Income tax: will the hire of substantial equipment in Australia under a hire-purchase agreement create a deemed permanent establishment for a Singaporean resident hirer under Article 4(3)(b) of the tax treaty between Australia and Singapore as a result of the decision in McDermott Industries (Aust) Pty Ltd v. Federal Commissioner of Taxation [2005] FCAFC 67?

Yes. In accordance with the decision in McDermott Industries (Aust) Pty Ltd v. Federal Commissioner of Taxation [2005] FCAFC 67 ( McDermott's case ), a Singaporean resident hirer will be deemed to have a permanent establishment in Australia in relation to the hire of substantial equipment in Australia under a hire-purchase agreement.

This view is not limited to the tax treaty between Australia and Singapore but also applies in respect of other tax treaties with Australia as specified in paragraphs 10 to 12 of this Determination.

A Singaporean enterprise hires substantial equipment to an entity for operation in Australia, under a hire-purchase agreement .

As the Singaporean enterprise is using the substantial equipment it will have a deemed permanent establishment under Article 4(3)(b) of the tax treaty between Australia and Singapore (the Singapore Agreement) in Australia . [1]

It is proposed that when the Determination is issued, it will apply both before and after its date of issue. However, the Determination does not apply to the extent that it conflicts with the terms of settlement of a dispute agree to before the date of issue of the Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).

For the purposes of this Determination, the term hire-purchase agreement has the same meaning as it does in Draft Taxation Ruling TR 2006/D8. [2]

Article 4(3)(b) of the Singapore Agreement provides that a Singaporean enterprise will be deemed to have a permanent establishment in Australia and to carry on trade or business through that permanent establishment if substantial equipment is being used in Australia by, for or under contract with the Singaporean enterprise.

In interpreting Article 4(3)(b) of the Singapore Agreement, the Full Federal Court in McDermott's case held that the relevant use might, but need not be, use by an Australian enterprise. [3] The Court considered that there was nothing in the context of Article 4 or the Singapore Agreement that required a reading down of the natural meaning of the provision. As a result, the Court held that a permanent establishment was deemed to arise because the substantial equipment was being used in Australia either by the Singaporean resident or by McDermott Industries under contract with the Singaporean resident. [4]

While McDermott's case involved bare boat charters being a particular type of standard leasing arrangement, the Commissioner considers that the same outcome arises where the arrangement involves the hiring of substantial equipment under a hire-purchase agreement. This is because the Singaporean hirer maintains legal rights over the equipment under the hire-purchase agreement. Thus, the Singaporean hirer is using the equipment in Australia because it is gaining income from equipment it legally owns being operated by the other entity in Australia. Also, the equipment is used in Australia by the other entity under contract with the Singaporean hirer.

The Commissioner's interpretation is not limited to Article 4(3)(b) of the Singapore Agreement but also applies in respect of the tax treaties specified below: Tax Treaty Schedule No. to Agreements Act New Zealand 4 Malaysian 16 Irish 20 Norwegian 23 Papua New Guinea 29 Thai 30 Sri Lankan 31 Kiribati 34 Indian 35 Vietnamese 38 Czech [5] 40 South African 42 Argentine 44 Russian [6] 46 Mexican [7] 47

For the tax treaties listed below, the view in this Taxation Determination will only apply where the substantial equipment is present in Australia under the hire-purchase agreement for more than the time period specified in the relevant tax treaty. The tax treaties and respective time periods are specified in the following table: Tax Treaty Schedule No. to Agreements Act Time period French 11 6 months Philippine 14 6 months Polish 36 12 months Taipei 41 3 months Romanian 45 6 months

For the tax treaties listed below, a non-resident will only have a permanent establishment where, under the hire-purchase agreement, the substantial equipment is used in exploration for, or the exploitation of, natural resources, or in activities connected with such exploration or exploitation in Australia for more than the time period specified in the relevant tax treaty. The tax treaties and respective time periods are specified in the following table: Tax Treaty Schedule No. to Agreements Act Time period Netherlands 10 12 months Belgian 13 12 months Swiss 15 12 months Swedish 17 12 months Danish 18 12 months Italian 21 12 months Korean 22 12 months Finnish 25 12 months Chinese [8] 28 3 months Hungarian 33 12 months Spanish [9] 39 12 months

We invite you to comment on this draft Taxation Determination. Please forward your comments to the contact officer by the due date. (Note: The Tax Office prepares a compendium of comments for the consideration of the relevant Rulings Panel or relevant Tax officers. The Tax Office may use a version (names and identifying information removed) of the compendium in providing responses to persons providing comments. Please advise if you do not want your comments included in the latter version of the compendium.) Due date: 6 July 2007 Contact officer details have been removed following publication of the final ruling.