that a permanent establishment existed from the Singaporean company leasing equipment for use in Australian waters, even though the entity did not have a significant presence in Australia.

However the Singapore Agreement materially differs from the overseas country's Agreement, which contains additional requirements that the substantial equipment is connected to the exploration of natural resources.

Exploration and or Exploitation of Natural resources

ATO Interpretive Decision ATO ID 2006/306 discusses the Swiss Agreement which at Article XZ is consistent with the Agreement. It also discusses the McDermott decision, stating that the taxpayer will have a deemed PE if the substantial equipment is being used in Australia to process natural resources by:

the taxpayer itself,

· the Australian company, 'for' the taxpayer; or

· the Australian company, 'under contract with' the taxpayer.

In your case;

· Part of your business is equipment rental,

· You have leased equipment on a without staff basis to Australian resident companies,

· You do not undertake activities in connection with the business of exploration or exploitation of natural resources,

· You have no place of business, office or employees in Australia, and

· You have no direct or indirect contractual relationship with any participant in the natural resource industry in Australia in respect of the leased equipment.

Your substantial equipment i.e. equipment on lease to an Australian company will not be a deemed PE as it is not being used in Australia to process natural resources by you, the Lessee for you or the Lessee under contract with you. Therefore, you do not have a PE in Australia and as such are not an Australian resident for taxation purposes under Article X of the Agreement.

Withholding tax

Under section 128B(2B) of the ITAA 1936, there is a requirement to withhold tax from income that is derived by a non-resident and is paid to the non-resident by a person to whom this section applies and is not an outgoing wholly incurred by that person in carrying on business in a foreign country at or through a permanent establishment of that person in that country.

Under section 6(1) of the ITAA 1936, a royalty includes:

"any amount credited... as consideration for ... the use of, or right to use, any industrial, commercial or scientific equipment; [and] the supply of any assistance that is ancillary to and subsidiary to, and is furnished as a means of enabling the application or enjoyment of ... any such equipment."

Article XQ of the Agreement states that royalties include payments for the use of or right to use commercial equipment.

Taxation Ruling TR 2003/2 confirms that where the arrangement between the leaser and the lessee is a contract for the use of, or right to use a specific type of equipment the payments will be royalties as defined for tax purposes.

Article XQ of the Agreement states that royalties may be taxed in the country in which they arise but the tax cannot exceed 10% of gross amount.

In your case, you are a non-resident of Australia for taxation purposes and will be deriving income in Australia from the lease of equipment to Australian companies. This income is considered to be royalties as it is an amount for the use of or right to use commercial equipment. As per the Agreement these amounts may be taxed at 10% of the gross amount.

Subject to section 128(2B) of the ITAA 1936, section 128D of the ITAA 1936 applies to make the applicable income not assessable and not exempt. Therefore, any withholding tax paid is a final tax on the applicable income.