Permanent Establishment and Business Profits Taxation

The term permanent establishment refers to fixed place of business through which an enterprise carries on the business either entirely or partly (Woellner et al. 2016).

The business profits of an enterprise of the contracting state will be considered for taxation purpose only in that state except the enterprise carries on the business in other contracting state through the permanent establishment situated in other state. Business profits of an enterprise that is incorporated in UK will be subjected to Australian company tax at the present tax rate of 30% on the business profits that is attributable to that branch (Braithwaite 2017). According to the UK/Australia Double Taxation Convention if a company carries on the business in Australia the profits of the enterprise may be taxed in the other state but only to the extent that is attributable to such permanent establishment.

The article 5 (5) of the OECD states that the activities does not results in Permanent establishment if it is carried out by the independent agent that is acting in the ordinary business course. According to the general view of the OECD MC Article 5 (6) if it is found that an independent agent is concluding a contract that is out of the ordinary business course, such contracts would not result in permanent establishment of the enterprise except the independent agent has the authority to conclude such contract (Robin 2017). If the contract is simply preliminary or auxiliary in nature, then it would not result the enterprise in having the permanent establishment.    

“Section 995-1 of the ITAA 1997” defines resident or resident of Australia as the person who lives in Australia and comprises of person whose domicile is in Australia unless the commissioner is content that the person’s permanent place of dwelling is out of Australia (Blakelock and King 2017). In the current case of Andrew McSwington it was noticed that he is born in Australia and later went to Mexico and America for a period of 2 and 15 months respectively to play minor leagues. Later, he returns to Australia to sign another contract for fifteen months to play for minor league team.

The “Taxation ruling of TR 98/17” states that residency status is a matter of fact and primary principles in determining an individual’s liability under Australian taxation system. In accordance with “Domicile Act 1982” Domicile is the legal concept that is used in determining the residential status. An individual acquires the domicile by birth in the country of origin. In “FCT v Miller (1946)” the question of fact and degree has been explained depending upon the circumstances of case (Barkoczy 2014). The “Taxation Ruling of IT 2650” explains that intentional and original length of stay in the overseas nation is important. Similarly, in the situation of Andrew, he left Australia only with the intention of returning following the end of the transitory overseas stay. Therefore, for income tax purpose Andrew would be regarded as the Australian resident for income tax purpose. 

The “Taxation ruling of TR 1999/17” explains that the benefit that is received by a person from the sporting involvement are treated as taxable income under ITAA 1936. Payments that are received from sporting involvement in connection with the service provided or exploitation of personal skills in the commercial manner would be considered taxable (Coleman and Sadiq 2013). The assessable income includes bonuses, allowances, sign-on fees and inducement or retention payments that is received for the continuation of service. Similarly, in “Kelly v FCT” the amount of 20,000 was taxable since it was received from the employment of sportsperson and directly associated to the taxpayer’s skills (Grange et al. 2015). Similarly, for Andrew the sum of $145,000 would be considered taxable as it was related to the commercial exploitation of the skills developed and used in pursuit of sporting excellence. 

Resident Definition and Tax Liability

The liability to tax originates yearly and the question where the taxpayer resides should be determined yearly based on the facts that are applicable in the particular year of income which is under consideration (Jover-Ledesma 2014). As evident in the situation of Andrew the sum of $145,000 would be considered taxable under “subsection 6-5(1) of the ITAA 1997” as the income from ordinary concepts. 

An Australian resident are taxed from all the sources. As evident Andrew bought a house in America and renting out the same for the remaining part of income year when he returns to Australia. Referring to the judgement in “Adelaide Fruit and Produce Exchange Co Ltd (1932)” rental income derived from the rental properties represents the entire sum of payment that a person receives while renting out the property (Kenny 2013).

Preceding the explanation from the above stated paragraph the rental income received by Andrew consists of periodic receipts and same would be included into his tax returns which would attract tax liability based on income from ordinary sources under “section 6-5 of the ITAA 1997”.     

In Myer’s case the taxpayer was the parent company under a group that performed the business mainly in the retail trade areas and development of property. During the month of March 1981 the group re-organized and the taxpayer loaned a sum of $80 million to the subsidiary company for a term of seven years by charging interest at a rate of 12.5% yearly. After three days as it was intended, the taxpayer consigned to a finance firm for its rights of receiving the interest payable over the remaining period of loan (Krever 2013). As the consideration for the consignment, the taxpayer was paid a single sum of $45.37 million by the finance company. The amount was computed based on the outstanding amount of interest that was payable at the discounted rate of 16% yearly.

The taxation commissioner considered the lump sum amount of $45.37 million that was received by the taxpayer as the taxable earnings for the period ended 30 June 1981. Following the appeal, the Victorian Supreme Court and Federal Court of Australia stated that the amount was non-taxable capital receipt (Morgan, Mortimer and Pinto 2013).

Later the commissioner successfully bought an appeal to the Full High Court where it was held that the sum was earnings in accordance to the ordinary concept under the “subsection 25 (1)” and profit originating from carrying out the profit making scheme under second limb of paragraph 26 (a).

In Myer’s case the first strand is associated with the receipts and profits derived from the isolated transactions. It was stated that the first strand foundations represents the business proceeds based on the income concept. As evident the profit derived from the isolated transaction would be considered as income if the transaction was entered with the objective of making profit and the transaction possessing commercial or in the nature of business deal. Three broad proposition was submitted in Myer concerning the first strand that receipts or profits made from the ordinary business course was income (Woellner 2013). The Full High Court in its decision held that the profit on the transaction was the ordinary income based on the first strand of Myer. The court further held that second limb of Section 26 (a) was applicable since the profit was the taxable earnings for the taxpayer.   

Taxation of Sporting Involvement

On the other hand, in the case of “Westfield Ltd v FCT of T 91 ATC” despite the profit or gain that is made during the ordinary business course constitute income but it does not follow from the decision that was made in “FC of T v Myer Emporium Ltd 87” that every profit which is derived by the taxpayer in the business course will be an income (Woellner et al. 2014). To explain such proposition would abolish the difference between the income and capital profit. The federal court held that the payment which is an income according to ordinary concept would be taxable under “section 25 (1)”. Furthermore, neither single nor dominant intention of entering in the scheme is required to be profit making. While in “Westfield Ltd” case the selling of land was outside the ordinary business course of taxpayer and therefore the amount was capital in nature, not income.  

The argument overstates the scope of Myer principle. As held in “Westfield Ltd” not all business receipts would be of income character though it may be contrary to the Act and the basic concepts of difference between profit and capital. Moreover, the principle of Myer is only applied where the intention of taxpayer involves profit making and the sale involves commercial transaction. Therefore, much is implicit in the high court decision in Myer’s case.  

Losses or outgoings that are considered preliminary to the beginning of the income generating business is not occurred as “in the course of” and no deduction is allowed under the general provision of “section 8-1 of the ITAA 1997”. As held in “Softwood Pulp & Paper” the company incurred expenses on feasibility study and other certain cost to understand whether or not a new paper producing mill can be established. The taxation commissioner held that cost were not considered as allowable deductions since everything that was conducted was preliminary in beginning the income generating activity or business. 

As held in “Ronpibon Tin NL v FC of T (1949)” for a legal expenditure to be allowed as the allowable deduction it should be represented that the expenditure is incidental or relevant in the generation of the taxpayer’s taxable income or business operations (Kenny 2013). The incidental and relevant test explains that for an expenditure to be considered as the allowable deduction in the form of outgoing occurred in generating taxation income should be incidental and relevant to such extent. Briefly, to come inside the initial portion of subsection it is necessary and sufficient that the circumstances of loss or outgoing must be found in of any kind of production of taxable income.   

Similarly, denoting the above explanation interest paid on loan holds both necessary and sufficient circumstances of outgoing in producing assessable income. Hence, interest paid on loan would be held as allowable deduction. 

Interest paid on loans that is used for investing in the investment assets is regarded as deductible expenditure up to the extent that it is used in generating taxable income (Roe 2017). Post cessation expenditure may be allowed for deduction given the circumstances of loss or outgoing is noticed in the business functions that was previously carried on by the individual taxpayer for producing the taxable income. Similarly, in case of “FCT v Brown (1999)” the commissioner of taxation allowed deduction for interest on loan to the taxpayer and his wife for the money borrowed from bank to fund the purchase of deli business (Coleman and Sadiq 2013). The commission stated that interest may be continuously allowed for deduction even though the income producing source does exists however, the interest referred should be for income producing activities. 

According to the tax agent code of professional conduct the agent is required to ensure that the reasonable care is paid towards taxation laws in claiming the deductibility of interest despite the business activities are ceased (Tpb.gov.au 2018). These includes the following

1. 1. The tax agent duty is to take care a reasonable amount care in maintaining the written evidence of the expenses
   2. The tax agent is required to advise the client regarding the rights and obligation under the taxation laws which is materially associated to tax advice services provided by the agent (gov.au 2018).
   3. The tax agent is required to lawfully act in the client’s best interest and advising the clients to maintain the records ceased business for a period of five years.  

References 

Barkoczy, S. 2014. Foundations of taxation law.

Blakelock, S. and King, P., 2017. Taxation law: The advance of ATO data matching. Proctor, The, 37(6), p.18.

Braithwaite, V., 2017. Taxing democracy: Understanding tax avoidance and evasion. Routledge.

Coleman, C. and Sadiq, K. 2013 Principles of taxation law.

Grange, J., Jover-Ledesma, G. and Maydew, G. 2014 principles of business taxation.

Jover-Ledesma, G. 2014. Principles of business taxation 2015. [Place of publication not identified]: Cch Incorporated.

Kenny, P. 2013. Australian tax 2013. Chatswood, N.S.W.: LexisNexis Butterworths.

Krever, R. 2013. Australian taxation law cases 2013. Pyrmont, N.S.W.: Thomson Reuters.

Morgan, A., Mortimer, C. and Pinto, D. 2013. A practical introduction to Australian taxation law. North Ryde [N.S.W.]: CCH Australia.

Robin, H., 2017. Australian taxation law 2017. Oxford University Press.

Roe, A., 2017. The doctrine of sham in Australian taxation law. AUSTRALIAN TAX REVIEW, 46(2), pp.99-119.

Tpb.gov.au. (2018). Reasonable care to ensure taxation laws are applied correctly for tax (financial) advisers TPB(I) 29/2016 | TPB. [online] Available at: https://www.tpb.gov.au/reasonable-care-ensure-taxation-laws-are-applied-correctly-tax-financial-advisers-tpbi-292016 [Accessed 2 Aug. 2018].

Tpb.gov.au. (2018). Reasonable care to ensure taxation laws are applied correctly Information Sheet TPB(I) 18/2013 | TPB. [online] Available at: https://www.tpb.gov.au/reasonable-care-ensure-taxation-laws-are-applied-correctly-information-sheet-tpbi-182013 [Accessed 2 Aug. 2018].

Woellner, R. (2013). Australian taxation law select 2013. North Ryde, N.S.W.: CCH Australia.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D. 2014. Australian taxation law select.

Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2016. Australian Taxation Law 2016. OUP Catalogue.