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Edited version of your private ruling
Authorisation Number: 1012583138407
Ruling
Subject: Taxation obligations under the Double Tax Agreement
Question 1
Is the company a resident of Australia for taxation purposes?
Answer
No.
Question 2
Is the company carrying on a business in Australia?
Answer
No.
Question 3
Does the company have a permanent establishment in Australia?
Answer
No.
Question 4
Is the company's Australian source income assessable in Australia?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2009
Year ended 30 June 2010
Year ended 30 June 2011
Year ended 30 June 2012
Year ended 30 June 2013
Year ending 30 June 2014
The scheme commenced on:
1 July 2008
Relevant facts and circumstances
The company is a registered Country Y company.
The company directors and employees are country Y residents.
The head office of the company is in Country Y.
The company is controlled and managed from country Y.
The company has one employee.
The company does not have a branch or an office in Australia.
The company has not provided services in Australia for more than 183 days in any one financial year.
The company has provided services in Australia for a number of years.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 995-1
Income Tax Assessment Act 1936 Section 6(1)
International Tax Agreements Act 1953 Section 4
International Tax Agreements Act 1953 Section 5
Convention between Australia and Country Y for the avoidance of double taxation with respect to taxes on income and fringe benefits and the prevention of fiscal evasion, Articles 5 and 7
OECD Commentary on the Model Tax Convention on Income and Capital
Reasons for decision
There are three tests to determine residency for the purposes of income tax law: refer to subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).
A company will be a resident if:
· it is incorporated in Australia, or
· if the company is not incorporated in Australia, but it is either:
· carrying on a business in Australia and its central management and control is in Australia, or
· carrying on a business in Australia and its voting power is controlled by shareholders who are Australian residents.
A company will only need to satisfy one of the tests to be a resident of Australia for tax purposes.
The company is not incorporated in Australia, so it is necessary to consider if the company is carrying on a business in Australia with further consideration to whether that business' central control and management is in Australia; or whether the voting power is controlled by shareholders who are Australian residents.
Carries on a business in Australia
The question of where business is carried on is one of fact requires consideration of where the activities of the company are carried on and is dependent on the facts and circumstances of a case.
The company has its head office in Country Y.
The company has one director who lives in Country Y.
The director controls and manages the company from Country Y.
The company is therefore not carrying on a business in Australia.
As the company is located in Country Y and it is not considered to be carrying on business in Australia, it is a non-resident of Australia and does not meet any of the three statutory tests.
Permanent establishment (PE) and assessability of Australian source income
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.
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 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 Country Y Agreement is listed in section 5 of the Agreements Act.
The Country Y agreement operates to avoid the double taxation of income received by residents of Australia and Country Y.
In interpreting the wording of the tax treaty, the Commissioner accepts in Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements that it is appropriate to have reference to the OECD Commentary on the Model Tax Convention on Income and Capital (the OECD Model Commentary).
Under Article X of the Country Y agreement, the business profits of an enterprise of Country Y shall be only taxable in Country Y 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.
PE is defined in Article Z(1) of the Country Y agreement as a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes a branch or an office.
Paragraph 4 of the OECD Model Commentary on Article Z(1) explains that 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 so long as a certain amount of space is at its disposal.
In this case, the company does not have an office, a branch, a factory or a workshop in Australia. Therefore, the company does not have a fixed place of business in Australia under Article Z(1) of the Country Y Agreement.
Article Z(4) of the Country Y agreement provides that an enterprise shall be deemed to have a permanent establishment in Australia where an enterprise of Country Y:
a) performs services in Australia
(i) through an individual who is present in Australia for a period or periods exceeding in the aggregate 183 days in any twelve month period, and more than 50 per cent of the gross revenues attributable to active business activities of the enterprise during the period or periods are derived from the services performed in Australia through that individual, or
(ii) for a period or periods exceeding in the aggregate 183 days in any twelve month period, and these services are performed for the same project or for connected projects through one or more individuals who are present and performing such services in Australia.
The company does not carry out services for more than 183 days in any financial year.
Therefore, in accordance with Article Z of the Country Y Agreement, the company does not have a PE in Australia, and so in line with Article X of the Country Y Agreement, the income of the company is not assessable in Australia.