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4.1.1. The Concept of a Permanent Establishment

The Australian domestic concept of a permanent establishment (PE), which is also generally followed in most of Australia’s tax treaties, is generally consistent with the OECD tax treaty definition of a PE, but with a few notable exceptions that give it a broader scope compared to the Model. In subsection 6(1) of the ITAA 1936, the term "permanent establishment" is defined in general in relation to a person as "a place at or through which the person carries on any business".

In particular, a PE includes the following:

  • a place where the person is carrying on business through an agent;
  • a place where the person has, is using or is installing substantial equipment or substantial machinery;
  • a place where the person is engaged in a construction project; and
  • where the person is engaged in selling goods manufactured, assembled, processed, packed or distributed by another person for, or at or to the order of, the first mentioned person and either of those persons participates in the management, control or capital of the other person or another person participates in the management, control or capital of both of those persons—the place where the goods are manufactured, assembled, processed, packed or distributed. In such cases, the person is deemed to be carrying on, through that other person, the business of selling the goods manufactured, assembled, processed, packed or distributed by that other person.

A PE excludes the following:

  • a place where the person is engaged in business dealings through a bona fide commission agent or broker who, in relation to those dealings, acts in the ordinary course of his or her business as a commission agent or broker and does not receive remuneration otherwise than at a rate customary in relation to dealings of that kind, not being a place where the person otherwise carries on business;
  • a place where the person is carrying on business through an agent. For this condition to be met, the place must not be one where the person otherwise carries on business and the agent must (a) not have or habitually exercise a general authority to negotiate and conclude contracts on behalf of the person, or (b) though having an authority to fill orders on behalf of the person from a stock of goods or merchandise situated in the country where the place is located, does not exercise that authority regularly; or
  • a place of business maintained by the person solely for the purpose of purchasing goods or merchandise.

The phrase "a place at or through which person carries on any business" as interpreted by the Commissioner of the ATO, is set out in the latter’s Taxation Ruling TR 2002/5. According to the ruling, the place at or through which a person carries on business must have an element of permanence in both a geographic and temporal sense. Geographically, such permanence may be evidenced through business premises, including a factory, office, farm, mine or market. Furthermore, though the business need not be operated in the place for a permanent period of time, the business presence must not be purely temporary in nature. Purely as a general guide, a business that operates at or through a place for a continuous period of 6 months or more is considered to be temporally permanent. However, a shorter duration may still be treated as meeting this requirement based on other factors, such as where the business is not set up merely for a temporary purpose or where it returns to a particular location in the country on an on-going and regular basis but for short periods each time. In any case, whether such permanence exists is a question of fact and degree to be construed in the context of the business concerned.