Edited version of your written advice

Authorisation Number: 1012697921334

Ruling

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

Question 1

Is Personnel Co a foreign resident for the purposes of section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

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

Answer

Yes.

Question 3

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

Answer

No.

Question 4

Does Personnel Co's assessable income include only its ordinary and statutory income derived indirectly or directly from all Australian sources and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source in accordance with subsections 6-5(3) and 6-10(5) of the ITAA 1997?

Answer

Yes.

Question 5

Are the payments received by Personnel Co under the Personnel Agreement between Personnel Co and Overseas Co considered to be Australian sourced in accordance with sections 6-5 and 6-10 of the ITAA 1997?

Answer

No.

Question 6

Do the payments received by Personnel Co from Overseas Co in respect of the Personnel Agreement constitute royalties in accordance with subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 7

Does the royalties article of the overseas country's DTA apply to Personnel Co in respect of the receipts arising to Personnel Co under the Personnel Agreement?

Answer

No.

Question 8

Does the business profits article of the overseas country's DTA apply to Personnel Co in respect of the receipts arising to Personnel Co under the Personnel Agreement?

Answer

Yes.

This ruling applies for the following period:

A number of income years.

The scheme commenced:

During the 2013 income year.

Relevant facts and circumstances

Personnel Co

1. Personnel Co is treated as a tax resident of an overseas country.

2. Personnel Co is a member of Overseas Group.

3. Personnel Co provides personnel to members of Overseas Group.

4. Personnel Co has no presence in Australia.

A Co

5. A Co is a member of Overseas Group.

6. A Co is an Australian incorporated company.

7. A Co is treated as a resident of the overseas country.

8. A Co entered into a contract with a third party contractor to provide certain services in Australia.

Overseas Co

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

10. Overseas Co is treated as a resident of an overseas country.

11. The entire scope of the work to be performed by A Co under the contract is subcontracted to Overseas Co under a sub-contract.

Personnel Agreement

12. 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.

13. Under the Personnel Agreement, Personnel Co will be paid compensation of a flat, all inclusive rate, covering all Personnel Co's costs.

14. The work to be performed by the personnel will be the general operation activities in respect of the work under the sub-contract.

15. Personnel Co undertakes to provide Overseas Co with any physical result of the work performed.

Relevant legislative provisions

Subsection 6(1) of the ITAA 1936.

Subsection 6-5(3) of the ITAA 1997.

Subsection 6-10(5) of the ITAA 1997.

Section 995-1 of the ITAA 1997.

Reasons for decision

Question 1

Is Personnel Co a foreign resident for the purposes of section 995-1 of the ITAA 1997?

Summary

Yes. Personnel Co a foreign resident for the purposes of section 995-1 of the ITAA 1997

Detailed reasoning

Subsection 995-1(1) of the ITAA 1997 provides that 'foreign resident' means a person who is not a resident of Australia for the purposes of the ITAA 1936.

For the purposes of the ITAA 1936, 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.

Personnel Co is a company incorporated in an overseas country. Furthermore, Personnel Co's effective place of control and its business is carried on in that overseas country, and it is wholly owned by a resident company of that overseas country.

Personnel Co does not therefore meet the definition of 'resident of Australia' under paragraph 6(1)(b) of the ITAA 1936, and as such, is a 'foreign resident' for the purposes of section 995-1 of the ITAA 1997.

Question 2

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

Summary

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

Detailed reasoning

Question 1 above confirms that Personnel Co is not a resident of Australia for Australian tax purposes and that it is in fact a foreign resident for Australian tax purposes.

As such, Personnel Co does not satisfy the definition of a resident of Australia for the purposes of the overseas country's DTA.

As the overseas country's DTA provides that a person is a resident of the overseas country, if the person is a resident of that overseas country for the purposes of its tax, Personnel Co is treated as a tax resident of that overseas country for the purposes of its DTA.

Question 3

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

Summary

No. Personnel Co does not have a permanent establishment in Australia for the purposes of the overseas country's DTA.

Detailed reasoning

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

Personnel Co does not meet any elements of this definition.

Personnel Co does not therefore have a permanent establishment in Australia for the purposes of the overseas country's DTA.

Question 4

Does Personnel Co's assessable income include only its ordinary and statutory income derived indirectly or directly from all Australian sources and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source in accordance with subsections 6-5(3) and 6-10(5) of the ITAA 1997?

Summary

Yes. Personnel Co's assessable income includes only its ordinary and statutory income derived indirectly or directly from all Australian sources and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source in accordance with subsections 6-5(3) and 6-10(5) of the ITAA 1997.

Detailed reasoning

Subsection 6-5(3) of the ITAA 1997 provides that:

If you are a foreign resident, your assessable income includes:

(a) the ordinary income you derive directly or indirectly from all Australian sources during the income year; and

(b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source.

Subsection 6-10(5) of the ITAA 1997 further provides that:

If you are a foreign resident, your assessable income includes:

(a) your statutory income from all Australian sources; and

(b) other statutory income that a provision includes in your assessable income on some basis other than having an Australian source.

Question 1 above confirms that Personnel Co is a foreign resident for Australian tax purposes. As such, subsections 6-5(3) and 6-10(5) of the ITAA 1997 apply to Personnel Co such that its assessable income only includes its ordinary and statutory income derived indirectly or directly from all Australian sources and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source in accordance with subsections 6-5(3) and 6-10(5) of the ITAA 1997.

Question 5

Are the payments received by Personnel Co under the Personnel Agreement between Personnel Co and Overseas Co considered to be Australian sourced in accordance with sections 6-5 and 6-10 of the ITAA 1997?

Summary

No. The payments received by Personnel Co under the Personnel Agreement between Personnel Co and Overseas Co are not considered to be Australian sourced in accordance with sections 6-5 and 6-10 of the ITAA 1997.

Detailed reasoning

As confirmed above in Question 4, as Personnel Co is a foreign resident for Australian tax purposes, subsections 6-5(3) and 6-10(5) of the ITAA 1997 apply to Personnel Co such that its assessable income includes its ordinary and statutory income derived indirectly or directly from Australian sources (and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source).

The payments received by Personnel Co under the Personnel Agreement will be Australian sourced only if such payments are derived from a source in Australia.

Determining the source of an item of income is a matter of fact to be determined having regard to the facts and circumstances of each case.

In the present case, the provision of personnel is the relevant or chief act under the Personnel Agreement and therefore forms the substance of the contract between Personnel Co and Overseas Co. As such, where Personnel Co provides its services is the significant determinant of the source of Personnel Co's income under the Personnel Agreement.

Whilst the personnel provided to Overseas Co under the Personnel Agreement ultimately perform work in Australia, the provision made by Personnel Co of the personnel is made in the overseas country as part of its usual business operations carried on there. The provision of personnel by Personnel Co is not made in Australia. This, combined with the fact that the contract was negotiated and executed in the overseas country and its usual business is carried on in the overseas country, means that the payments received by Personnel Co under the Personnel Agreement between Personnel Co and Overseas Co are not considered to be Australian sourced in accordance with sections 6-5 and 6-10 of the ITAA 1997.

Question 6

Do the payments received by Personnel Co from Overseas Co in respect of the Personnel Agreement constitute royalties in accordance with subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Summary

No. The payments received by Personnel Co from Overseas Co in respect of the Personnel Agreement 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:

• 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 Personnel Agreement

Under the Personnel Agreement, Personnel Co will simply provide personnel to Overseas Co in accordance with Overseas Co's requirements. Furthermore, Personnel Co undertakes to provide Overseas Co with any physical result of the work performed.

The personnel will undertake general operational activities in respect of the work under the sub-contract undertaken.

The scope of the service provided by Personnel Co to Overseas Co is simply the provision of personnel or labour. The provision of personnel does not constitute the supply of scientific, technical or commercial knowledge or information, nor does it involved the imparting or communication of particular specialised skills or know-how. Furthermore, the work undertaken by the personnel following their provision to Overseas Co does not involve the imparting or communication of particular specialised skills or know-how by that personnel.

As such, any payments to Personnel Co under the Personnel Agreement in respect of the provision of personnel to Overseas Co constitute payments for a service provided.

Accordingly, payments received by Personnel Co under the Personnel Agreement do not constitute royalties in accordance with subsection 6(1) of the ITAA 1936.

Question 7

Does the royalties article of the overseas country's DTA apply to Personnel Co in respect of the receipts arising to Personnel Co under the Personnel Agreement?

Summary

No. The royalties article of the overseas country's DTA does not apply to Personnel Co in respect of the receipts arising to Personnel Co under the Personnel Agreement.

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 Personnel Co under the Personnel Agreement constitute payments for services rendered or work done, and such activities will not involve the imparting or communicating of Personnel Co's specialist skills, knowledge or expertise.

Payments to Personnel Co under the Personnel Agreement are considered to be payments for services provided 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 Personnel Co under the Personnel Agreement.

Question 8

Does the business profits article of the overseas country's DTA apply to Personnel Co in respect of the receipts arising to Personnel Co under the Personnel Agreement?

Summary

Yes. The business profits article of the overseas country's DTA will apply to Personnel Co in respect of receipts arising to Personnel Co under the Personnel Agreement, allocating taxing rights to the overseas country only.

Detailed reasoning

As the payments received by Personnel Co under the Personnel Agreement constitute business profits, the business profits article of the overseas country's DTA will apply to Personnel Co in respect of those payments. However, this article only applies to confirm that such payments are taxable only in the overseas country. This is on the basis that the article allocates taxing rights to Australia to the extent that profits are attributable to a permanent establishment in Australia. As Question 3 above confirms that Personnel Co does not have a permanent establishment in Australia for the purposes of the overseas country's DTA, no business profits can be attributed to Australia.