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Who does this affect?

All non-residents of Australia who lease substantial equipment into Australia.

What do you need to do?

Review the ATO ID and consider whether your activities connected with Australia may constitute carrying on business through a permanent establishment in Australia. We can help.

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Darren McClafferty  
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Julian Roberts  
Solicitor
Phillip Davies  
Partner
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Sydney
Justin Cherrington  
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Peter Green  
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Ken Lord  
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Melbourne
Frank Brody  
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Michael Clough  
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Perth
 

Permanent establishments: new Interpretative Decision issued - 1 May 2009

A new Interpretative Decision (ATO ID 2009/21) issued by the Australian Taxation Office highlights some important tax issues which need to be considered by US and other foreign resident taxpayers that lease substantial equipment in Australia.

The ATO ID makes it clear that it is necessary to consider not only whether the lease of such equipment gives rise to a permanent establishment (PE), but also whether the activities undertaken by the lessor in Australia are such that the lessor can be taken to be carrying on business through that PE. This may be particularly helpful to foreign residents that have nominal activities in Australia outside of maintaining substantial equipment.

ATO ID 2009/21 considers the Australian tax position of a US resident that leased substantial equipment to an Australian resident. The Australian resident then sub-leased the equipment to third parties who used the equipment in Australia for more than 12 months.

Under Article 7 of the Australia/US Double Tax Agreement (DTA), a US resident that carries on business in Australia through a PE can be taxed in Australia on business profits attributable to that PE. To this end, Article 5(4)(b) of the DTA provides that a US enterprise will be deemed to have a PE in Australia if it “maintains substantial equipment for rental or other purposes within Australia (excluding equipment let under a hire-purchase agreement) for a period of more than 12 months”.

Deemed PE in Australia

In concluding that the US resident had a deemed PE in Australia, the Australian Tax Office (ATO) noted that Article 5(4)(b) applies to situations where the actions of a lessor are directed towards keeping substantial equipment in Australia for leasing purposes. According to the ATO, this will happen where a lessor:

  • directs or otherwise requires that its substantial equipment be used by the lessee in Australia, or
  • already has equipment located in Australia which is available for lease in Australia, and the equipment is actually used in Australia.

The ATO noted that a lessor would not be considered to direct or otherwise require that its substantial equipment be used by the lessee in Australia where the equipment is of a general nature such that it can be used in most locations, the lessor has no requirement as to where the lessee uses the equipment, and it simply eventuates that the lessee brings the equipment into Australia to be used. On the other hand, there would be a deemed PE if the equipment was already located and available for lease in Australia.

Carrying on business

The ATO noted that maintaining substantial equipment in Australia does not of itself mean that a lessor is carrying on business in Australia through a deemed PE. While maintaining substantial equipment in Australia is the activity that gives rise to a deemed PE, it is a consideration of the entirety of the activities undertaken by the lessor in Australia that determines whether the lessor is carrying on business in Australia through a deemed PE.

In this regard, the ATO considered that to carry on business in Australia through a deemed PE, a lessor would need to undertake more of the activities constituting its leasing business in Australia, for example, inspection and maintenance checks and lease negotiations. As the US taxpayer did not carry on any of its business activities in Australia, Australia did not have taxing rights under Article 7 of the DTA.

For more information please contact the Mallesons Tax Team.

This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.