On 11 June 2014 the ATO issued a final taxation ruling TR 2014/3, entitled “Income tax: satisfying the ‘carrying on a business at or through a permanent establishment’ requirement in section 23AH of the Income Tax Assessment Act 1936 where a company is taken to have a permanent establishment (PE) in relation to substantial equipment”.
The ruling considers the application of the requirement in s 23AH that a company “carry on a business at or through a permanent establishment (PE)”, in circumstances where a company is taken to have a PE (i) in relation to substantial equipment under paragraph (b) of the definition of PE in s 6(1), or (ii) under an Article in one of Australia’s tax treaties that deems an enterprise to have a PE if it has substantial equipment in a contracting State.
In particular, this ruling considers whether a company that has a PE because it satisfies paragraph (b) of the definition in s 6(1) or, in the case where a tax treaty applies, because it has substantial equipment, automatically satisfies the “carrying on a business” requirement in s 23AH.
Further, the ruling considers whether a company that is taken (under an applicable tax treaty) to carry on business through the PE thereby satisfies the “carrying on a business” requirement in s 23AH.
The ruling says that if a company is taken to have a PE in relation to substantial equipment (by the domestic law or by a tax treaty), foreign income derived by that company will not be non-assessable non-exempt income (NANE) under s 23AH unless, among other things, it is derived in actually carrying on a business at or through a PE in the foreign jurisdiction.
Where the s 6(1) definition of PE applies, a company does not automatically satisfy the requirement in s 23AH of “carrying on a business at or through a PE” of the company merely by having a PE within the extended meaning of the expression in paragraph (b) of that definition.
Equally, where the definition of PE under a tax treaty applies, the requirement is not automatically satisfied just because there is a deemed PE by virtue of the presence of substantial equipment.
Further, even if a tax treaty also deems the company to carry on a business through that PE, this does not mean that the requirement to carry on a business for the purposes of s 23AH is satisfied.
Whether a company is actually carrying on a business at or through the PE is a question of fact and degree to be determined having regard to the circumstances of each particular case. This enquiry must objectively support the conclusion that actual business activities are being carried on. There is no scope for a positive finding that a business is being carried on unless there is real business activity occurring at or through the PE.
The use of the indefinite article “a” in the phrase “carrying on a business” does not mean that the activities must comprise a single or entire business in their own right.
Even if a company actually carries on business at or through a PE that exists because of the presence of substantial equipment, all the other requirements of s 23AH must be satisfied in order for the provision to apply to treat the income as NANE.
Where a company has an indirect interest in foreign income derived by a trustee or partnership in carrying on a business at or through a PE of the trustee or partnership, and is taken by s 23AH(10) to have derived foreign income through a PE, that income will likewise be taken to have been derived by the company in carrying on a business. Whether the foreign income actually derived by the trustee or partnership was derived in carrying on a business is to be tested in accordance with the principles set out in this ruling.
This ruling was previously issued in draft as TR 2013/D8.