Income tax: Permanent establishment - What is 'a place at or through which [a] person carries on any business' in the definition of permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936?

This Ruling provides the Commissioner's interpretation of the meaning of the phrase 'a place at or through which [a] person carries on any business' [1] in the definition of 'permanent establishment' (PE) in subsection 6(1) of the Income Tax Assessment Act 1936 ('ITAA 1936').

The definition of PE in subsection 6(1) of the ITAA 1936 also applies for the purposes of both the of Income Tax Assessment Act 1997 ('ITAA 1997') and Schedule 1 to the Taxation Administration Act 1953 ('TAA 1953'), except so far as the contrary intention appears.

This Ruling applies to an Australian resident who carries on business overseas or a non-resident who carries on business in Australia and who wants guidance as to whether they have a place for the purposes of the definition of PE in subsection 6(1).

The subsection 6(1) definition of PE is relevant not just for income tax purposes. Appendix A contains a list of some of the provisions which utilise the subsection 6(1) PE definition, or elements of it.

This ruling is concerned with the meaning of the phrase 'a place at or through which [a] person carries on any business'. It does not deal with whether a person carries on any business, nor the meaning of 'at or through'. [2] It also does not deal with the other aspects of the definition of PE contained in subsection 6(1). [3]

In some contexts Australian tax liability will arise as a consequence of the application of the approach adopted in this Ruling. [4] To that extent, this document is a 'public ruling' on the way in which a tax law applies in terms of Division 358 of Schedule 1 to the TAA 1953. In other contexts, this document will assist in determining a range of non-liability issues, including administrative or collection questions. [5] In those situations, the Ruling is not a 'public ruling' as defined in section 358-5 of Schedule 1 to the TAA 1953.

While this Ruling refers to the concept of PE used in Australia's tax treaties, it does not deal with the specific application of the tax treaty definitions.

The subsection 6(1) definition of PE does not have a specific territorial limitation. Depending on the context in which the PE definition is used, the definition can apply both to activities in Australia and outside Australia.

The subsection 6(1) definition of PE is based on the concept of PE used in Australia's tax treaties. For the purposes of the definition of PE in subsection 6(1) 'a place at or through which [a] person carries on any business' is a reference to a place used for carrying on that person's business activities. That place must have an element of permanence, both geographic and temporal. [6] Permanence must be construed in the context of each particular business and is a question of fact and degree. Permanent in this context does not mean forever.

This Ruling applies to years commencing both before and after 13 March 2002. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 75 and 77 of Taxation Ruling TR 2006/10).

This ruling adopts the contextual approach to interpretation used by Australian Courts. For example the Full Federal Court in Chaudhri v. FCT 2001 ATC 4214 at 4216; (2001) 47 ATR 126 at 128 said: 'The guiding principle of statutory interpretation may be summed up as being the ascertaining of the meaning of the words which Parliament has used by reference to the context in which they appear, where 'context' has the wide meaning which extends to the legislative history, the parliamentary intention and the mischief to which a particular provision has been directed as well as the narrower meaning which would dictate reading the words to be construed by reference to the immediately surrounding or otherwise related provisions.'

Subsection 6(1) of the ITAA 1936 defines permanent establishment as: 'permanent establishment' , in relation to a person (including the Commonwealth, a State or an authority of the Commonwealth or a State), means a place at or through which the person carries on any business and, without limiting the generality of the foregoing, includes: a) a place where the person is carrying on business through an agent; b) a place where the person has, is using or is installing substantial equipment or substantial machinery; c) a place where the person is engaged in a construction project; and d) where the person is engaged in selling goods manufactured, assembled, processed, packed or distributed by another person for, or at or to the order of, the first-mentioned person and either of those persons participates in the management, control or capital of the other person or another person participates in the management, control or capital of both of those persons - the place where the goods are manufactured, assembled, processed, packed or distributed; but does not include: e) a place where the person is engaged in business dealings through a bona fide commission agent or broker who, in relation to those dealings, acts in the ordinary course of his or her business as a commission agent or broker and does not receive remuneration otherwise than at a rate customary in relation to dealings of that kind, not being a place where the person otherwise carries on business; f) a place where the person is carrying on business through an agent: (i) who does not have, or does not habitually exercise, a general authority to negotiate and conclude contracts on behalf of the person; or (ii) whose authority extends to filling orders on behalf of the person from a stock of goods or merchandise situated in the country where the place is located, but who does not regularly exercise that authority, not being a place where the person otherwise carries on business; or g) a place of business maintained by the person solely for the purpose of purchasing goods or merchandise.

This Ruling deals only with the opening words of the definition of PE in subsection 6(1). It will still be necessary for the parties concerned, where appropriate, to look at the rest of the definition to determine if a PE exists or not under paragraphs (a) to (g).

Subsection 6(1AA) of the ITAA 1936 says that so far as a provision of the ITAA 1936 gives an expression a particular meaning, the provision does not also have effect for the purposes of the ITAA 1997 or for the purposes of Schedule 1 to the TAA 1953, except as provided in the ITAA 1997 or in that Schedule. Section 995-1 of the ITAA 1997 says that 'in this Act, except so far as the contrary intention appears: permanent establishment has the meaning given by subsection 6(1) of the ITAA 1936'. Likewise, subsection 3AA(2) of the TAA 1953 says that 'an expression has the same meaning in Schedule 1 (of the TAA 1953) as in the ITAA 1997'. The end result is that the definition of PE in subsection 6(1) of the ITAA 1936 is also the definition in the ITAA 1997 and Schedule 1 to the TAA 1953 except so far as the contrary intention appears.

Appendix A contains a list of some of the provisions which utilise the subsection 6(1) PE definition, or elements of it.

'Permanent establishment' is a concept used both in international and domestic tax law. In Australia it was first used in our tax treaty with the United Kingdom signed in 1946. It appeared specifically in Australia's domestic tax law outside the tax treaty context in 1959.

PE is defined in most of Australia's tax treaties to mean, among other things, a fixed place of business through which the business of an enterprise is wholly or partly carried on (or words to similar effect). This is consistent with the primary meaning of PE in the OECD Model Tax Convention on Income and on Capital. [8]

The Commentary [9] on the Permanent Establishment Article (Article 5) of the OECD Model Tax Convention says that the general definition of PE outlined in the previous paragraph: '... contains the following conditions: • the existence of a "place of business", ie a facility such as premises or, in certain instances, machinery or equipment; [10] • this place of business must be "fixed", i.e., it must be established at a distinct place with a certain degree of permanence; • the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.' [11]

While the general definitions of PE in Australia's tax treaties refer to a fixed place of business through which the business of the enterprise is wholly or partly carried on, the subsection 6(1) definition refers only to 'a place at or through which [a] person carries on any business'. The ATO does not consider it significant that the word 'fixed' does not appear in the subsection 6(1) definition of PE.

The Income Tax Assessment Act 1947 gave force of law to the 1946 United Kingdom Double Tax Agreement (DTA). Subparagraph 1(j) of Article II of that DTA said that the term 'permanent establishment', when used with respect to an enterprise of one of the territories, meant a branch or other fixed place of business and included a management, factory, mine or agricultural or pastoral property. As the Explanatory Memorandum (EM) put it, 'the substantive part of the definition is designed to ensure that an enterprise of one of the territories having a fixed place of business in the other territory shall be regarded as having a permanent establishment in that territory.'

The Income Tax International Agreements Act 1953 among other things [12] gave force of law to the 1953 United States Double Tax Convention (DTC). Paragraph 1(o) of Article II of that DTC said a 'permanent establishment' meant a branch, agency, management or fixed place of business and included a factory, workshop, mine, oilwell, office or agricultural or pastoral property.

The Income Tax and Social Services Contribution Assessment Act (No. 3) 1959 introduced a dividend withholding tax regime in Australia. Dividends derived by non-residents engaged in business through a PE in Australia were excluded from the tax. A non-resident was deemed in section 128A of the ITAA 1936 (as it then was) to be engaged in business through a PE in Australia only if, in connection with a business carried on by him: (a) he [had] in Australia a branch, agency, place of management, office, factory, mine, quarry, oilwell, agricultural, pastoral or forestry property or other place of business...

The EM to that Act said about this definition: The substance of sub-sections (4) and (5) corresponds closely with definitions of 'permanent establishment' found in double taxation agreements entered into by Australia.

The Income Tax Assessment Act 1968 repealed the definition of PE mentioned (in part) above in paragraph 22 and inserted the present subsection 6(1) definition. The EM on that Act said: Paragraph (a) of clause 3 will insert a definition of the phrase 'permanent establishment'. The concept of a permanent establishment is significant in the imposition of withholding tax on dividends and interest paid from Australia to non-residents. It will also have effect for the purposes of the proposals in this Bill relating to the taxation of royalties paid from Australia to non-residents. Section 128A of the Principal Act at present contains provisions in sub-sections (5), (6) and (7) which determine the circumstances in which a place of business in a country is regarded as a permanent establishment for the purposes of the withholding tax on dividends and interest derived by non-residents. As a drafting measure, these provisions are being repealed by a later clause of the Bill (Clause 8) and replaced by a definition in section 6 of the Principal Act. This will not make any change in the basis on which the withholding tax on dividends and interest is now applied. In the future, however, the definition will also have effect for the purposes of taxing royalties paid to non-residents.

Having regard to the context in which the definition arose, it is clear that the subsection 6(1) definition of PE in the ITAA 1936 continued the previous approach, which was based on the meaning of permanent establishment in the 1946 UK DTA and the 1953 US DTC. The predominant idea in these two tax treaties was of a fixed place of business. For these reasons, it is the Commissioner's view that the phrase 'a place at or through which [a] person carries on any business' in the subsection 6(1) definition of PE has as its essence the concept of permanence.

Further arguments support this approach. First, the term 'permanent establishment' itself connotes permanence. [13] Secondly, the word 'place' denotes something that is not transitory or temporary, ie something that is permanent. The requirement that the person carry on a business at or through a place reinforces the idea of permanence in the sense of not being transitory or temporary. The phrase links the business to a particular place for a particular period. As McHugh J said in Thiel v. FCT (1990) 171 CLR 338 at 359; 90 ATC 4717 at 4728; 21 ATR 531 at 544 '...the carrying on of a business requires the habitual pursuit of business activities.' [14] The phrase 'a place at or through which a person carries on any business' thus requires a place - something of permanence - at or through which the habitual pursuit of business activities (also something of permanence) occurs.

The analysis set out in paragraphs 16 to 26 above leads the Commissioner to conclude that the phrase 'a place at or through which [a] person carries on any business' in the definition of PE in subsection 6(1) should be construed in a way that is broadly consistent with the meaning of PE in our tax treaties. Interpreting the phrase to include the concept of permanence in both its geographical and temporal senses facilitates such an approach.

While each situation needs to be judged in the context of the particular business, and is a question of fact and degree, the following comments offer guidance in determining whether 'a place at or through which a person carries on any business' exists for the purposes of the definition of PE in subsection 6(1).

A place at or through which a person carries on any business in the context of the definition of PE in subsection 6(1) must be geographically permanent. Any area, viewed commercially and as a whole, may, in relation to the business concerned, be a place. [15] Examples include business premises such as a factory, office, farm, mine or market. Thus a market is a place (and a place at or through which a trader carries on business) where that trader operates a stall regularly in that market. This is the case even if the stall is set up at different locations within the market at different times. It is the market which is, in relation to the trader, the distinct or discrete commercial area and it is therefore a place (and a place at or through which the trader carries on their business) within the definition of PE in subsection 6(1).

The second criteria for a place at or through which a person carries on any business to exist for the purposes of the definition of PE in subsection 6(1) is temporal permanence, ie the business presence must not be of a purely temporary nature. In other words, the business must operate at that place for a period of time. Again, this has to be judged in the context of the particular business and is a question of fact and degree.

Permanent in this context does not mean forever. As Sheppard J said in Applegate v. FCT 78 ATC 4054 at 4060; (1978) 8 ATR 372 at 378 in discussing the meaning of permanent in the phrase permanent place of abode: ...permanent is used in the sense of something which is to be contrasted with that which is temporary or transitory. It does not mean everlasting. The question is thus one of fact and degree.

This is the sense in which permanence is used in this ruling. [16]

Whether temporal permanence exists is a matter of fact and degree. However, as a guide, if a business operates at or through a place continuously for six months or more that place will be temporally permanent. [17]

Because each case is a question of fact and degree the six month guide is not a hard and fast rule. The circumstances may for example indicate that a period of less than six months is sufficient to lead to the conclusion that temporal permanence exists. Where the period in Australia is less than six months there may still be temporal permanence where the connection with Australia is very strong. One example would be where the business returns to a particular location in Australia on an on-going and regular basis but for short periods each time. Another example would be where a place is set up in Australia with a view to carrying on business permanently in Australia at or through that place but the business ceases after a short period of time. One instance of this would be where the taxpayer dies after a short time but their intention had been to carry on business in Australia at or through a place for more than six months. This is consistent with the Commentary on the Permanent Establishment Article (Article 5) of the OECD Model Tax Convention on Income and on Capital [18] which says at paragraph 6.3: 'If the place of business was not set up merely for a temporary purpose, it can constitute a permanent establishment, even though it existed, in practice, only for a very short period of time because of the special nature of the activity of the enterprise or because, as a consequence of special circumstances (e.g., death of the taxpayer, investment failure), it was prematurely liquidated.'

It is also conceivable that in some limited circumstances, a period of six months or more might not constitute temporal permanence, however the Commissioner considers this would be likely to occur in only the most extraordinary of circumstances. For example, the international travel restrictions and government-mandated lockdowns globally during the COVID-19 pandemic resulted in many businesses having employees present in Australia when they would ordinarily have been located outside of Australia, and many employees were typically required to continue their employment under 'working from home' arrangements. While temporal permanence remained a question of fact and degree in each case, the extraordinary circumstances of the COVID-19 pandemic presented some situations in which a forced presence in Australia for more than six months was considered temporary.

The following examples are intended to illustrate the analysis set out above. They concentrate on the issue of whether there is a place at or through which a person carries on any business.

Neil is a professional golfer and a resident of Namibia. He visits Australia to compete in an Australian golf tournament. The event is played at a prominent course in a major Australian city and takes four days. Neil is in Australia for a total of two weeks in the particular income year (including practice days and rest days.) The question is whether the golf course is a place at or through which Neil carries on his golfing business. [19] For the golf course to be a place at or through which Neil carries on his golfing business for the purposes of the definition of PE in subsection 6(1) his activity as a professional golfer in Australia would need to be both geographically and temporally permanent. While the activities on the golf course are undertaken at a single location which is geographically permanent, Neil plays at the course for only seven days (including practice days). As a result, sufficient temporal permanence does not exist and the golf course is therefore not a place at or through which Neil carries on his business for the purposes of the definition of PE in subsection 6(1).

Plays & Co is a theatrical company incorporated in Iceland. The company visits Australia with a production of a modern Icelandic play. Plays & Co performs in a theatre in Melbourne over a 12 month period. [20] It pays royalties to the author of the play who is a resident of Iceland. In this case the company has a place at or through which it carries on its business in Melbourne because it satisfies the geographic and temporal permanence requirements. This could have tax implications for the author of the play. [21]

If Plays & Co did not have a base in Australia and were to tour the country giving 'one-off' performances at numerous towns and cities for four months (and with separate performance contracts with local clubs and other venues) the company would not have a place at or through which it carries on business for the purposes of the definition of PE in subsection 6(1) in Australia in either its geographic or temporal sense. If the tour lasted more than six months there would be temporal permanence but because of the itinerant nature of the activity in Australia, Plays & Co does not satisfy the geographic permanence requirement and so does not have a place at or through which it carries on its business.

Ausco Ltd is an Australian resident retailing company. As well as its on-going Australian operations, for four months it sells products through rented premises in Zimbabwe. Without more the company does not have a place at or through which it carries on business in Zimbabwe for the purposes of the definition of PE in subsection 6(1). This could have tax implications for Ausco. [22]

ChiCo is a Chilean wine maker. It has a vineyard in Chile where it grows its grapes and makes and bottles its wine. The company advertises its wines in an Australian wine magazine. It has no other connection with Australia. Many Australian residents who after reading the advertisement in the magazine have ordered and paid for substantial amounts of ChiCo's wines. ChiCo does not have a place at or through which it carries on business in Australia for the purposes of the definition of PE in subsection 6(1).

HKco is a computer service provider and a resident of Hong Kong. It successfully tenders to train the employees of Ausco, a company resident in Australia, in a new computer system. To undertake the training, HKco sends four of its employees to Australia for six months. Ausco provides HKco employees with a room in one of its offices for that six months. Because HKco has at its disposal a room in Ausco's offices for six months and carries on its business at or through that room, HKco has a place at or through which it carries on its business in Australia.

Below is a detailed contents list for this draft Ruling: Paragraph What this Ruling is about 1 Class of person 3 Other aspects 4 Ruling 9 Date of effect 10 Explanations 11 Contextual approach 11 Statutory definitions 12 The PE Concept 16 Historical context 20 Concept of Permanence 25 Geographic Permanence 29 Temporal Permanence 30 Six months 33 Examples 36 Example 1 37 Example 2 38 Example 3 39 Example 4 40 Example 5 41 Example 6 42 Detailed contents list 43 Appendix A Page 16