Case U162

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 5 August 1987.

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P.M. Roach (Senior Member)

During the years of income ended 30 June 1982 and 1983 a gifted athlete (Player) came to Australia from his home in the United States of America and played some golf. He was in Australia for 24 days in the first of those years and 28 days in the other. As a result he generated substantial income. (In presenting these reasons I shall refer to all amounts of money as calculated in $A, converted (where appropriate) at the then current rates of exchange: $A1.15 to $US1.00 (1982) and $A1.03 to $US1.00 (1983). Further, the figures to be cited will not be the figures established by the evidence, but will be the figures referred to in evidence multiplied by a factor not referred to in these reasons. The value of that factor should be readily established by the parties.) In the year ended 30 June 1982 the personal actions and identity of Player generated income from within Australia of $33,210 by way of tournament participation and sponsorship. In the following year the figure was $75,577.

2. The case was presented on the basis that the income so generated was not derived by Player but by a company (Gamesco) incorporated in the United States of America and wholly owned by Player. In the case before me there was no suggestion on the part of the Commissioner that the arrangement was ineffective despite the decisions of the High Court of Australia in F.C. of T. v. Gulland: Watson v. F.C. of T.;
Pincus v. F.C. of T. 85 ATC 4765; nor by reference to the decision of a Full Bench of the Federal Court of Australia in
Tupicoff v. F.C. of T. 84 ATC 4851. Gamesco was incorporated in the United States of America and was not registered as a foreign company in any State or Territory of Australia. Player was a director of Gamesco but it was not established what other persons (if any) were directors or officers of Gamesco. At all material times it was agreed between Gamesco and Player that Player would be employed by Gamesco; that Gamesco would have the right to market Player's "endorsement"; and, further, that he would "play professional golf exclusively for and on behalf of (Gamesco) at such times, in such places and in such tournaments, exhibitions and appearances within the Territory as (Gamesco) may require". "Territory" was not defined by the

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agreement, but I think that in all the circumstances it is reasonable to conclude, and I so find, that it was regarded as encompassing the entirety of the globe. The agreement provided for a substantial annual base salary (to be reviewed annually); plus an annual performance bonus; plus an obligation in Gamesco to contribute to, and an entitlement in Player to benefit from, a "Money Purchase Pension Plan" and a "Retirement Plan" both to be further mentioned hereafter. Gamesco was to pay for, or reimburse Player for, all necessary and reasonable expenses incurred in connection with the performance of his duties, including hotel, meals and travel expenses.

3. I observe that there was nothing expressly provided in the agreement obliging Gamesco to be represented in Australia at any time. Nor did it have any obligation in relation to the events which were later to generate assessable income in Australia to be in any way present in or represented in Australia.

4. Two other companies were engaged in relevant activities. The first was a company incorporated in the United States of America which I shall refer to as "Sporting Managers International". There is nothing in the evidence before me to suggest that Player directly or indirectly had any control over its affairs or those of its Australian subsidiary "Sporting Managers Australia". Upon the evidence before me, given by a director of Sporting Managers Australia, I am satisfied that Sporting Managers International provided management and promotional services in relation to the affairs of such persons as Player. Under that arrangement and in accordance with predetermined norms, they sought income-earning activities for Gamesco, with the income to be generated by the personal skills and reputation of Player. With the consent of Gamesco, they arranged on behalf of Gamesco for Player to appear in tournaments throughout the world and to provide sponsorship. For their services, they were paid by Gamesco a substantial fee by way of commission. Sporting Managers International had its headquarters in the United States of America and its central management and control existed there. On the local scene it used subsidiaries and, in Australia, Sporting Managers Australia was such a subsidiary. Sporting Managers Australia had its own local board of directors, including directors from Sporting Managers International. It had its own executive officer and it also employed a secretary for him. It was responsible for all activity in Australia relating to the marketing and promotions arising out of Player's activities in Australia.

5. In the years in question, the relevant figures for the year for Gamesco internationally were as follows:

                                         30 June              30 June
                                           1982                 1983
                                             $                    $
      Prize money,
        appearances
        exhibitions                       432,059              270,678
      Merchandising                       127,840              134,029
      Reimbursed expenses                  17,210               14,720
      interest - dividends                 28,407               21,126
                                          -------              -------
                                          605,516              440,554
                                          -------              -------
      Management fees                     100,402               77,338
      Salary and bonus
      (incl. Pay-roll tax
        3181:3382)                        320,561              190,889
      Business travel,
      entertainment, car
      expenses, etc.                       34,120               38,662
      Taxes -
      State and property                    1,908                1,545
      foreign                              37,278               16,170
      Professional fees                       474                4,141
      Employee expenses -
      Pension plan                         62,978               59,224
      Money purchase                       11,706               11,982
      Medical expenses                        296                  839
      Administrative expenses               2,738               23,698
      Other expenses                       33,349               14,476
                                          605,808              438,784
      Net                                    (292)               1,770
      

6. Gamesco presented its income tax returns for those years to the Commissioner of Taxation based on those accounts but disclosing as relevant to Australia the following information:

                                        30 June              30 June
                                         1982                 1983
                                           $                    $
      Prize money,
        appearances,
        exhibitions,
        merchandising                    33,210


         75,577

        Merchandising
        Management fees                   8,299               18,895
        Tax agent and
        accountancy fees
        (Australia)                         330                  624
        Salary - proportion of
        salary, bonus and
        pay-roll taxes                    9,323               11,098
        General administrative
        expenses                          6,114               19,587
                                         24,066               50,204
        Taxable income returned           9,144               25,373
      

General and administrative expenses were apportioned by relating Australian source income to total income.

7. By doing so, Gamesco acknowledged a liability to tax in Australia on taxable incomes of $9,143 and $25,373. The Commissioner assessed the applicant. In doing so he adjusted the incomes returned and increased the taxable incomes to $13,220 and $37,034. It appears from the annotations to the first return that he made those adjustments without considering the relevance of any double taxation convention. The assessments which issued differed from the returns of income made by Gamesco in that the amounts allowed in relation to sums paid by Gamesco to the "money purchase plan" and "profit sharing plan" were reduced. The calculations made by the Commissioner reflected the Commissioner's view that, pursuant to the provisions of the Income Tax Assessment Act ("the Act"), and in particular sec. 82AAE thereof, the deductions allowable to the company should not exceed 5% of "Australian salary"; and that "Australian salary" did not exceed $9,323 and $11,100 in the two years in question.

8. Before embarking upon a consideration of the relevant legislation and tax convention, it must be recognised that, as the case was presented, there were difficulties in determining what findings of fact are appropriate. That arises because no direct evidence was available from witnesses, such as Player, as to the identity of the directors and officers of Gamesco; or of their activities in Australia and elsewhere, either while Player was in this country or at other times. Two affidavits were tendered as sworn in the United States of America by Player but, in so far as they contained statements such as "(Gamesco) does not carry on business in Australia" and "nor were any of its business or affairs managed from Australia during... the relevant period", I declined to admit them in evidence.

9. However, a consideration of the affidavits of Player (to the extent admitted); of the documents annexed to them; and of the evidence of the Australian director of Sports Managers Australia does enable me to find that International derives its large commission as a reward for promoting the individual and managing his appearances and other activities in the interests of Gamesco. However, I also accept that nothing can happen against the will of Player. I also find that, as Player is the sole stockholder in Gamesco, no differences arise between Player and the management of Gamesco.

10. I am not persuaded that I should find that Player was the only person to play a part in the management of Gamesco; or that Player did not conduct any negotiations between Gamesco and International or with others (whether introduced by International, or Gamesco, or anyone else) while in Australia. However, having said that, I think on the balance of probabilities that it is more likely than not that Player was the principal actor in the affairs of Gamesco and that its "controlling mind and will" was to be found in him. I further think it probable, and more probable than not, that while Player was in Australia he did participate in decisionmaking and in contractual negotiations as an officer of Gamesco in relation to tasks to be undertaken outside Australia, just as before coming to Australia negotiations for that visit occurred while he was outside this country.

11. Even so, I am satisfied that such activities as did occur did not involve the acquisition of any premises or facilities in Australia which by any fair use of language might be described as "business premises" or a "place of business". Taking into account the substantial organisation provided by International, I doubt that anything much needed to be carried out by Gamesco. In the absence of any other or further evidence, I find that Gamesco needed to do no more than secure the confirmation of Player that offers introduced to him by International and/or Gamesco were acceptable to him personally. Such confirmation could be had whenever an offer was communicated to Gamesco (represented by Player) and accepted by Gamesco (represented by Player). That

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required nothing more than that Player should be available to confer by telephone: something which could be done anywhere in the world wherever a telephone was available.

12. Although the evidence is slight, having regard to what is established about Player: his proficiency which enables him to generate gross earnings of vast amounts; the absence of any indication of the need for others to play any substantial part in the affairs of Gamesco; the absence of any indication that Gamesco employed anyone other than Player; and the absence of any indication that Gamesco incurred any expenses in relation to the operations in Australia of anyone other than Player and the tax agent to Gamesco, I find that it is more probable than not that, leaving aside the performance of his duties under the contract of employment with Gamesco, Player alone acted for Gamesco while he was in Australia; but that his activities were not limited to concern with the Australian affairs of Gamesco.

13. I also find that all the Australian income derived by Gamesco arose from the personal actions of Player, whether in participating in competition or in lending his name or image to the affairs of others by displaying their equipment or extolling their products. I further find that that relationship extended to all of the income (other than property income) derived from all sources throughout the globe by Gamesco in the two years in question.

14. As the matter was argued before me, the contentions of the applicant were that:

• (a) despite having submitted itself to assessment to income tax, the entirety of the income of the applicant, and, in particular, so much of it as was derived in Australia was exempt from taxation by force of the Double Tax Convention of 1953 between the United States of America and the Commonwealth of Australia; and, alternatively
• (b) that the deductions claimed against the income returned should be wholly allowed by force of the same Convention; and, alternatively
• (c) that a greater sum should have been allowed as deductible pursuant to the provisions of sec. 82AAC, 82AAE and 82AAR.

On the other hand the Commissioner contends that the Double Tax Convention had no application in the circumstances and, in particular, had no application such as would allow the taxable income of the applicant to be assessed at any lower figure than had been assessed.

15. The starting point must be a consideration of the Income Tax (International Agreements) Act 1953, described by its preamble as "An Act to give the force of Law to certain Conventions and Agreements with respect to Taxes on Income, and for purposes incidental thereto".

Section 4(1) provided:

"Subject to subsection (2), the Assessment Act is incorporated and shall be read as one with this Act."

Section 4(2) provided:

"The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than section 160AO or Part IVA of that Act) or in an Act imposing Australian tax."

Section 6 empowered the making of a Convention between the Commonwealth and the United States of America in relation to taxation matters and such a Convention was entered into in 1953. It was in force at all material times. Article III(2) of that Convention provided:

"(2) A United States enterprise shall not be subject to Australian tax in respect of its industrial or commercial profits unless it is engaged in trade or business in Australia through a permanent establishment in Australia. If it is so engaged, Australian tax may be imposed upon the entire income of that enterprise from sources within Australia."

The terms in that Article were defined by Art. II(1) as follows:

"1. In this Convention, unless the context otherwise requires -

• ...
• (g) the term `United States resident' means any individual who is resident in the United States for the purposes of United States tax and not a resident of

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  ATC 947

  Australia, and any United States corporation and any partnership created or organized in or under the laws of the United States, being a corporation or partnership which is not a resident of Australia;
• ...
• (k) the term `United States enterprise' means an industrial or commercial enterprise or undertaking carried on by a United States resident;
• ...
• (m) the term `United States corporation' means a corporation, association or other like entity created or organized in or under the laws of the United States;
• (n) the term `industrial or commercial profits' includes the profits of an industrial or commercial enterprise or undertaking but does not include income in the form of dividends, interest, rent, royalties, management charges, remuneration for personal services, or income from the operation of ships or aircraft;
• (o) the term `permanent establishment' means a branch, agency, management or fixed place of business and includes a factory, workshop, mine, oilwell, office or agricultural or pastoral property, or the use or installation of substantial equipment or machinery by, for, or under contract with, an enterprise of one of the Contracting States. Where an enterprise or a resident of one of the Contracting States -
  • (i) carries on business dealings in the other Contracting State through a bona fide commission agent or broker acting in the ordinary course of his business as such and receiving remuneration in respect of those dealings at the rate customary in the class of business in question; or
  • (ii) maintains in that other State a fixed place of business exclusively for the purchase of goods or merchandise; or
  • (iii) has a subsidiary corporation which is engaged in trade or business in that other State, whether through a permanent establishment or otherwise; or
  • (iv) has an agent in that other State (other than an agent who has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of that enterprise, or regularly fills orders on its behalf from a stock of goods or merchandise located in that other State),

  that enterprise or resident shall not, merely by reason thereof, be deemed to have a permanent establishment in that other State."

16. For reasons already stated, I am satisfied that the applicant is a "United States Corporation". I also find that the income derived by it as a result of the activities of Player in Australia was the income of "a commercial enterprise or undertaking carried on by a United States resident" so as to constitute a "United States enterprise".

17. Having reached that conclusion, it is then necessary to consider whether, in carrying on business in Australia as it did, the applicant was "engaged in trade or business in Australia through a permanent establishment in Australia". The mere fact that it carried on some business dealings in Australia alone does not require that it be "deemed to have" a permanent establishment in Australia. However, that principle falls far short of resolving the problem. The critical words are those defining "permanent establishment" in a positive way. Such an establishment may include "a factory, workshop, mine, oilwell, office or agricultural or pastoral property", but in my judgment the activities of the applicant in Australia did not encompass anything in any of those categories. A permanent establishment may exist by reason of "the use or installation of substantial equipment or machinery...", but in my judgment that is not an apt expression to describe a set of golf clubs or anything else associated with the Australian endeavours of the applicant or Player. It follows that, if the applicant was engaged in trade or business in Australia through a "permanent establishment", it is because it had in Australia "a branch, agency, management or fixed place of business...". In my view, it did not have any of those things. Its only association with Australia in the two years was through the

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presence of Player and, later, its concern with the assessments of income tax.

18. Having reached that conclusion, it is unnecessary that I should consider other possibilities raised by the arguments advanced at the hearing.

19. Having determined that the entirety of the income derived from sources in Australia by the applicant was exempt income, the next question to be addressed is what order should be made. The applicant submitted itself to taxation in Australia. It was only when the Commissioner assessed the applicant as having derived a larger income than that contended for by the Commissioner that the applicant objected. In doing so (inter alia) it objected "that the company is a resident of the United States of America and is exempt from Australian tax under Art. 3 of the Double Tax Convention between Australia and the United States of America, and that the assessment should accordingly be withdrawn".

20. It follows that, although it had invited an assessment in the same return - in so far as any return can be said to "invite" assessment - upon objection it challenged any right in the Commissioner to issue any assessment. For the reasons I have stated I consider that view to be well founded. Accordingly, the order of the Tribunal will be that the determination of the Commissioner upon the objections under review be varied and that in lieu thereof the objections of the applicant be wholly allowed.