TD 2007/31: Income tax: is a non-resident enterprise that under a hire-purchase agreement hires out substantial equipment to another entity that uses the equipment in Australia deemed to have a permanent establishment in Australia under Article 4(3)(b) of the tax treaty between Australia and Singapore or equivalent provisions in other Australian tax treaties?
 

Please note that the PDF version is the authorised version of this ruling.

Ruling

1. No. A non-resident enterprise is not deemed to have a permanent establishment in Australia under Article 4(3)(b) of the tax treaty between Australia and Singapore¹ (the Singapore Agreement) or equivalent provisions in other Australian tax treaties if it hires out substantial equipment under a hire-purchase agreement to an entity that uses the equipment in Australia.

2. This view applies in respect of other tax treaties with Australia as specified in paragraph 17 of this Determination.

3. For the purposes of this Determination, the term 'hire-purchase agreement' has the same meaning as in Taxation Ruling TR 2007/10.²

Date of effect

4. This Determination applies to income years commencing 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 agreed to before the date of issue of the Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).

Commissioner of Taxation

19 December 2007

Appendix 1 - Explanation

Explanation

5. Whilst the following explanation discusses Article 4(3)(b) of the Singapore Agreement, the reasoning applies equally to all other tax treaties containing an equivalent provision. These tax treaties are listed at paragraph 17 of this Determination.

6. Article 4(3)(b) of the Singapore Agreement provides that a Singapore enterprise is 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 enterprise.

7. The Full Federal Court in McDermott Industries (Aust) Pty Ltd v. Federal Commissioner of Taxation ³ (McDermott) held that a Singapore bareboat lessor of substantial equipment had a deemed permanent establishment in Australia under Article 4(3)(b) of the Singapore Agreement on the basis that the equipment was, by virtue of that lease, being used in Australia either by, or under contract with, the Singapore lessor.⁴

8. It has been suggested that there is no relevant distinction between a bareboat lease and a hire-purchase agreement, so the Court's reasoning in McDermott would apply equally to substantial equipment that is in Australia under a hire-purchase agreement with a Singapore enterprise.

9. Whether the elements of Article 4(3)(b) of the Singapore Agreement are satisfied in the case of a hire-purchase agreement is to be determined in accordance with the broad principles of treaty interpretation⁵. In taking a liberal approach where the rules of construction are not as precise as for domestic provisions, gaps and ambiguities in applying the provisions of a treaty are to some extent to be accommodated in a way that addresses the context of the provision and meets the object and purpose of the tax treaty.⁶

10. The Singapore Agreement does not have any direct references to hire-purchase agreements, nor does the relevant extrinsic material provide any insight into the interpretation to be given to Article 4(3)(b), particularly for instances involving hire-purchase agreements, both in respect of Article 4(3)(b) itself and in the context of the Singapore Agreement as a whole.

11. There is no change in legal ownership under a hire-purchase agreement until the option to purchase is exercised. The Court in McDermott took a broad view of the scope of the expression 'used ... by, for or under contract with'. On the face of it, a hire-purchase agreement could be seen as a type of contract under which equipment is 'used' by its owner in the sense contemplated by the Court. However, the Commissioner considers that, on balance, a number of factors weigh against this conclusion.

12. Firstly, nothing in the decision in McDermott suggests that the Court had considered the issue in relation to hire-purchase agreements either directly or indirectly.

13. Secondly, a relevant consideration is the treatment of hire-purchase agreements in paragraph 9 of the Commentary on Article 12 of the 1977 OECD Model Double Taxation Convention on Income and on Capital. Although Article 12 dealt with a different subject matter, namely the taxation of equipment leasing under the royalties definition in the Model Convention, the context is relevant in that the Commentary outlines a distinction for treaty purposes between sale and hire that is not solely dependent on the legal form of a transaction. A hire-purchase agreement is given as a specific example of a transaction that should be treated as a sale for the purposes of the Royalties Article. In the absence of any contrary factors, this approach is also relevant when determining the treatment to be provided for Article 4(3)(b) of the Singapore Agreement purposes.

14. Thirdly, in a number of contexts Australian domestic law expressly treats a hire-purchase agreement as though it were an initial sale of the equipment together with a loan arrangement. See section 128AC of the Income Tax Assessment Act 1936 and Divisions 40 and 240 of the Income Tax Assessment Act 1997. This of course does not compel a similar conclusion in the treaty context in the absence of an equivalent deeming provision but, other things being equal, it would be broadly desirable, so far as the respective texts allow, to interpret Article 4(3)(b) of the Singapore Agreement in a manner that gives consideration to the approach taken under domestic law.

15. Therefore, given that there is no express guidance in the treaty itself and based on the abovementioned contextual considerations, the Commissioner considers that when applying Article 4(3)(b) of the Singapore Agreement to a hire-purchase agreement involving substantial equipment, the agreement should be treated as, in effect, an initial sale of the equipment together with a loan arrangement. This approach is considered to resolve ambiguity in applying the tax treaty provision in a way that is consistent with the context in which the provision exists and the underlying object and purpose of the tax treaty.

16. As the substantial equipment is treated as if it has initially been disposed of by the Singapore enterprise for the purposes of Article 4(3)(b) of the Singapore Agreement, it is not used in Australia, by, for or under contract with the Singapore enterprise and the enterprise is not deemed to have a permanent establishment in Australia.

17. This approach is not limited to Article 4(3)(b) of the Singapore Agreement but also applies in respect of the tax treaties specified below:

Footnotes

Other References 
OECD Committee on Fiscal Affairs for the Organisation for Economic Co-operation and Development, Model Tax Convention on Income and Capital, Paris, 1977 published version