Edited version of private advice

Authorisation Number: 1051890194621

Date of advice: 6 September 2021

Ruling

Subject: Permanent establishment in Australia

Question 1

Do you have a permanent establishment in Australia at workplace X for the purposes of Article 5 of the double tax agreement between Australia and Country Y?

Answer

Yes.

Question 2

Do you have a permanent establishment in Australia at the other workplaces for the purposes of Article 5 of the double tax agreement between Australia and Country Y?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a citizen of Country Y and you enter Australia by virtue of a temporary visa.

You are a resident of Country Y for tax purposes.

You are not a resident of Australia for tax purposes.

You are self-employed and work mainly in Country Y.

You entered into a contract as an independent contractor with an Australian entity to provide services at workplace X in Australia for several years.

Due to the nature of your work and role, there is no office made available to you at the workplace. In addition, you are not provided with a computer, chair or defined area to perform administrative duties.

Under the terms of your appointment, you were allocated a certain number of hours of work. To fulfill this requirement, you have spent short periods of time in Australia to provide your services. You stay in accommodation provided by the Australian entity when you are working in Australia.

During the relevant years, you spent less than one third of each year in Australia working for short periods at a time.

Although you were engaged to carry out work at workplace X, you also carried out work under your contract at other workplaces in different towns for less than a total of 30 days spread over several months.

When you are not working in Australia, you carry out your other work activities and personal life in Country Y. Your family remains in Country Y when you travel to Australia.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-20

International Tax Agreements Act 1953

Reasons for decision

You are a tax resident of Country Y who entered into a contract for your services to work as an independent consultant in Australia. As such, you are subject to the business profits article of the double tax agreement between Australia and Country Y (the agreement).

Article 7 of the agreement deals with the taxation of business profits derived from the carrying on of a business by an enterprise. Relevantly, in this case:

1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.

3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses of the enterprise, being expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether incurred in the Contracting State in which the permanent establishment is situated or elsewhere.

Article 5 of the agreement deals with what may constitute a 'permanent establishment'. Relevantly, in this case:

1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of the enterprise is wholly or partly carried on.

2. The term "permanent establishment" includes especially:

a) a place of management

b) a branch

c) an office

d) a factory

e) a workshop

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

g) an agricultural, pastoral or forestry property.

Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) defines 'permanent establishment' to be, at its most basic level, 'a place at or through which the person carries on any business'.

Taxation Ruling TR 2002/5 Income Tax: Permanent Establishment - What is 'a place at or through which [a] person carries on any business' in the definition of permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936? (TR 2002/5) provides guidance on the above definition. Paragraphs 25 to 35 explain that:

•                    PE has its essence in the concept of permanence, in the sense of not being transitory or temporary. The phrase links the business to a particular place for a particular period

•                    The definition of PE in subsection 6(1) should be construed in a way that is broadly consistent with the meaning of PE in our tax treaties. Interpreting the phrase to include the concept of permanence in both its geographical and temporal senses facilitates such an approach

•                    Each situation needs to be judged in the context of the particular business and is a question of fact and degree

•                    A place at or through which a person carries on a business must be geographically permanent. Any area, viewed commercially and as a whole, may, in relation to the business concerned, be a place. Examples include business premises such as a factory, office, farm, mine or market

•                    While concepts such as ownership, rights to use and the length of time such rights exist are factors to consider in confirming geographic and temporal permanence, the lack of such ownership and other rights does not preclude the finding that a place exists

•                    While the control of a site might indicate a place exists in relation to the person exercising control, the lack of control by a person of an area does not mean that that area is not a place for the purposes of the definition of PE in relation to that person

•                    A place at or through which a person carries on a business must have temporal permanence, i.e. the business presence must not be of a purely temporary nature. The business must operate at that place for a period of time.

In Thiel v FC of T (1990) 90 ATC 4717, the High Court judges accepted that the OECD Model Taxation Convention's official Commentaries may be relevant to the interpretation of DTAs based on the OECD Model (Taxation Ruling TR 2001/13, paragraph 102).

Paragraph 6 of the OECD Model Tax Convention on Income and on Capital (2017 version) (the OECD Commentary) explains that the definition of PE in Article 5 contains the following conditions:

1.            the existence of a 'place of business', i.e. a facility such as premises or, in certain instances, machinery or equipment;

2.            this place of business must be 'fixed', i.e. it must be established at a distinct place with a certain degree of permanence;

3.            the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.

First condition - existence of a place of business

Paragraphs 10 to 12 of the OECD Commentary explain that there may be a place of business in the situation where an entity merely has a certain amount of space at their disposal. It is also immaterial whether the premises or facilities are owned or rented by or are otherwise at the disposal of the enterprise. Further, the place of business may be situated in the business facilities of another enterprise. This may be the case, for instance, where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise.

Paragraph 17 provides an example of - 'a painter who, for two years, spends three days a week in the large office building of its main client. In that case, the presence of the painter in that office building where he is performing the most important functions of his business (i.e. painting) constitute a permanent establishment of that painter.'

In your case, while you carried on your business activities primarily at workplace X, you also carried out activities at other workplaces. As such, your place of business was situated in the business facilities of another enterprise and you had a certain amount of space at your disposal to carry out your activities at each workplace.

Therefore, it is evident that a place of business existed at each workplace for you to carry on your business activities.

Second condition - place of business must be fixed

Established at a distinct place

Paragraphs 21 to 25 of the OECD Commentary explain that:

•                    There must be a link between the place of business and a specific geographical point

•                    Where the nature of the business activities carried on by an enterprise is such that these activities are moved between different locations, there may be difficulties in determining whether there is a single 'place of business'. However, for example, if two places of business are occupied and the other requirements are met, the enterprise may have two permanent establishments. A single place of business will generally be considered to exist where, in light of the nature of the business, a particular location within which the activities are moved may be identified as constituting a coherent whole commercially and geographically with respect to that business

•                    A mine, for example, constitutes a single place of business even though business activities may move from one location to another at the mine site as it constitutes a single geographical and commercial unit in respect of the mining business

•                    Where there is no commercial coherence, the fact that activities may be carried on within a limited geographic area should not result in that area being considered as a single place of business

•                    An area where activities are carried on as part of a single project which constitutes a coherent commercial whole may lack the necessary geographic coherence to be considered as a single place of business. For example, where a consultant works at different branches in separate locations pursuant to a single project for training the employees of a bank, each branch should be considered separately. However, if the consultant moves from one office to another within the same branch location, he should be considered to remain in the same place of business. The single branch location possesses geographical coherence which is absent where the consultant moves between branches in different locations.

In your case, while you carried on your business activities primarily at workplace X, you also carried out activities at other workplaces. Therefore, it is evident that you carried out your activities from multiple places of business.

Consequently, each workplace needs to be looked at separately to determine whether you had a permanent establishment at one or more of those workplaces.

A certain degree of permanence

Paragraphs 28 to 32 of the OECD Commentary explain that:

•                    Since the place of business must be fixed, it also follows that a permanent establishment can be deemed to exist only if the place of business has a certain degree of permanency, i.e. if it is not of a purely temporary nature. However, this can be difficult to determine

•                    A permanent establishment may exist where the activities are of a recurrent nature; in such cases, each period of time during which the place is used needs to be considered in combination with the number of times during which that place is used (which may extend over a number of years). For example, the time requirement may be met due to the recurring nature of an activity regardless of the fact that any continuous presence lasts less than six months

•                    Where a particular place of business is used for only very short periods of time, but such usage takes place regularly over long periods of time, the place of business should not be considered to be of a purely temporary nature.

Workplace X

In your case, you were contracted to work at workplace X for several years. Although your contract only required you to work a limited number of hours per month and you worked for no more than one third of the year in any of the relevant income years, you returned to workplace X to work on a fairly regular basis throughout the relevant period.

Therefore, it is considered that your place of business at workplace X had a sufficient degree of permanence, as although you only used it for short periods of time, the usage took place with a sufficient degree of regularity over a long period of time. Consequently, the place of business is not considered to be of a purely temporary nature, and you meet this condition.

Other workplaces

You also worked at other workplaces for less than a total of 30 days spread over several months of the relevant years. Consequently, it is considered that these locations were purely of a temporary nature.

Therefore, you did not have a PE at any of the other workplaces.

Third condition - carrying on the business through the fixed place of business

In regard to workplace X, you were contracted to carry out your business activities at that workplace and physically carried out the activities mainly at that location.

Therefore, it is evident that you carried on your business through a fixed place of business and you had a PE at workplace X.

Summary

You had permanent establishment at workplace X; however, you did not have a permanent establishment at either of the other workplaces.