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ATO to allow refunds of royalty withholding tax — Orbitax Tax News & Alerts

The Australian Taxation Office (ATO) has indicated that, following the Full Federal Court's decision in McDermott Industries (Aust) P/L v FC of T[2005] FCAFC 67, affected taxpayers may request for refunds of royalty withholding tax.

By way of background, in the McDermott case, a Singaporean resident leased barges to an Australian resident for use in Australian waters. The Full Federal Court decided, in favour of the taxpayer, that the Singaporean resident had a permanent establishment (PE) in Australia under Art. 4(3)(b) of the Australia-Singapore income tax treaty, as substantial equipment was used in Australia by, for, or under contract. The Commissioner was unsuccessful in obtaining special leave from the High Court to appeal the decision; accordingly, the Full Federal Court's decision stands.

In its press release on 18 April 2006, the ATO stated that as a result of the decision, foreign residents of many treaty partner countries conducting enterprises as lessors or sublessors of substantial equipment used in Australia are likely to be deemed to have a PE in Australia. As such, these foreign residents will not be liable to royalty withholding tax on their lease payments and any such tax previously paid will be refunded, upon a written request to the ATO.

The release also mentions that if a foreign resident has a PE in Australia, profits attributable to the PE will be subject to tax in Australia.

Further, the ATO is examining whether other foreign residents, such as finance lessors and mortgagors of substantial equipment may also have a deemed PE in Australia in light of the McDermott decision.