What happens from a tax point of view when you don’t think you conduct a business overseas, but you are deemed to be?
This article deals with a situation where an Australian business leases assets to an overseas company. The overseas company uses the assets in its operations in the overseas company. What are some of the tax issues that can arise?
Australia has a number of tax treaties with overseas countries. All Australian major trading partners are covered, among other countries. These treaties have the purpose (mainly) of determining which country has the right, but not the obligation, to tax income that has the possibility of being taxed under the domestic tax laws of both countries. That is, the treaties have the main purpose of stopping double taxation.
A recent Australian Taxation Office ruling refers to this issue in a real life situation. Here are the facts.
An Australian company is involved in the transport industry. As an incidental part of its business, it leases equipment (possibly trucks) to other parties. One such party was a company in New Zealand. The NZ company pays the Australian company lease payments for the use of the equipment in NZ. Although not stated in the ruling, it is assumed that the Australian company does not have an office or any other type of presence in New Zealand. What are the Australian tax consequences?
Australia does have a tax treaty with New Zealand. Under this treaty, as with most tax treaties, if an enterprise of one country (country A) has a “permanent establishment” in the other country (country B), then country B has the right to tax the business profits that arise from the operation in country B. The interesting thing about the facts in this case is that the Australian company had “substantial equipment” in New Zealand (country B). Because of this, the Australian company was deemed to have a permanent establishment in NZ even though it did not have an office or any other type of operation there. Further, because of this, the Australian enterprise was deemed to be carrying on business there. This means that NZ is given the right to tax the leasing income.
However, that is not the complete end of the story. Under the Australian domestic law, the income is deemed to be “non-assessable non-exempt” income. Put another way, the Australian tax law treats the leasing income as a “nothing”.
The ruling does not tell us exactly what equipment the Australian company had in NZ to make it “substantial”. The point for readers of this article to note is that substantial does not mean massive. One item of equipment, depending on its type, can be substantial and therefore alter the taxation obligations.
Wishing you easier business.
John Jeffreys