Income tax: helicopter - 'substantial equipment' - Article 5(4)(b) of the Norwegian Convention

Is a 15 - 18 passenger helicopter leased by the taxpayer, a Norwegian resident company, to an Australian resident lessee 'substantial equipment' for the purposes of Article 5(4)(b) of Schedule 23 (the Norwegian Convention) of the International Tax Agreements Act 1953?

Yes. A 15 - 18 passenger helicopter is 'substantial equipment' for the purposes of Article 5(4)(b) of the Norwegian Convention.

The taxpayer is a company resident in Norway.

The taxpayer leases a helicopter to Australian resident lessee. The lessee uses the helicopter to transport workers between two places within 'Australia' as the term defined in Article 3(1)(a) of the Norwegian Convention.

The helicopter can carry 15 - 18 passengers (depending on the fuel supply). The helicopter has the approximate dimensions of 18.7 x 3.79 x 4.9 metres.

Article 5(4)(b) of the Norwegian Convention deems a Norwegian enterprise to have a permanent establishment in Australia and to carry on business through that permanent establishment if substantial equipment is used in Australia by, for or under contract with the enterprise.

Article 3(3) of the Norwegian Convention provides that any term not defined in the Convention shall, unless the context requires otherwise, have the meaning it has under the domestic laws in respect of the taxes to which the Convention applies. The word 'equipment' and the term 'substantial equipment' are not defined in the Norwegian Convention or in Australia's domestic taxation law.

Paragraphs 106 to 108 of Draft Taxation Ruling TR 2006/D8 explain the meaning of 'equipment' in the provision of the convention between Australia and the United States of America (the US Convention). Article 5(4)(b) of the US Convention corresponds to Article 5(4)(b) of the Norwegian Convention.

As stated at paragraph 106 of TR 2006/D8, the relevant meanings of the word 'equipment' in the Macquarie Dictionary , 2001, 5th edn, The Macquarie Library Pty Ltd, NSW are: anything used in or provided for equipping, a collection of necessary implements (such as tools).

Paragraph 107 of TR 2006/D8 states that paragraphs 33 to 38 of Taxation Ruling TR 98/21 point to a number of cases and other references indicating that the meaning of 'equipment' should be determined in the context in which it appears and, when used in a treaty context, it has a broad meaning. In particular, paragraph 18 of Taxation Ruling IT 2660 states that the term 'equipment' in the context of the definition of 'royalty' includes such things as machinery and apparatus.

Paragraph 108 of TR 2006/D8 states that a particular item does not necessarily have to be something ancillary to, or part of, the greater whole to be considered 'equipment'. As stated at paragraph 34 of TR 98/21, there seems to be tacit approval by O'Bryan and Ashley JJ in Mayne Nickless Ltd v. FC of T 91 ATC 4621; (1991) 22 ATR 198 that an entirety can be equipment. Paragraph 35 of TR 98/21 states that the descriptors 'industrial, commercial or scientific' in the paragraph (b) of the definition of 'royalty' in subsection 6(1) of the Income Tax Assessment Act 1936 do not connote that equipment must be ancillary and cannot be an entirety. The same descriptors are used in Article 12(3)(b) of the Norwegian Convention. Paragraph 36 of TR 98/21 states that, the context in the permanent establishment definition in most of Australia's tax treaties likewise indicates that equipment can be an entirety.

Accordingly, an entirety such as the helicopter is an item of 'equipment' for the purposes of Article 5(4)(b) of the Norwegian Convention.

The relevant meanings of the word 'substantial' in the Macquarie Dictionary are: • of ample or considerable amount, quantity or size • of real worth or value, and • of or relating to the essence of a thing; essential, material, or important.

Paragraph 112 of TR 2006/D8 states that whether the equipment in question is 'substantial' is a question of fact and degree to be determined: • on balance, according to the facts and circumstances of each particular case, and • in an absolute sense, that is, when viewed independently; not in comparison with something else, or • in a relative sense; that is, by comparing it to something else.

Based on the ordinary meaning of the term, the relevant case law ( McDermott Industries (Aust) Pty Ltd v. Commissioner of Taxation (2005) 142 FCR 134; 2005 ATC 4398; (2005) 59 ATR 358; Tillmanns Butcheries Pty Ltd v. Australian Meat Industry Employees' Union (1979) 42 FLR 331; Case H106 (1957) 8 TBRD 484; (1957) 7 CTBR (NS) Case 98 ) and the guidance at paragraphs 1.61 to 1.64 of the Explanatory Memorandum to the International Tax Agreements Amendment Bill 2003 incorporating the 2003 convention between Australia and the United Kingdom of Great Britain and Northern Ireland (the 2003 UK Convention), the Commissioner considers that the following factors are relevant in determining whether equipment is 'substantial': • size • quantity - where part of a unified process • value, and • importance - in the sense of whether the equipment plays a core role in the income producing activity.

As the common characteristic of the examples of substantial equipment in McDermott Industries (Aust) Pty Ltd v. Commissioner of Taxation (supra) and at paragraph 1.63 of the Explanatory Memorandum to the 2003 UK Convention is the size of the equipment, the Commissioner considers that size is the key factor and has greater weight in determining whether equipment is 'substantial'. If an item of equipment is sufficiently large in size, it will be 'substantial' in an absolute sense. In such instances, this factor alone will be decisive and further consideration of any of the other factors is not necessary.

The Commissioner considers that the dimensions of the helicopter are sufficiently large in size for the helicopter to be 'substantial' in an absolute sense.

Accordingly, the helicopter is 'substantial equipment' for the purposes of Article 5(4)(b) of the Norwegian Convention.