Issue
For what periods of time in each income year will the taxpayer, an Australian resident company, have a permanent establishment (PE) in a listed country for the purposes of subsection 23AH(2) of the Income Tax Assessment Act 1936 (ITAA 1936) where the taxpayer derives income from leasing substantial equipment that is used in New Zealand for part of that year and in other countries at other times?
Decision
For the purposes of subsection 23AH(2) of the ITAA 1936, the taxpayer will have a PE in a listed country at any time in an income year where one or more of the items of substantial equipment are being used in New Zealand for the purposes of Article 5.4(c) of the 1995 New Zealand Agreement.
The taxpayer does not have a PE in New Zealand for the period(s) of time in an income year where none of the substantial equipment is being used in New Zealand.
Facts
The taxpayer is a company that is a resident of Australia for income tax purposes.
The taxpayer, as a sublessor, leases a number of items of equipment (leased equipment) to a New Zealand resident under a bareboat lease agreement entered into in New Zealand. The only presence of the taxpayer in New Zealand is that of the leased equipment.
The leased equipment is 'substantial equipment' for the purposes of Article 5.4(c) of the tax treaty between Australia and New Zealand signed on 27 January 1995 as modified by the Protocol signed on 15 November 2005 (the 1995 New Zealand Agreement).
The sublessee operates the leased equipment in New Zealand for part of each income year and in other countries at other times in that year.
The sublessee makes regular premium payments to the taxpayer from New Zealand in accordance with the terms of the bareboat lease agreement.
As the sublessor, the taxpayer derives income from the receipt of bareboat lease premiums. This income is not from 'the operation of ships or aircraft in international traffic' nor from 'things that are ancillary to that operation' for the purposes of subsection 23AH(14A) of the ITAA 1936.
New Zealand is a listed country for the purpose of subsection 23AH(2) of the ITAA 1936 by virtue of subsections 23AH(15) and 320(1) of the ITAA 1936 and Schedule 10 of the Income Tax Regulations 1936.
Reasons for Decision
Subsection 23AH(2) of the ITAA 1936 provides that, subject to other parts of section 23AH of the ITAA 1936, foreign income derived by a company, at a time when the company is a resident in carrying on a business, at or through a PE of the company in a listed country or unlisted country is not assessable income, and is not exempt income, of the company.
From the facts stated above, subsection 23AH(14A) of the ITAA 1936 does not apply in the present case so as to exclude subsection 23AH(2) of the ITAA 1936 from having application.
In order to determine whether the taxpayer has a PE in New Zealand for the purposes of subsection 23AH(2) of the ITAA 1936, the definition of the term 'permanent establishment' or 'PE' in subsection 23AH(15) of the ITAA 1936 provides for present purposes that, in section 23AH of the ITAA 1936, the term has the same meaning as in the 1995 New Zealand Agreement, the applicable tax treaty in force for the income years stated below.
Article 5.4(c) of the 1995 New Zealand Agreement provides, amongst other things, that an enterprise is deemed to have a PE in a Contracting State if 'substantial equipment is being used in that State by, for or under contract with the enterprise'. From the facts stated above, the leased equipment is substantial equipment for the purposes of Article 5.4(c).
The term 'used' in Article 5.4(c) of the 1995 New Zealand Agreement is not defined. Article 3.3 of the 1995 New Zealand Agreement provides that the term takes its meaning from the tax law of the State applying the treaty, unless the context otherwise requires.
In McDermott Industries (Aust) Pty Ltd v. Commissioner of Taxation (2005) 142 FCR 134; 2005 ATC 4398; (2005) 59 ATR 358 ( McDermott's Case ) where Article 4(3)(b) of the Singapore Agreement was considered, the Full Federal Court stated at paragraph 39 that 'the relevant use might, but need not be, use by the Australian enterprise' (the lessee of the barges in that case). 'All that is required is that there be a use within Australia ...'. This indicates that the wording of the provision is to be interpreted as stating that the relevant use be within a particular Contracting State by the lessor, the lessee or both. At paragraph 71, the Full Federal Court concluded that the leased equipment in that case was used either by the enterprise of the lessor or by the lessee under contract with the enterprise of the lessor.
Apart from the inclusion of the words 'trade or' and 'in that other Contracting State' in Article 4(3)(b) of the Singapore Agreement, Article 5.4(c) of the 1995 New Zealand Agreement is on the same terms as Article 4(3)(b) of the Singapore Agreement. The differences above are not material for present purposes. Accordingly, the meaning of the term 'is being used' in Article 5.4(c) of the 1995 New Zealand Agreement is the same as the meaning of the term adopted for the purposes of Article 4(3)(b) of the Singapore Agreement in McDermott's Case .
Therefore, in the present case, the substantial equipment is being used either by the taxpayer ('the company' for the purposes of subsection 23AH(2) of the ITAA 1936), as the sublessor of the leased equipment, or by the sublessee.
The Full Federal Court in McDermott's Case concluded at paragraph 53 of its judgment that 'the deeming provision of Article 4(3)(b) operates without a time limit'. Similarly, there is no minimum time period specified in Article 5.4(c) of the 1995 New Zealand Agreement for which the leased equipment must be used before a deemed PE can arise.
The term 'in that State' in Article 5.4(c) of the 1995 New Zealand Agreement refers to the term 'Contracting State', which is defined in Article 3.1(e) of the 1995 New Zealand Agreement to mean New Zealand or Australia, as the context requires. In the present context, both these terms refer to New Zealand as defined in Article 3.1(a)(i) of the 1995 New Zealand Agreement.
The term 'substantial equipment' encompasses in the present case the leased equipment both in the singular and plural sense (see paragraphs 104 and 134 - 135 of Taxation Ruling TR 2007/10).
From this, the deeming of the enterprise of the taxpayer to have a PE in New Zealand under Article 5.4(c) of the 1995 New Zealand Agreement will occur at any time where one or more of the leased equipment are, in the relevant sense, being used 'in that State' (New Zealand). This can be when one or more items of the leased equipment are present in New Zealand.
On the other hand, the taxpayer does not have a PE in New Zealand for the period(s) of time in an income year where none of the substantial equipment is being used in New Zealand by, or under contract with, the taxpayer's enterprise for the purposes of Article 5.4(c) of the 1995 New Zealand Agreement. The requirement in Article 5.4(c) that the use be 'in that State' is not satisfied at such times. This is consistent with the result in example 10 at paragraphs 75 - 77 of TR 2007/10.
Accordingly, for the period(s) of time the enterprise of the taxpayer has a PE under Article 5.4(c) of the 1995 New Zealand Agreement, the taxpayer has a PE in New Zealand for the purposes of subsection 23AH(2) of the ITAA 1936 by operation of subsection 23AH(15) of the ITAA 1936. Note 1: This ATO ID also applies to substantial equipment being used in the relevant sense in another country with which Australia has entered into a tax treaty where that tax treaty contains provisions which are on equivalent terms to Article 5.4(c) of the 1995 New Zealand Agreement and Article 4(3)(b) of the Singapore Agreement. Note 2: This ATO ID does not apply in respect of the 1995 New Zealand Agreement for the 2010-11 income year and any subsequent income years. Under paragraph 3 and subparagraph 1(a)(iii) of Article 30 of the Convention between Australia and New Zealand signed on 24 June 2009 (the 2009 New Zealand Convention), the 1995 New Zealand Agreement ceased to have effect for present purposes as from 1 July 2010. Instead, the 2009 New Zealand Convention which entered into force on 19 March 2010 has effect as from 1 July 2010.