Edited version of private advice

Authorisation Number: 1051626391114

Date of advice: 20 January 2020

Ruling

Subject: Requirement to lodge general purpose financial statement under section 3CA of the Taxation Administration Act 1953

Question

Does the entity have an obligation to lodge general purpose financial statements (GPFS) with its annual income tax return in accordance with subsection 3CA(2) of the Taxation Administration Act 1953 (TAA 1953)?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20xx

Year ending 30 June 20xx

Year ending 30 June 20xx

Year ending 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

1. The entity is incorporated and domiciled in Country X.
2. The entity has lodged GPFS with its annual income tax return for the 2017 and 2018 income years. The entity has an Australian Tax File Number and Australian Business Number.
3. The entity furnishes annual Australian income tax returns for the Australian sourced rental income it derives.
4. The entity's parent entity is a company incorporated and domiciled in Country Y. The entity's accounts are consolidated into the parent entity's accounts for reporting purposes.
5. The entity's parent entity is a global parent entity under section 960-560 of the Income Tax Assessment Act 1997 (ITAA 1997).
6. The entity's parent entity has an annual global income of over $1 billion.
7. The entity's principal activity in Australia has been the leasing of a single commercial property.

The Property

8. The entity owns the commercial property lot known as the Property.
9. The Property has many tenants.
10. The entity entered into a five-year lease with a tenant based on a payment per square metre per annum plus GST.
11. The entity derives rental income from the Property.
12. At all times since the entity purchased the Property, the Property has been managed by a third party real estate agent.
13. The property is currently managed by the Property Manager, in accordance with the service agreement (Service Agreement) made between the entity and the Property Manager.
14. In accordance with the Service Agreement, the services that the Property Manager provides include:
    1. entering into third party agreements as the entity's agent under certain conditions
    2. negotiating and concluding renewals of lease agreements in accordance with the entity's instructions
    3. entering into maintenance and service agreements for the management of the Property as the entity's agent under certain conditions
    4. establishing and maintaining a trust account, including paying expenses necessary for the leasing of the Property on the entity's behalf
    5. collecting rent and all other monies payable in relation to the Property (which is held on trust for the entity).
15. In accordance with the Service Agreement, the Property Manager is remunerated through, for example:
    1. management fees paid per annum
    2. leasing fees for leasing vacant space to a tenant with the rate calculated as a percentage of the average annual rent
16. The entity maintains an operating account with the Property Manager for the purposes of receiving rental income from the Property and paying outgoings, taxes and charges pertaining to the ownership of the Property.
17. The operating account is managed by the Property Manager. The entity has little to no involvement in the management of the operating account.
18. For each income year since the commencement of the scheme where the entity has lodged an income tax return, the entity has made a taxable profit from renting out the Property.

The entity's activities in Australia

19. The entity has advised that during the 20xx financial year it intends to register with the Australian Securities and Investments Commission (ASIC) as a foreign company.

20.  The entity has advised that the following responsibilities and obligations will apply to it as a result of the proposed registration as a foreign company with ASIC:

      i.        The entity is required to register with ASIC and obtain an Australian Registered Body Number (ARBN).

     ii.        The entity must have an ASIC local agent in Australia.

    iii.        The entity must maintain a registered office in Australia (this will be facilitated via the local agent).

   iv.        The entity must provide ASIC (i) an original Certificate of Good Standing (or similar document) and (ii) an original certified copy of its constitution document as part of the registration process.

    v.        The entity must notify ASIC of the entity's address and directors' details.

   vi.        The entity must notify ASIC of changes to company details within the prescribed period.

  vii.        Unless relief is available, the entity is required to lodge audited financial statements annually, along with the accompanying ASIC form 405 and payment of the ASIC lodgement fee.

21. The entity does not maintain an office or employ any staff in Australia.
22. The entity does not own any property in Australia other than the Property. The entity is not the lessee or tenant of any property in Australia.

Assumption

23. The entity does not lodge GPFS with ASIC prior to the lodgment of the entity's income tax return for each of the relevant income years.

Relevant legislative provisions

Section 3CA of the Taxation Administration Act 1953

Reasons for decision

Question 1

Does the entity have an obligation to lodge GPFS with the entity's annual income tax return in accordance with subsection 3CA(2) of the TAA 1953?

Summary

The entity does not have to lodge GPFS under subsection 3CA(2) of the TAA 1953 as the entity's activity of leasing out a commercial property through an independent real estate agent does not constitute an Australian permanent establishment.

Detailed reasoning

Section 3CA of the TAA 1953requires a significant global entity to lodge a GPFS with the Commissioner where the entity is a foreign resident operating an Australian permanent establishment, and does not lodge a GPFS with ASIC. Subsections 3CA(1) and 3CA(2) of the TAA 1953 provide the following:

(1)   This section applies to a corporate tax entity for an income year if:

(a)  the entity is a significant global entity for the income year; and

(b)  at the end of the income year, the entity is:

(i)    an Australian resident; or

(ii)   a foreign resident who operates an Australian permanent establishment (within the meaning of Part IVA of the Income Tax Assessment Act 1936); and

(c)  the entity does not lodge a general purpose financial statement for the financial year most closely corresponding to the income year:

(i)    with the Australian Securities and Investments Commission; and

(ii)   within the time provided under subsection 319(3) of the Corporations Act 2001 for lodgement of a report for that financial year.

(2)   A corporate tax entity to which this section applies for an income year must, on or before the day by which the entity is required to lodge its income tax return for the income year with the Commissioner, give to the Commissioner in the approved form a general purposes financial statement for the financial year most closely corresponding to the income year.

Each of the paragraphs in subsection 3CA(1) of the TAA 1953 are considered below to determine if subsection 3CA(2) of the TAA 1953 requires the entity to lodge GPFS with its annual income tax return.

Paragraph 3CA(1)(a) - Significant global entity for the income year

Section 960-115 of the ITAA 1997provides the meaning of a 'corporate tax entity'. Paragraph 960-115(a) of the ITAA 1997 provides that an entity is a corporate tax entity at a particular time if the entity is a company at that time.

The entity was incorporated in Country X as a company and is therefore a corporate tax entity that is a resident of Country X.

Subsection 960-555(2) of the ITAA 1997 provides that an entity is a significant global entity for a period if it is a member of a group of entities that are consolidated for accounting purposes and the global parent entity has an annual global income of $1 billion or more.

The entity is a significant global entity because the entity is consolidated for accounting purposes with the entity's parent entity as the global parent entity of the group throughout the ruling period.

Therefore, paragraph 3CA(1)(a) of the TAA 1953 is satisfied.

Subparagraph 3CA(1)(b)(ii) - Foreign resident operating a permanent establishment in Australia

As previously established, the entity is a Country X resident entity, being incorporated in Country X. The entity is not an Australian resident. As such, in determining whether the entity is required to lodge GPFS with the Commissioner, the entity must be found to be carrying on a business at or through a permanent establishment.

The term 'permanent establishment' is defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

permanent establishment, in relation to a person (including the Commonwealth, a State or an authority of the Commonwealth or a State), means a place at or through which the person carries on any business and, without limiting the generality of the foregoing, includes:

(a)  a place where the person is carrying on business through an agent;

(b)  a place where the person has, is using or is installing substantial equipment or substantial machinery;

(c)  a place where the person is engaged in a construction project; and

(d)  where the person is engaged in selling goods manufactured, assembled, processed, packed or distributed by another person for, or at or to the order of, the first-mentioned person and either of those persons participates in the management, control or capital of the other person or another person participates in the management, control or capital of both of those persons - the place where the goods are manufactured, assembled, processed, packed or distributed;

but does not include:

(e)  a place where the person is engaged in business dealings through a bona fide commission agent or broker who, in relation to those dealings, acts in the ordinary course of his or her business as a commission agent or broker and does not receive remuneration otherwise than at a rate customary in relation to dealings of that kind, not being a place where the person otherwise carries on business;

(f)   a place where the person is carrying on business through an agent:

(i)    who does not have, or does not habitually exercise, a general authority to negotiate and conclude contracts on behalf of the person; or

(ii)   whose authority extends to filling orders on behalf of the person from a stock of goods or merchandise situated in the country where the place is located, but who does not regularly exercise that authority;

not being a place where the person otherwise carries on business; or

(g)  a place of business maintained by the person solely for the purpose of purchasing goods or merchandise.

Carrying on a business

The first question to be considered is whether the entity carries on a business in Australia.

Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? (TR 2019/1) outlines the Commissioner's view in regard to whether a company is carrying on a business for the purposes of accessing the small business entity tax rate.

TR 2019/1 states that whether the activities of a company constitute carrying on a business is a question of fact, and must be answered after considering the company's circumstances and activities, having regard to the indicia of carrying on a business. There is extensive case law in considering whether a company is carrying on a business. The Commissioner considers that companies have an underlying commercial nature, and as such, the same activities carried on by a company are more likely to amount to the carrying on of a business than if they were carried out by an individual or a trust.

Paragraph 8 of TR 2019/1 states that the Ruling does not apply to companies not incorporated under Corporations Act 2001. However, paragraph 10 provides:

For those companies and other entities not covered by this Ruling, it is necessary to consider whether their activities amount to the carrying on of a business in the way relevant for the provision in question by reference to:

·         the indicia of carrying on a business set out in the case law

·         the nature of and purpose for which the entity was established, and

·         the words and purpose of the provision and the context in which the concept of carrying on a business appears.

The key indicia considered by the courts in determining whether the activities carried on by an entity amount to the carrying on of a business are:

·         whether the person intends to carry on a business

·         the nature of the activities, particularly whether they have a profit making purpose

·         whether the activities are

o   repeated and regular

o   organised in a business-like manner, including the keeping of books, records and the use of a system

·         the size and scale of a company's activities including the amount of capital employed in them, and

·         whether the activity is better described as a hobby, or recreation.

Where the activities of a company have a commercial nature or purpose and are conducted in a commercially viable manner, they are likely to be carrying on a business.

Consequently, the activities of a company may have a fundamentally different character to those of an individual. The courts have observed that the receipt of rental income from leasing a property will not result in the presumption that an individual is carrying on a business, whereas it would for a company. For a company, it is difficult to displace the prima facie inference that the gainful use of a company's property in letting it out for rent would constitute the carrying on of a business.

Is the entity carrying on a business?

The entity leases the Property to derive rental income, and acquired the Property for this purpose. The entity has rented this property to multiple tenants and has engaged the services of a property manager to do so. The entity intended to, and has been making profit from renting out the property for the years the ruling relates to.

As the entity is a company whose regular leasing activities have a clear profit-making purpose, in accordance with the principles outlined in the case law, the Commissioner considers that the entity is carrying on a business in Australia.

However, as stated above, the definition in subsection 6(1) of the ITAA 1936 provides that a permanent establishment does not exist in a place where the person is carrying on business through:

·         a place where the person is engaged in business dealings through a commission agent or broker who undertakes those dealings as part of the ordinary course of his or her business as a commission agent or broker, or

·         a place where the person is carrying on a business through an agent who does not have the general authority to negotiate and conclude contracts on behalf of the person.

Taxation Ruling IT 2423 Withholding tax: whether rental income constitutes proceeds of business - permanent establishment - deduction for interest (IT 2423) at paragraph 6 states

...the definition of "permanent establishment" in sub-section 6(1) specifically excludes a place where the person is engaged in business dealings through a bona fide commission agent or broker. This means that in the case of rental properties managed by a real estate agent acting as a commission agent it could not generally be said that the non-resident has a permanent establishment in Australia unless there are other factors.

Does the entity have a permanent establishment in Australia?

The entity's only activity in Australia is owning and renting out the Property. The entity does not maintain an office or employ any staff in Australia. The entity is incorporated in, and has its central management and control in Country X.

The day-to-day management of the Property is carried out by the property management entity, the Property Manager. The Property Manager is a real estate services firm that provides real estate services for property owners.

The general authority to negotiate and conclude contracts actually needs to be exercised by the agent and for activities that last a significant period. Under the Service Agreement, the Property Manager's responsibilities include:

a.    negotiating and concluding lease agreements and renewals, according to the entity's instructions

b.    entering into maintenance and service contracts, where the entity's approval will not be required if they are below a certain value

c.    establishing and maintaining a trust account, including paying expenses necessary for the leasing of the Property on behalf of the entity, and

d.    collecting rent and all other monies payable in relation to the Property (which is held on trust for the entity).

For the provision of these services, the Property Manager is remunerated by the entity for:

The entity entered into a five-year lease with the tenant based on a payment per square metre per annum plus GST. Based on these circumstances, it is clear that the Property Manager is an independent real estate agent that carries on its own business of providing real estate services in exchange for a fee or commission, and has entered into such an agreement with the entity. As such, pursuant to the view expressed in IT 2423, the Commissioner considers that it cannot be said that the Property Manager's activities on the entity's behalf could lead to a conclusion that the entity has a permanent establishment in Australia.

In light of the entity's circumstances, the Commissioner does not consider that the entity has a permanent establishment as defined in subsection 6(1) of the ITAA 1936. Therefore, paragraph 3CA(1)(b) of the TAA 1953 is not satisfied.

Effect of ASIC registration

A foreign company registers with ASIC if it is carrying on a business in Australia.

While the appointment of a local agent may indicate a physical presence in Australia, the local agent themselves is not necessarily carrying on a business but rather exists to meet ASIC requirements.

Conclusion

Therefore, as subsection 3CA(1) of the TAA 1953 has not been satisfied, subsection 3CA(2) of the TAA 1953 does not create an obligation for the entity to lodge GPFS with its income tax return.