Edited version of your written advice

Authorisation Number: 1012697883280

Ruling

Subject: residency, permanent establishment, source and assessability of income and withholding obligations

Question 1

Is A Co a resident of Australia for the purposes of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Is A Co a resident of an overseas country for the purposes of that country's Double Tax Agreement (DTA)?

Answer

Yes.

Question 3

Does A Co have a permanent establishment in Australia for the purposes of that overseas country's DTA?

Answer

Yes.

Question 4

Do subsections 6-5(2) and 6-10(4) and section 6-15 of the Income Tax Assessment Act 1997 (ITAA 1997) apply such that A Co's assessable income includes the ordinary income and statutory income it derives directly and indirectly from all sources, whether in or out of Australia, during the income year and excludes any exempt income or non-assessable, non-exempt income?

Answer

Yes.

Question 5

Do the payments received by A Co under the Contract and Services Contract constitute royalties in accordance with subsection 6(1) of the ITAA 1936?

Answer

No.

Question 6

Does the royalties article of the overseas country's DTA apply to the receipts arising to A Co under the Contract and Services Contract?

Answer

No.

Question 7

Will the business profits article of the overseas country's DTA apply to A Co in respect of the payments it receives under the Contract and Services Contract?

Answer

No.

Question 8

Is A Co a foreign resident for the purposes of the foreign resident withholding provisions under paragraph 12-315(2)(a) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)?

Answer

No.

Question 9

Is A Co required to withhold an amount from payments it makes to Overseas Co arising under the Subcontract in accordance with section 12-280 of Schedule 1 to the TAA 1953?

Answer

No.

Question 10

Will only the payments made by A Co to Overseas Co under the Subcontract for services provided by Overseas Co to A Co in Australia be subject to a foreign resident withholding obligation under section 12-315 of Schedule 1 to the TAA 1953?

Answer

Yes.

Question 11

Will the payments made by A Co to Overseas Co under the Subcontract be subject to withholding under section 12-190 of Part 2-5 of Schedule 1 to the TAA 1953 where Overseas Co has provided its Australian Business Number (ABN) to A Co?

Answer

No.

This ruling applies for the following period:

A number of income years.

The scheme commenced:

During the 2013 income year.

Relevant facts and circumstances

A Co

1. A Co is a member of Overseas Group.

2. A Co is an Australian incorporated company with an Australian resident director and a presence in Australia. However, A Co's key management and commercial decisions are made by the overseas Board of its overseas holding company.

3. A Co is treated as a resident of that overseas country.

Overseas Co

4. Overseas Co is the operating entity of Overseas Group.

5. Overseas Co is a company incorporated in an overseas country of which A Co is a tax resident.

6. Overseas Co is treated as a tax resident of the overseas country and its effective place of management is in that overseas country.

7. The Commissioner has ruled that Overseas Co is a foreign resident for Australian tax purposes.

8. Overseas Co is not covered by an exemption in force under subsection 12-319(1) of Schedule 1 to the TAA 1953.

Personnel Co

9. Personnel Co is a company incorporated in the overseas country of which A Co is a tax resident.

10. Personnel Co is treated as a tax resident of the overseas country and its effective place of management is in that overseas country.

11. Personnel Co is a member of Overseas Group and provides personnel to members of Overseas Group.

12. Personnel Co has no presence in Australia.

The Contract

13. A Co entered into the Contract with a third party contractor (Main Contractor) to provide certain services in Australia.

14. At the completion of the Contract, the Main Contractor will take ownership of what is produced by A Co's services.

15. The entire scope of the work to be performed by A Co under the Contract however, is subcontracted to Overseas Co under a sub-contract (referred to as either the Subcontract or the Services Contract).

16. All activities performed by A Co will be supervised by Overseas Co.

17. The duration of A Co's and Overseas Co's respective work is expected to exceed twelve months.

The Subcontract/Services Contract

18. A Co and Overseas Co entered into the Subcontract (or alternatively referred to as the Services Contract) under which:

• A Co will receive payments to provide certain services to Overseas Co (referred to as payments under the Services Contract); and

• Overseas Co will receive payments to provide certain services to A Co (referred to as payments under the Subcontract).

19. Where possible, Overseas Co will perform its activities under the Subcontract outside Australia, in the overseas country of which it is a tax resident. Only those activities which are required to be performed in Australia will be performed in Australia.

20. Overseas Co will include its ABN on the invoices it raises to A Co in respect of the payments to be made by A Co to Overseas Co under the Subcontract.

21. The Commissioner has ruled that the payments from A Co to Overseas Co under the Subcontract are not royalties for Australian tax purposes.

Personnel Agreement

22. Overseas Co entered into the Personnel Agreement with Personnel Co under which Personnel Co agrees to provide personnel to Overseas Co in accordance with Overseas Co's requirements.

23. Under the Personnel Agreement, Personnel Co will be paid a flat, all inclusive rate for the provision of personnel, covering all Personnel Co's costs.

24. Personnel Co remains legally responsible for paying all wages during the provision of the personnel to Overseas Co.

Further personnel arrangements

25. For the purposes of the work under the Subcontract/Services Contract, the personnel (originally provided by Personnel Co under the Personnel Agreement) will be assigned to A Co and Overseas Co will charge an arm's length amount with no further mark-up to A Co for this assignment.

26. A Co will then make the personnel available to Overseas Co to undertake general operational activities, and will charge an arm's length amount with no further mark-up to Overseas Co for this provision.

27. This arrangement is used for ease of administration based on A Co's knowledge and experience with managing and complying with various applicable Australian laws.

Relevant legislative provisions

Subsection 6(1) of the ITAA 1936.

Subsection 6-5(2) of the ITAA 1997.

Subsection 6-10(4) of the ITAA 1997.

Section 6-15 of the ITAA 1997.

Section 995-1 of the ITAA 1997.

Section 12-190 of Part 2-5 of Schedule 1 to the TAA 1953.

Section 12-280 of Schedule 1 to the TAA 1953.

Section 12-315 of Schedule 1 to the TAA 1953.

Regulation 44C of the Taxation Administration Regulations 1976 (TAR 1976).

Subsection 9-20(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Reasons for decision

Question 1

Is A Co a resident of Australia for the purposes of subsection 6(1) of the ITAA 1936?

Summary

Yes. A Co is a resident of Australia for the purposes of subsection 6(1) of the ITAA 1936.

Detailed reasoning

Paragraph 6(1)(b) of the ITAA 1936 defines a 'resident of Australia', in respect of a company, as a company which is incorporated in Australia, or which, not being incorporated in Australia carries on a business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

A Co is a company incorporated in Australia. Accordingly, A Co is a resident of Australia for the purposes of subsection 6(1) of the ITAA 1936.

Question 2

Is A Co a resident of an overseas country for the purposes of that country's DTA?

Summary

Yes. A Co is a resident of an overseas country for the purposes of that country's DTA.

Detailed reasoning

Question 1 above confirms that A Co is a resident of Australia for Australian tax purposes, however A Co is also treated as a resident of an overseas country.

As A Co is consequently categorised as a dual resident, the tiebreaker rule in the residency article of that overseas country's DTA must be considered.

Under this tiebreaker rule, an entity is deemed to be a resident solely of the State in which its place of effective management is situated.

Despite A Co being a company incorporated in Australia with an Australian presence, A Co's effective management is in the overseas country.

As such, A Co is deemed to be a resident solely of the overseas country for the purposes of that overseas country's DTA.

This categorisation does not affect A Co's status as a resident of Australia for Australian tax purposes.

Question 3

Does A Co have a permanent establishment in Australia for the purposes of that overseas country's DTA?

Summary

Yes. A Co has a permanent establishment in Australia for the purposes of that overseas country's DTA.

Detailed reasoning

'Permanent establishment' is a defined term under the overseas country's DTA.

A Co meets the criteria to have a permanent establishment in Australia.

A Co therefore has a permanent establishment in Australia for the purposes of overseas country's DTA.

Question 4

Do subsections 6-5(2) and 6-10(4) and section 6-15 of the ITAA 1997 apply such that A Co's assessable income includes the ordinary income and statutory income it derives directly and indirectly from all sources, whether in or out of Australia, during the income year and excludes any exempt income or non-assessable, non-exempt income?

Summary

Yes. Subsections 6-5(2) and 6-10(4) and section 6-15 of the ITAA 1997 apply such that A Co's assessable income includes the ordinary income and statutory income it derives directly and indirectly from all sources, whether in or out of Australia, during the income year and excludes any exempt income or non-assessable, non-exempt income.

Detailed reasoning

Subsection 6-5(2) of the ITAA 1997 provides that:

If you are an Australian resident, your assessable income includes the ordinary income you derive directly or indirectly from all sources, whether in or out of Australia, during the income year.

Subsection 6-10(4) of the ITAA 1997 further provides that:

If you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia.

Subsection 6-15(1) of the ITAA 1997 clarifies that if an amount is not ordinary income and is not statutory income, it is not assessable income. Subsections 6-15(2) and 6-15(3) of the ITAA 1997 go on to confirm that exempt income and non-assessable non-exempt income respectively are not assessable income.

Question 1 above confirms that A Co is an Australian resident for Australian tax purposes. As such, subsections 6-5(2) and 6-10(4) of the ITAA 1997 apply to A Co, and accordingly its assessable income includes the ordinary income and statutory income it derives directly and indirectly from all sources, whether in or out of Australia, during the income year.

Furthermore, section 6-15 of the ITAA 1997 applies to A Co such that its exempt income or non-assessable non-exempt income is excluded from its assessable income.

Question 5

Do the payments received by A Co under the Contract and Services Contract constitute royalties in accordance with subsection 6(1) of the ITAA 1936?

Summary

No. The payments received by A Co under the Contract and Services Contract do not constitute royalties in accordance with subsection 6(1) of the ITAA 1936.

Detailed reasoning

According to subsection 6(1) of the ITAA 1936, 'royalties' include any amount paid or credited, however described or computed, and whether the payment or credit is periodical or not, to the extent to which it is paid or credited, as consideration for (inter alia):

…

(a) the use of, or the right to use, any industrial, commercial or scientific equipment;

(b) the supply of scientific, technical , industrial or commercial knowledge or information; and

(c) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of,…any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);…

Taxation Ruling IT 2660 (IT 2660) provides the Commissioner's views on the definition of 'royalty' and 'royalties' in subsection 6(1) of the ITAA 1936.

Payments for services rendered and work done can be distinguished from royalty payments.

In terms of distinguishing elements, a contract for the supply of know-how generally involves the following:

• a 'product' (knowledge, information, technique, formula, skills, process, plan etc.) is already in existence; and

• the right to use the product is what is being transferred to the buyer under the contract (and the seller retains the right to use the product themselves and/or transfer it to others).

A contract to perform services or work however, involves:

• a contractor undertaking to perform services or work which will bring into existence a product;

• the contractor applying their existing knowledge, skill and expertise (not transferring this knowledge, skill or expertise) in bringing the product into existence; and

• the resulting product being owned by the buyer.

Essentially then, the question to be determined in making the distinction between royalties and payments for services rendered is - 'Is the contract one for the supply, for use by the 'buyer', of a 'product' which is already in existence, or rather, does the contract require the contractor to apply special skills and knowledge for their own use in order to bring into existence a 'product' for the buyer?' In the first case, a contract for the supply of know-how exists (in which case the payment for such is a royalty as defined by subsection 6(1) of the ITAA 1936). In the second case, the contract is simply for services rendered or work done.

Payments under the Contract

Under the Contract:

• A Co will perform services or work to bring into existence a product for the Main Contractor;

• A Co will apply its existing knowledge, skill and expertise in order to bring into existence that product; and

• the Main Contractor will take ownership of that product at the completion of the Contract.

No technical knowledge, information, experience or technique necessary for the production of the product is transferred by A Co to the Main Contractor.

As such, payments to A Co under the Contract constitute payments for services rendered or work done and do not constitute royalties in accordance with subsection 6(1) of the ITAA 1936.

Payments under the Services Contract

Services to be provided by A Co under the Services Contract involve the use of A Co's skills in relevant areas to produce work under the Services Contract for Overseas Co. There is no transfer of knowledge or 'know-how' from A Co to Overseas Co in this respect.

Rather, A Co will use its existing knowledge, skill and expertise in order to perform work or services for Overseas Co.

Therefore, payments received by A Co under the Services Contract do not constitute royalties in accordance with subsection 6(1) of the ITAA 1936.

Question 6

Does the royalties article of the overseas country's DTA apply to the receipts arising to A Co under the Contract and Services Contract?

Summary

No. The royalties article of the overseas country's DTA does not apply to the receipts arising to A Co under the Contract and Services Contract.

Detailed reasoning

'Royalties' is a defined term under the overseas country's DTA.

IT 2660 provides not only the Commissioner's views on the definition of 'royalty' and 'royalties' for the purposes of subsection 6(1) of the ITAA 1936, but also for various double tax agreements in the Schedules in the International Tax Agreements Act 1953. As such, the same considerations and features as discussed above for the purposes of the taxation law definition of 'royalty', equally apply to the overseas country's DTA's definition.

As stated above, payments received by A Co under the Contract and the Services Contract constitute payments for services rendered or work done, and such activities will not involve the imparting or communicating of A Co's specialist skills, knowledge or expertise. Rather, the activities A Co undertakes to perform under the Contract and Services Contract involve the use of A Co's existing knowledge, skill and expertise in order to perform work or services for the Main Contractor and Overseas Co respectively.

Payments to A Co under the Contract and the Services Contract are considered to be payments for services provided or work done and therefore do not constitute royalties under the overseas country's DTA. As such, the royalties article of the overseas country's DTA does not apply to the receipts arising to A Co under the Contract and Services Contract.

Question 7

Will the business profits article of the overseas country's DTA apply to A Co in respect of the payments it receives under the Contract and Services Contract?

Summary

Yes. The business profits article of the overseas country's DTA will apply to A Co in respect of the payments it receives under the Contract and Services Contract.

Detailed reasoning

As the payments received by A Co under the Contract and Services Contract constitute business profits, the business profits article of the overseas country's DTA will apply to A Co in respect of those payments, thereby attributing taxing rights to Australia on such payments to the extent that they are attributable to A Co's permanent establishment in Australia.

Question 8

Is A Co a foreign resident for the purposes of the foreign resident withholding provisions under paragraph 12-315(2)(a) of Schedule 1 to the TAA 1953?

Summary

No. A Co is not a foreign resident for the purposes of the foreign resident withholding provisions under paragraph 12-315(2)(a) of Schedule 1 to the TAA 1953.

Detailed reasoning

Question 1 above confirms that A Co is an Australian resident for Australian tax purposes, including for the purposes of paragraph 12-315(2)(a) of Schedule 1 to the TAA 1953. As such, A Co is not a foreign resident for the purposes of the foreign resident withholding provisions under paragraph 12-315(2)(a) of Schedule 1 to the TAA 1953.

Question 9

Is A Co required to withhold an amount from payments it makes to Overseas Co arising under the Subcontract in accordance with section 12-280 of Schedule 1 to the TAA 1953?

Summary

No. A Co is not required to withhold an amount from payments it makes to Overseas Co arising under the Subcontract in accordance with section 12-280 of Schedule 1 to the TAA 1953.

Detailed reasoning

Section 12-280 of Schedule 1 of the TAA 1953 deals with royalty payments to overseas persons and a payer's associated withholding obligation.

The Commissioner has ruled that the payments from A Co to Overseas Co under the Subcontract are not royalties for Australian tax purposes, including for the purposes of section 12-280 of Schedule 1 to the TAA 1953. As such, this section does not apply to the payments made by A Co to Overseas Co under the Subcontract and A Co will not have an obligation to withhold an amount in accordance with section 12-280 of Schedule 1 of the TAA 1953 from any such payments.

Question 10

Will only the payments made by A Co to Overseas Co under the Subcontract for services provided by Overseas Co to A Co in Australia be subject to a foreign resident withholding obligation under section 12-315 of Schedule 1 to the TAA 1953?

Summary

Yes. Only the payments made by A Co to Overseas Co under the Subcontract for services provided by Overseas Co to A Co in Australia will be subject to a foreign resident withholding obligation under section 12-315 of Schedule 1 to the TAA 1953.

Detailed reasoning

Section 12-315 of Schedule 1 to the TAA 1953 deals with a payer's withholding obligation in respect of payments made to foreign residents.

Subsection 12-315(1) of Schedule 1 to the TAA 1953 provides that:

An entity (the payer) that carries on an enterprise must withhold an amount from a payment it makes to another entity…in the course or furtherance of the enterprise if:

(a) the entity receiving the payment…is an entity covered by subsection (2); and

(b) the payment is of a kind set out in the regulations; and

(c) the payment is not:…

iii. a royalty;…

and

(d) the entity receiving the payment is not covered by an exemption in force under subsection 12-319(1)…

Carrying on an enterprise

Section 995-1 of the ITAA 1997 provides that 'enterprise' has the meaning given by section 9-20 of the GST Act.

Subsection 9-20(1) of the GST Act's definition of 'enterprise' includes an activity, or series of activities done in the form of a business.

A Co's activities are in the form of a business. As such, A Co is carrying on an enterprise in Australia.

Payments

Payments from A Co to Overseas Co under the Subcontract are made in the course or furtherance of A Co's enterprise.

Regulation 44C of the TAR 1976 deals with certain prescribed payments to foreign residents. To the extent that Overseas Co's activities are performed in Australia, they are prescribed payments.

Finally, as stated above, the Commissioner has ruled that the payments from A Co to Overseas Co under the Subcontract are not royalties for Australian tax purposes.

The receiving entity

Overseas Co is not covered by an exemption in force under subsection 12-319(1) of Schedule 1 to the TAA 1953.

Relevantly for this case, an 'entity' (as mentioned in paragraph 12-315(1)(a)) will be covered by section 12-315 of Schedule 1 to the TAA 1953 if it is a foreign resident.

As stated above, the Commissioner has ruled that Overseas Co is a foreign resident for Australian tax purposes.

Overseas Co is therefore an entity covered by section 12-315 of Schedule 1 to the TAA 1953.

Conclusion

Given that:

• A Co is carrying on an enterprise in Australia;

• A Co makes payments to Overseas Co under the Subcontract in the course or furtherance of that enterprise;

• the payments from A Co to Overseas Co under the Subcontract (to the extent that the payments relate to activities performed by Overseas Co in Australia) are prescribed payments under the TAR 1976;

• Overseas Co is not covered by an exemption; and

• Overseas Co is a foreign resident,

only the payments made by A Co to Overseas Co under the Subcontract for services provided by Overseas Co to A Co in Australia will be subject to a foreign resident withholding obligation under section 12-315 of Schedule 1 to the TAA 1953.

Question 11

Will the payments made by A Co to Overseas Co under the Subcontract be subject to withholding under section 12-190 of Part 2-5 of Schedule 1 to the TAA 1953 where Overseas Co has provided its ABN to A Co?

Summary

No. The payments made by A Co to Overseas Co under the Subcontract will not be subject to withholding under section 12-190 of Part 2-5 of Schedule 1 to the TAA 1953 where Overseas Co has provided its ABN to A Co.

Detailed reasoning

Subsection 12-190(1) of Part 2-5 of Schedule 1 to the TAA 1953 requires a payer to withhold an amount from a payment it makes to another entity if the payment is for a supply made (or proposed to be made) by that other entity to the payer in the course or furtherance of an enterprise carried on in Australia by the other entity, and an exception in section 12-190 does not apply.

Subsection 12-190(2) of Part 2-5 of Schedule 1 to the TAA 1953 provides such an exception where the other entity gives the payer an invoice for the supply quoting the other entity's ABN or the payer has some other document relating to the supply on which the other entity's ABN is quoted (paragraphs 12-190(2)(a) and (b) respectively).

Supply made in the course or furtherance of an enterprise carried on in Australia

Section 12-190 of Part 2-5 of Schedule 1 to the TAA 1953 only applies to payments made for supplies made in the course or furtherance of an enterprise carried on in Australia. Given that Overseas Co will provide services to A Co under the Subcontract in Australia and in the overseas country, this provision only applies to the services provided to A Co by Overseas Co in Australia.

As stated above, subsection 9-20(1) of the GST Act's definition of 'enterprise' includes an activity, or series of activities done in the form of a business.

Overseas Co activities performed in Australia are undertaken in the form of a business and therefore Overseas Co's activities (performed in Australia) under the Subcontract constitute an enterprise. Furthermore, the services provided by Overseas Co to A Co under the Subcontract in Australia are made in the course or furtherance of this enterprise.

Exception

As Overseas Co will quote its ABN on invoices raised to A Co for services it provides in Australia under the Subcontract, the exception in paragraph 12-190(2)(a) of Part 2-5 of Schedule 1 to the TAA 1953 will apply.

Accordingly, A Co will not be required to withhold an amount from such payments made by A Co to Overseas Co under the Subcontract for services provided by Overseas Co in Australia where Overseas Co provides its ABN to A Co.