Edited version of private advice

Authorisation Number: 1052374517989

Date of advice: 20 March 2025

Ruling

Subject: Australian resident for taxation purposes

Question 1

Is Company A an Australia tax resident under section 6(1) of the Income Tax Assessment Act 1936?

Answer 1

No.

Question 2

Will Company A operate an Australian permanent establishment within the meaning of Part IVA of the Income Tax Assessment Act 1936?

Answer 2

No.

Question 3

Will the fees derived by Company A in relation to agreements in place with Company B (an unrelated company) be assessable under section 6-5 of the Income Tax Assessment Act 1997?

Answer 3

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company A is resident in an offshore jurisdiction.

Company A is registered with ASIC as a foreign company.

Company A is a global provider of services.

Company A is a 100% owned by another Company who is also resident of an offshore jurisdiction.

All decision regarding the management of the Company A is made in the offshore jurisdiction.

Company A does use a third-party address as its registered office in Australia. The third party does not perform any Services on behalf of Company A.

Company A entered into an agreement with Company B (an unrelated company who is a resident of an offshore jurisdiction) for the provision of services. These agreements are directly between Company A and Company B. The agreements are executed outside of Australia.

The services provided by Company A are limited to facilitating the flow of funds (payments) between the Australian based customers of Company B and Company B itself. Company B sells products via an online marketplace.

There are no agreements between Company A and any Australian-based customers. Company A does not provide any services to Australian individuals or to any Australian entities. Company A does not participate in the operations of Company B.

Company A does not have any Australian based employees and does not have any Australian based assets Company A only has an Australian bank account.

An offshore user account is set up with Company A for Company B, from which Company B can withdraw funds as required, with any Company A fees automatically deducted at the time of withdrawal. These fees are deducted from the funds when they are withdrawn from Company A's offshore bank account.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 subsection 6-5(3)

Income Tax Assessment Act 1997 subsection 6-10(5)

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Question 1

Is Company A an Australia tax resident under section 6(1) of the Income Tax Assessment Act 1936?

Summary

Company A is not an Australian tax resident for tax purpose because it is not incorporated in Australia, and it does not have Central Management & Control (CM&C) or voting power controlled by resident shareholders in Australia, therefore Company A fails the residency test under section 6(1) of the Income Tax Assessment Act 1936 for the year ended 31 December 2023.

Detailed reasoning

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a person is an 'Australian resident' if that person is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

Subsection 995-1(1) of the ITAA 1997 defines 'person' to include a company.

Subsection 6(1) of the ITAA 1936 defines 'resident or a resident of Australia' to mean:

....

(b)           a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on 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.

The definition sets the criteria necessary to establish residency of a company. The first element of the definition states that a company which is incorporated in Australia, is a resident of Australia (the incorporation test). For a company incorporated in Australia, this is where the inquiry ends.

A company will be a resident under 'the central management and control test' of company residency in paragraph (b) if it carries on business in Australia and has its central management and control in Australia.

Alternatively, a company may be a resident under 'the voting power test' if its voting power is controlled by shareholders who are Australian residents and it carries on business in Australia.

Taxation Ruling TR 2018/5 Income tax: central management and control test of residency (TR 2018/5) sets out the Commissioner's view on how to apply the CM&C test of company residency.

Paragraphs 3 of TR 2018/5states:

A company is a resident or a resident of Australia under the central management and control test of residency if it:

•                     carries on business in Australia, and

•                     has its central management and control in Australia.

Paragraph 8 of TR 2018/5 provides the Commissioner's view that where a company's central management and control takes place in Australia, it will be carrying on a business in Australia, 'because the central management and control of a business is factually part of carrying on that business. Therefore, it is not necessary to determine this question separately, if we are also considering whether there is central management and control in Australia.

Paragraphs 10 and 11 of TR 2018/5states:

10.          Central management and control refers to the control and direction of a company's operations. It does not refer to a physical location in which the control and direction of a company is located and may ultimately be exercised in more than one location.

11.          The key element in the control and direction of a company's operations is the making of high-level decisions that set the company's general policies and determine the direction of its operations and the type of transactions it will enter.

The matters that are most likely to determine where those who control and direct the operations of a company do so are listed at paragraph 36 of TR 2018/5:

•                     where those who exercise central management and control do so, rather than where they live

•                     where the governing body of the company meets

•                     where the company declares and pays dividends

•                     the nature of the business and whether it dictates where control and management decisions are made in practice, and

•                     minutes or other documents recording where high-level decisions are made.

Application to your circumstances

Incorporation test

Company A is incorporated in an offshore jurisdiction. Company A does not satisfy the first element of the definition of resident in subsection 6(1) of the ITAA 1936 as Company is not incorporated in Australia.

Central management & control test

As noted above, Company A is incorporated in an offshore jurisdiction and is a wholly owned subsidiary of another offshore Company. Company A presence in Australia consists only of an Australian bank account. The activities related to the Australian bank account are described in the facts outlined above but essentially relate to the collection of the funds on behalf of Company B who sells to Australian customers via an online marketplace. Company A does not have any Australian based employees and does not have any Australian based assets. All decision regarding the management of the company are made overseas.

Voting Power Test

Company A is incorporated in XX and is a wholly owned subsidiary of another offshore resident company. The voting power of Company A is controlled by shareholders who are not residents of Australia.

Conclusion

Based on the facts and circumstances outlined above the Commissioner has concluded that the CM&C of Company A does not occur in Australia.

Question 2

Will Company A operate an Australian permanent establishment within the meaning of Part IVA of the Income Tax Assessment Act 1936?

Summary

Company A does not a permanent establishment under section 6(1) of the Income Tax Assessment Act 1936 for the year ended XX XX 20XX.

Detailed reasoning

Section 177A (1) (within Part IVA of the ITAA 1936) states:

Australian permanent establishment of an entity means:

(a)           if:

(i)            the entity is a resident in a country that has entered into an international tax agreement (within the meaning of subsection 995-1(1) of the Income Tax Assessment Act 1997) with Australia; and

(ii)           that agreement contains a permanent establishment article (within the meaning of that subsection);

(iii)          a permanent establishment (within the meaning of that agreement) in Australia; or

(b)           otherwise - a permanent establishment of the person in Australia.

The term 'permanent establishment' (PE) is defined within subsection 6(1) of the ITAA 1936 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.

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 the Commissioner's interpretation of the meaning of the phrase 'a place at or through which [a] person carries on any business.'

Paragraph 9 of TR 2002/5 provides that:

The subsection 6(1) definition of PE is based on the concept of PE used in Australia's tax treaties. For the purposes of the definition of PE in subsection 6(1) 'a place at or through which [a] person carries on any business' is a reference to a place used for carrying on that person's business activities. That place must have an element of permanence, both geographic and temporal. Permanence must be construed in the context of each particular business and is a question of fact and degree. Permanent in this context does not mean forever.

Paragraph 16 and 17 of TR 2002/5 further states that, PE is a concept used both in international and domestic tax law. PE is defined in most of Australia's tax treaties to mean, among other things, a fixed place of business through which the business of an enterprise is wholly or partly carried on (or words to similar effect). This is consistent with the primary meaning of PE in the OECD Model Tax Convention on Income and on Capital.

In Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4714; (1990) 21 ATR 531 (Thiel), the High Court accepted that the OECD Commentaries may be referred to when interpreting tax treaties in accordance with Article 32 of the Vienna Convention (See paragraph 90 of Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements).

The Commissioner has also expressed the view at paragraph 18 of TR 2002/5 that it is appropriate to take into account the commentary text when interpreting the definition of permanent establishment in subsection 6(1) of the ITAA 1936.

Paragraph 18 of TR 2002/5 states:

The Commentary on the Permanent Establishment Article (Article 5) of the OECD Model Tax Convention says that the general definition of PE outlined in the previous paragraph:

'... contains the following conditions:

•                     the existence of a "place of business", ie a facility such as premises or, in certain instances, machinery or equipment;

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

•                     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.'

Paragraph 6 of the OECD Model Tax Convention on Income and on Capital 2017 (OECD Commentary) also outlines the conditions of a 'permanent establishment':

•                     the existence of a 'place of business',

•                     this place of business must be fixed, and

•                     the business of the enterprise is, wholly or partly, carried on through this fixed place of business.

Existence of a place of business

The following paragraphs from the OECD Commentary are relevant in interpreting the meaning of 'place of business'.

10.          The term "place of business" covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose... It is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise.

Application to your circumstances

Company A does not have any premises, facilities (such as an office or warehouse) or installations in Australia. Company A does not have any Australian based employees and does not have any Australian based assets (apart from an Australian Bank account)

Company A does use a third party address as its registered office in Australia. The third party does not perform any services on behalf of Company A.

The services required to be performed by Company A under the agreements with Company B are performed in the offshore jurisdiction. There are no agreements between Company A and any Australian-based customers. Company A does not provide any services to Australian individuals or to any Australian entities.

Therefore, the Commissioner has concluded that Company A does not have a place at or through which it carries on any business for the purposes of the definition of a PE in subsection 6(1) of the ITAA 1936

Question 3

Will the fees derived by Company A in relation to agreements in place with Company B (an unrelated company) be assessable under section 6-5 of the Income Tax Assessment Act 1997?

Summary

The fees derived by Company A in relation to the agreement in place with Company B will not be assessable under section 6-5 of the Income Tax Assessment Act 1997.

Detailed reasoning

Subsection 6-5(2) sets out the treatment of ordinary income that applies to an Australian resident while subsection 6-5(3) sets out the treatment of ordinary income that applies to a foreign resident.

As set out above in relation to question 1, Company A will not satisfy the definition of an Australian resident in subsection 995-1(1) of the ITAA 1997. Therefore, Company A will be a foreign resident and thus the application of subsection 6-5(3) must be considered.

Subsection 6-5(3) provides:

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

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

(b)           other *ordinary income that provisions include in your assessable income for the income year on some basis other than having an *Australian source.

Subsection 995-1(1) of the ITAA 1997 states that ordinary income is defined in section 6-5 of the ITAA 1997.

Subsection 6-5(1) of the ITAA 1997 provides that:

Your assessable income includes income according to ordinary concepts, which is called ordinary income.

Company A derives fees from agreements in place with XX merchants. The fees are considered to be ordinary income.

The term 'Australian source' is defined in subsection 995-1(1) of the ITAA 1997 as follows:

*ordinary income or *statutory income has an Australian source if, and only if, it is *derived from a source in Australia for the purposes of the Income Tax Assessment Act 1936.

In turn the term 'derived' has a meaning affected by subsection 6-5(4) of the ITAA 1997 which reads:

In working out whether you have derived an amount of *ordinary income, and (if so) when you derived it, you are taken to have the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

In order for subsection 6-5(3) of the ITAA 1997 to apply, it is necessary to determine whether the fees derived by Company A are ordinary income from an Australian source.

Source of income

Apart from certain rules prescribed for statutory income (for example, interest, royalties and dividends), there is nothing in the income tax legislation which prescribes the source of income. In the absence of statutory source rules, reliance is placed on common law rules that relate to income source.

In relation to the nature of the test to be applied to determine the source of an item of income, paragraphs 19 to 23 of Taxation Determination TD 2011/24 (TD 2011/24) state the following:

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. This was originally stated by Isaacs J in Nathan v. FC of T: The Legislature in using the word 'source' meant, not a legal concept, but something which a practical man would regard as a real source of income. Legal concepts must, of course, enter into the question when we have to consider to whom a given source belongs. But the ascertainment of the actual source of a given income is a practical, hard matter of fact.

In Spotless Services Ltd & Anor v. FC of T (Spotless), Lockhart J said:

The cases demonstrate that there is no universal or absolute rule which can be applied to determine the source of income. It is a matter of judgment and relative weight in each case to determine the various factors to be taken into account in reaching the conclusion as to source of income.

On appeal to the Full Federal Court, Beaumont J agreed with Lockhart J's views and said:

As has been noted, Lockhart J stated, correctly in my view, that the test to be applied in determining the source of income is to 'search for the 'real source' and to judge the question in a practical way'. As his Honour went on to say (at ATC 4409-10), it is a matter of 'judgment' and 'relative weight' in each case to determine the various factors to be taken into account in reaching this conclusion. I also, with respect, agree with his Honour's statement (at ATC 4410 - cited above) as to the relative importance, for present purposes, of the place or places where the contract was made and the money lent.

There have been numerous court cases that have considered the question of source of income. Matters the courts have considered include the place where a contract is entered into, the place where a contract is negotiated, the place of payment, the place where a service is performed and the place where business operations are carried on.

In Commissioner of Taxes v. Lovell & Christmas Ltd, the House of Lords considered the question of the source of income arising from a business buying and selling goods on commission. The appellants' profits consisted of a commission deducted by them from moneys received in London under agency contracts of sales effected in London of goods brought from New Zealand as a result of transactions made by them in New Zealand. It was held that the profits were actually made in London, and that the earlier transactions in New Zealand were insufficient to render those profits taxable as profits derived from business carried on in New Zealand.

Application to your circumstances

Company A entered into an agreement with Company B (an unrelated company who is a resident of an offshore jurisdiction) for the provision of services. These agreements are directly between Company A and Company B. The agreements are executed outside of Australia.

The services provided by Company A are limited to facilitating the flow of funds (payments) between the Australian based customers of Company B and Company B itself. Company B sells products via an online marketplace.

There are no agreements between Company A and any Australian-based customers. Company A does not provide any services to Australian individuals or to any Australian entities. Company A does not participate in the operations of Company B.

An offshore user account is set up with Company A for Company B, from which Company B can withdraw funds as required, with any Company A fees automatically deducted at the time of withdrawal. These fees are deducted from the funds when they are withdrawn from Company A's offshore bank account.

The services required to be performed by Company A under the agreement with Company B are performed offshore.

Conclusion

Based on the facts and circumstances outlined in this ruling, the Commissioner has concluded that the income derived by Company A under the agreement with Company B are not directly or indirectly sourced in Australia for the purpose of paragraph 6-5(3)(a) of the ITAA 1997.

In coming to this conclusion the Commissioner has considered, the place where the agreements are entered into, the place of payment (fees are deducted from an offshore bank account), the place where a service is performed (no activities are carried out in Australia), the place where business operations are carried on (no operations are carried on in Australia).

Accordingly, the fees derived by Company A do not constitute assessable income under paragraph 6-5(3)(a) of the ITAA 1997 as:

•                     Company A is a not a resident or resident of Australia for income tax purposes under subsection 6(1) of the ITAA 1936; and

•                     the income derived by Company A is not directly or indirectly sourced in Australia for the purpose of paragraph 6-5(3)(a) of the ITAA 1997.