Edited version of your written advice

Authorisation Number: 1012663861818

Ruling

Subject: Royalty Income

Question 1

Will the Double Tax Agreement between Australia and the Other State allocate taxing rights in respect of the royalty income solely to the Other State?

Answer

Yes.

This ruling applies for the following periods:

The scheme commences on:

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.

F Co

F Co is a company incorporated under the laws of Other State and is a tax resident of Other State.

F Co's income is subject to Other State's tax by virtue of F Co being incorporated in the Other State.

F Co carries on business principally as a participant in particular commodity trading activities.

Business Activities

F Co or any other related entity has not at any point beneficially or legally owned any of the tenements in respect of the relevant X.

F Co is not a related entity of X Pty Ltd.

The F Co group of companies maintains office premises in Australia. The office premises are maintained to facilitate the business of related Australian group entities, which includes regulated business conducted by those entities under the terms of Australian Financial Services Licenses which they hold and maintain.

As a matter of practical business operation, the premises are made available on an ad hoc basis to officers and employees of the broader group for use as required on visits to Australia as part of broader business activities. No F Co employees, officers or agents have made use, or are required to make use, of the premises in connection with the derivation of the royalty income from the X.

F Co does not have:

• a place of management

• a branch

• an office

• a factory

• a workshop

• a mine, an oil or gas well, a quarry or any other place of extraction of natural resources

• an agricultural, pastoral or forestry property

• a building site or construction, assembly or installation project which exists for more than 9 months, nor

• an installation, drilling rig or ship that, for an aggregate period of at least 6 months in any 24 month period, is used by F Co in Australia for dredging or for or in connection with the exploration or exploitation of natural resources of the sea-bed and subsoil.

F Co does not carry on business in Australia through a person who has authority to conclude contracts on behalf of F Co and who habitually exercises that authority in Australia. In addition, F Co has not appointed any agent of independent status.

F Co does not maintain substantial equipment for rental or other purposes within Australia (excluding equipment let under a hire-purchase agreement) for a period of more than 12 months.

F Co is not engaged in supervisory activities in Australia for more than 9 months in any 24 month period in connection with a building site or construction, assembly or installation project in Australia.

F Co does not have goods or merchandise belonging to it that:

• were purchased by it in Australia, and not subjected to prior substantial processing outside Australia, or

• were produced by it or on its behalf in Australia,

and are, after such purchase or production, subjected to substantial processing in Australia by an enterprise where either enterprise participates directly or indirectly in the management, control or capital of the other enterprise, or where the same persons participate directly or indirectly in the management, control or capital of both enterprises.

Aus Co

Aus Co is a company incorporated in Australia and is a tax resident of Australia for Australian income tax purposes.

Aus Co is a subsidiary member of Holdings Pty Ltd which is the head company of a consolidated group.

X Pty Ltd

X Pty Ltd is a company incorporated in Australia and is a tax resident of Australia and is not a tax resident of any other jurisdiction for Australian income tax purposes.

X Pty Ltd and/or its related bodies corporate are the sole legal and beneficial owners of all the tenements associated with the x.

Royalty Agreement

The relevant rights and obligations under the royalty agreement were acquired by related entities F Co and Aus Co

In 2014 F Co and Aus Co amended the agreement with X Pty Ltd.

F Co's entitlement to payments under the royalty agreement

Pursuant to the royalty agreement, X Pty Ltd must pay to F Co an income stream as a result of operations conducted by X Pty Ltd.

Relevant legislative provisions

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Permanent Establishment Article

International Tax Agreements Act 1953 Income from Real Property Article

International Tax Agreements Act 1953 Business Profits Article

International Tax Agreements Act 1953 Interest Article

International Tax Agreements Act 1953 Royalties Article

International Tax Agreements Act 1953 Alienation of Property Article

International Tax Agreements Act 1953 Other Income Article

Reasons for decision

In determining the liability to Australian income tax on income received by a non-resident, it is necessary to consider not only Australian income tax laws but also the tax treaties that are governed by the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1997 (ITAA 1997) so that the two Acts are read as one. The Agreements Act has the effect of overriding the ITAA 1997 to the extent of any inconsistency (except in some limited situations).

Australia and Other State have entered into a tax treaty (or Double Tax Agreement).

Based on the matters set out in the Relevant facts and circumstances, the Commissioner considers that the Income from real property, Interest, Royalties and Alienation articles in the Double Tax Agreement do not apply in respect of the royalty income that F Co is entitled to receive. 

Where the Business profits article applies, then the Other income article does not apply. 

The Business profits article provides the extent to which business profits of an enterprise can be taxed in a Contracting State. Essentially, the business profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated in that other State. If the enterprise carries on business in the other State, the business profits may be taxed in that other State but only so much of the profits that are attributable to that permanent establishment.

The Permanent Establishment article of the Double Tax Agreement provides the meaning of the term 'permanent establishment' for the purposes of the Double Tax Agreement. It is stated that the term means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

Based on the matters set out in the Relevant facts and circumstances, F Co does not have a permanent establishment in Australia for the purposes of the Permanent Establishment article.

The Commissioner accepts that the royalty income constitutes 'Business profits' of F Co as F Co does not have a permanent establishment in Australia, taxing rights over this income are granted to the Other State under the Business Profits article of the Double Tax Agreement.

Therefore, the taxing rights of the royalty income are allocated solely to the Other State.