1 Is Company A an Australian resident for tax purposes under subsection 6(1)?
Yes for Periods 1, 3 and 4. No for Period 2. Question 2 If the answer to Question 1 is 'yes', does Company A carry on business at or through a permanent establishment in the United States of America for the purposes of section 23AH? Answer No for Periods 1, 3, and 4. Not applicable for Period 2. Question 3 If the answer to Question 2 is 'no', is Company A able to carry forward and deduct losses to future years in accordance with section 36-17 subject to Division 165? Answer Yes, assuming Divisions 165 and 175 don't apply. Company A will be able to carry forward any tax losses incurred in Periods 1, 3 and 4 to future income years. However, Company A will only be able to deduct these losses where Divisions 165 and 175 don't operate. This ruling applies for the following period: 1 July XXXX to 30 June XXXX The scheme commenced on: Time AAAA
1. Company A is a limited liability company organised in the United States of America at time AAAA. 2. Company A is owned by Company B as trustee for Trust C. 3. Person D is, and has always been, the Chief Executive Officer of Company A and the sole director of Company B. 4. Person D was a resident of Australia for tax purposes for all the periods this ruling applies to. 5. Person D has always been Company A's sole responsible decision maker. Person D sets its business direction, operational policy, and makes all high-level decisions. 6. Company A is part of a group that includes Company E. Company E is a company incorporated in Australia that specialises in X products. Company E's goods are manufactured in Country F, and it mainly sells to the Australian market. Company A was set up to be the USA distributor of X products. It ordinarily purchased its products from Company E. However, occasionally, the manufacturing contract was between Company A and the Country F manufacturer.
7. An Advisory Board for the Group was established in time EEEE to give advice to Person D. However, Person D remained the sole decision maker. The Advisory Board included Person D, professional advisers, and a senior employee in the Group. Its function was to develop and drive strategy for the Australian and USA businesses. It gave counsel and recommendations only and didn't make decisions. Person D remained the sole decision maker for the Group, including Company A. Person D always exercised independent judgment when considering the Board's recommendations. 8. For context, we'll summarise some background about the Group's business. • Australia is the main market for the Group. • Most (about X%) of the Group's customers are in Australia. • <redacted for privacy reasons> • The Group's products are manufactured in Country F. • Company E's premises and staff are all in Australia. It has no premises, staff, or assets overseas. It engages agents when undertaking activities in other countries. 9. Company A has two main channels for distributing products to the USA market.
• It secures commercial clients to sell products. • It makes online sales directly to consumers. 10. Company A's operations have changed several times in its history. We've grouped this history into four periods. These changes relate to premises, warehousing and distribution arrangements, staff, and Person D's locations. Table 1 gives details. Table 1: Group's USA activities across 4 periods from time AAAA to present Table 1: Group's USA activities across 4 periods from time AAAA to present Topic Period 1 time AAAA to time BBBB Period 2 time BBBB to time CCCC Period 3 time CCCC to time DDDD Period 4 time DDDD to present Person D's location Resided in Australia and controlled Company A's operations from Company E's Australian offices. Person D visited the USA X times for training and trade shows. Relocated to the USA to manage Company A's operations, and to establish a warehouse facility. Relocated back to Australia. Visited the USA on an ad hoc basis. There were X trips totalling X days across Period 3. The purpose of these trips was to attend trade shows and visit the warehouse.
Person D remained in Australia and hasn't been to the USA since Period 3. Products: manufacturing and purchase arrangements All products manufactured in Country F. The manufacturing contract was generally between the Country F manufacturer and Company E, with Company A acquiring the stock from Company E. Occasionally the contract was directly between the Country F manufacturer and Company A. Negotiations and arrangements were conducted from Australia, except for Period 2, when some were made in the USA. Warehousing, storage, and distribution Products were sent directly to USA clients from the Australian warehouse using third-party logistics providers - there was no storage in the USA. Company A starting arranging this from the USA once it started renting the serviced office. Inventory was moved to the USA to have on hand there, stored using third-party logistics providers. Used the USA warehouse to store products. The USA warehouse completed the picking, packing, and arranged products to be shipped to customers. The warehouse operations stopped. Used third-party logistics providers. Staff/ agents/ contractors
Used an agent or contractor in the USA to assist with distribution services; that agent had no authority to conclude contracts. The agent stopped working for Company A. Company A started to employ USA-based staff members. Continued to employ USA based staff members, who worked out of the USA warehouse. There were up to X staff at the USA warehouse at any one time. The USA staff duties covered distribution and administration functions. No staff in the USA. Premises None. Rented a serviced office in the USA. (This ended at time CCCC when the warehouse opened.) Rented a warehouse in the USA. None. Shipping products to customers All goods were shipped directly from Australia to the USA customers, using third-party logistics. This was arranged from Australia. Goods were shipped from the third-party logistics storage in the USA to customers, using third party-logistics providers. This was arranged from Australia and the USA. Goods shipped from the USA warehouse operated by Company A. The USA staff picked, packed, and organised outbound shipping to customers. Warehouse closed - returned to using third-party logistics. USA sales Conducted from Australia. Conducted from the USA.
Conducted from Australia. Shipping products to the USA Arranged from Australia, except for Period 2, when Person D was in the USA. Generally products were shipped from Country F to Australia, then from Australia to the USA. However, occasionally products were shipped direct from Country F to the USA. All logistics decisions were made in Australia, except for Period 2, when some decisions were made in the USA. Web and outbound marketing Completed from Australia. 11. In Periods 1,3, and 4, Person D entered into all Company A's significant contracts and made all its high-level decisions from Australia. Only in Period 2 did Person D enter into any significant contracts or make any high-level decisions for, or on behalf of, Company A while in the USA. 12. During Period 2, Person D occupied rented office space in the USA for general business management and to meet larger potential clients. 13. Company A's premises in the USA during Period 3 was a rented warehouse of X square metres, with a small adjoining office. 14. Company A never maintained premises other than the rented office in Period 2 and the rented warehouse in Period 3.
15. Person D decided to establish the USA warehouse because of a change in strategic direction. Person E decided to reduce Company A's focus on low-margin, larger clients, and redirect its focus to consumer customers. Person D considered it was important to have a USA warehouse presence to run a successful consumer business. This would allow it to reduce third-party logistics shipping times. 16. Company A engaged staff who undertook duties at the warehouse in the USA during Periods 2 and 3. • A total of X staff were employed across the period spanning time BBBB through time DDDD. • Up to X staff were employed at any one time. • Their duties at the serviced office and warehouse included administration tasks (like generating invoices to accompany deliveries), packing samples and orders, answering phones, phone orders, and outbound freight administration. • They weren't responsible for sales or concluding contracts. • One was a warehouse team leader who also did some photography for marketing purposes (but no other advertising or sales tasks beyond that).
17. Company A didn't use its USA warehouse to make or conclude sales. • Company A generated its sales predominantly online or through Person D's trips to trade shows. • It also generated some sales through wholesale agreements and customers who dealt directly with Person D. • While customers occasionally visited the warehouse, this was rare and only for the purpose of viewing displayed goods. 18. Phone calls involving warehouse staff were mainly about delivery arrangements. • The USA website had a phone number which was routed to the warehouse. • Some incoming calls were about organising pick-up times from couriers and logistics providers. • Other calls were customer questions about delivery. Customers often called the warehouse to complain about missing or late delivery. Staff would take details and follow up with the courier or logistics provider to locate the goods. When goods went missing, warehouse staff contacted Company E to request orders to be reshipped.
• Sometimes customer calls were about returns or changes to orders. The warehouse staff were authorised to organise returns and credits under the returns policy. One customer often rang to change orders, and warehouse staff were authorised to process those changes. • The warehouse also received phone requests for samples from an established customer; they sent out samples in response. • Warehouse staff also received calls from two account customers who didn't use email or web-based ordering. These customers sent through orders by fax, and then called to confirm the orders had been received. Warehouse staff would take the call and then process the order. Person D had already agreed on the pricing and contract terms, so these phone calls were mainly about delivery.
19. The warehouse staff didn't deal with general questions or complaints, beyond delivery. They weren't trained to deal with complaints or questions about Group products. They passed on product or sales enquiries to the Australian sales team (employed by Company E). The USA staff received these questions only rarely (perhaps once every 2 or 3 weeks), because all website questions about products were handled by the Australian sales team. When a product question call came through to the warehouse, the USA staff would arrange for the Australian team to call the customer back. 20. In time DDDD the warehouse was shut down because it was taking too much money and management focus away from Company E. The Advisory Board advised Person D to focus on the Australian market. 21. Company A made losses in every income year from XXXX through to XXXX. Assumptions • Company B didn't carry on business in Australia, except to the extent that the central management and control of its activities may have occurred here. • Company B wasn't incorporated in Australia.
• Company B's losses are tax losses for the purposes of section 36-10 (meaning that they are calculated correctly, accounting for all assessable income, exempt income, and allowable deductions under Australian tax law) in the relevant periods.
Income Tax Assessment Act 1936 Section 6 Section 23AH Income Tax Assessment Act 1997 Section 36-10 Section 36-17 Section 36-25 Section 960-115 Section 995-1 OECD Model Convention Article 5 USA Convention Article 5 Detailed reasoning In these reasons: • un-hyphenated provisions (eg, section 23AH) are in the Income Tax Assessment Act 1936 • hyphenated provisions (eg, section 36-10) are in the Income Tax Assessment Act 1997 • Divisions 165 and 175 are in the Income Tax Assessment Act 1997 • 'DTA' means 'double tax agreement' • 'USA DTA' means the Convention Between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income,