Draft Taxation Determination
TD 2010/D1
Income tax and fringe benefits tax: can a non-resident employer be:
(a) required to withhold amounts from salary and wages paid to an Australian resident employee for work performed overseas under section 12-35 of Schedule 1 to the Taxation Administration Act 1953?
(b) subject to obligations under the Fringe Benefits Tax Assessment Act 1986 in relation to benefits provided to an Australian resident employee in relation to work performed overseas?
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Please note that the PDF version is the authorised version of this draft ruling.This document has been finalised by TD 2011/1.There is a Compendium for this document: TD 2011/1EC .
This publication provides you with the following level of protection:
This publication is a draft for public comment. It represents the Commissioner's preliminary view about the way in which a relevant taxation provision applies, or would apply to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. You can rely on this publication (excluding appendixes) to provide you with protection from interest and penalties in the following way. If a statement turns out to be incorrect and you underpay your tax as a result, you will not have to pay a penalty. Nor will you have to pay interest on the underpayment provided you reasonably relied on the publication in good faith. However, even if you don't have to pay a penalty or interest, you will have to pay the correct amount of tax provided the time limits under the law allow it. |
Ruling
Pay as You Go Withholding
2. A non-resident employer who pays an Australian resident for work performed overseas is subject to withholding obligations if the non-resident employer has a sufficient connection with Australia.
3. The nature of a sufficient connection is a matter of statutory interpretation having regard to the Pay As You Go (PAYG) Withholding provisions in the Taxation Administration Act 1953 (TAA). Where a non-resident employs an Australian resident for work performed overseas that employer will have a sufficient connection to Australia if they have a physical business presence in Australia. A non-resident entity will have a physical business presence in Australia if the non-resident carries on an enterprise or income producing activities (or part of such enterprise or activities) in Australia and has a physical presence in Australia.
Fringe benefits tax
4. If there is a withholding obligation, obligations under the Fringe Benefits Tax Assessment Act 1986 (FBTAA) will arise in relation to benefits provided to that employee. If there is no withholding obligation, amounts paid to the employee by the non-resident employer will not be 'salary and wages' as defined in subsection 136(1) of the FBTAA and no obligations under the FBTAA can arise for the non-resident employer in relation to benefits provided to that employee.
Example 1
5. Sheree is an Australian resident for tax purposes. She is employed as a project manager working in the Australian operations of a non-resident consultancy company. The company transfers her overseas for 5 months to work on a new consultancy project. The company continues to carry on business and maintains a physical presence in Australia. Sheree's wages are assessable income in Australia. The company has an obligation to withhold an amount for Australian tax purposes from the salary paid to her.
6. Sheree is provided with a car while overseas and is reimbursed for some additional living expenses. As amounts must be withheld from her salary, the employer would have obligations under the FBTAA in respect of the benefits provided to her.
Example 2
7. Raj is an Australian resident for tax purposes. While on a 6 month backpacking holiday overseas, she works as a fruit-picker for a local family-owned business. She is paid by the hour and given free board and lodgings. Her employer has no staff or operations in Australia, and therefore no connection with Australia. Raj's wages are assessable income in Australia. However, her employer has no obligation to withhold Australian tax from the wages paid to her. As there is no obligation to withhold, no obligations under the FBTAA can arise to her employer in respect of the board and lodgings provided.
Example 3
8. Laurren is an Australian resident for tax purposes. She works for an Australian subsidiary of an international hotel chain as an events manager. Under an incentive program for high performing staff, she is offered a 6 month overseas secondment with the group's global parent company. The parent company is a non-resident for tax purposes and does not carry on business in Australia. While on secondment she will be employed and paid by the parent company. Her employer, being the non-resident parent company not carrying on business in Australia and with no physical presence in Australia, has no obligation to withhold Australian tax from the salary paid to her. As there is no obligation to withhold, no obligations under the FBTAA can arise to her employer in respect of any benefits provided to her.
Date of effect
9. When the final Determination is issued, it is proposed to apply both before and after its date of issue. However, the Determination will not apply to taxpayers 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 to 77 of Taxation Ruling TR 2006/10).
Commissioner of Taxation
28 April 2010
Appendix 1 - Explanation
| This Appendix is provided as information to help you understand how the Commissioner's preliminary view has been reached. It does not form part of the proposed binding public ruling. |
Explanation
10. Under section 12-35 of Schedule 1 to the TAA[1] an entity must withhold an amount from salary and wages, commissions, bonuses or allowances it pays to an individual as an employee (whether of that or another entity). However, pursuant to subsection 12-1(1), an entity need not withhold an amount under section 12-35 if the whole of the payment is exempt income of the employee.[2]
11. Australian law can be validly enacted with extra-territorial effect.[3] While there is a general presumption of statutory interpretation that a law is not intended to have extra-territorial operation,[4] this presumption can be displaced where there is a clear legislative intention for the law to apply outside Australia.[5] Such an intention can be found in specific statutory provisions or by necessary implication having regard to the policy, object or purpose of the law.[6]
12. The TAA does not expressly provide that its application is limited to events and circumstances within Australia; nor does the Act expressly provide that its operation is extra-territorial.[7] Section 12-35 uses terms that do not have a particular territorial aspect to their meaning and is also silent regarding matters of extra-territorial effect.
13. However, the stated object of the part of the Act which contains section 12-35[8] is to ensure the efficient collection of certain specified taxes, including income tax.[9] Residents are, broadly speaking, assessable on their worldwide employment income. Non-residents are, broadly speaking, assessable on their income earned in Australia.[10] As a means of collection of tax payable on employment income, which includes such foreign-sourced income and income earned by non-residents, the presumption against any extra-territorial operation is inconsistent with the purpose of PAYG employment withholding.
14. The manner of a law's operation outside Australia is also a matter of statutory interpretation. In considering whether a law operates extra-territorially and the manner of such operation, regard is had to the presumption that the law is not intended to extend to matters properly within the jurisdiction of a foreign law.[11] Unless there is a contrary intention, a sufficient connection with Australia is required.[12]
15. In Clark (Inspector of Taxes) v. Oceanic Contractors [1983] 1 All ER 133; [1983] 2 WLR 94; 13 ATR 901, the House of Lords examined the territorial effect of the UK equivalent of section 12-35.[13] It was held that a non-resident company is subject to withholding obligations where it has a trading presence in the United Kingdom. Lord Scarman said (at All ER 141; 13 ATR 909):
...the present case is concerned with the territorial limitation to be implied into a section which establishes a method of tax collection. The method is to require the person paying the income to deduct it from his payments and account for it to the Revenue. The only critical factor, so far as collection is concerned, is whether in the circumstances it can be made effective. A trading presence in the United Kingdom will suffice.[14]
16. Similarly, in the context of Australia's PAYG withholding provisions, the employment withholding obligation is to be construed as not limited to persons and events in Australia. However the application of that obligation to persons and events outside of Australia requires a sufficient connection with Australia.[15] The obligation to withhold does not apply where there is no such connection.
17. Whether there is a sufficient connection with Australia for PAYG withholding purposes depends on a consideration of individual facts and circumstances relevant to the purpose, nature and effect of the particular law. Having regard to the wording of section 12-35, matters relating to the entity making the payment, the individual receiving the payment, the employment relationship, and the payment itself are relevant.
18. In the case of a non-resident making a payment to an Australian resident for work performed overseas, there is a sufficient connection with Australia if the non-resident carries on an enterprise[16] or income producing activities (or part of such enterprise or activities) in Australia and has a physical presence in Australia (collectively referred to as a physical business presence). As the obligation to withhold is on the employer, the sufficient connection must be with the employer. The residency of the employee is not a matter that establishes a sufficient connection of the employer with Australia. The fact that the payment is made overseas does not establish that there is no sufficient connection with Australia.
19. A physical business presence in Australia may include having an office, business operations, trading presence and/ or employees in Australia. Owning real estate or other investments in Australia will not of itself be sufficient to create a relevant physical business presence of that payer in Australia. Likewise, merely having Australian clients without any office or employees located in Australia would not be sufficient to create a relevant physical business presence in Australia. A parent company, subsidiary or presence of an associate in Australia will not of itself mean the non-resident employer has a physical business presence in Australia except in the situation where the entity present in Australia:
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- carries on the Australian business of the non-resident employer; or
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- is the common law agent of the non-resident employer.
20. In addition, a non-resident employer who is registered for PAYG withholding under section 16-140 will have established a sufficient connection with Australia, being subject to Australia's PAYG withholding regime and required to pay amounts to the Commissioner under it.
21. Where the employer does have a sufficient connection to Australia for PAYG withholding purposes, the employer is required to withhold tax from salary and wages paid to an Australian resident employee for work performed overseas under section 12-35.
22. An administrative penalty may be imposed under section 16-30 equal to the amount that was not withheld as required. Failing to withhold an amount under section 12-35 when required to do so is a strict liability offence under section 16-25 attracting a penalty of 10 penalty units when this offence applies.[17]
Fringe benefits tax implications
23. Where a non-resident employer has a sufficient connection with Australia to have an obligation to withhold from payments made to an Australian resident employee for work performed overseas, it will also have obligations under the FBTAA in relation to any benefit provided to that employee. In these circumstances, the payment will be 'salary or wages' for the purposes of the terms 'current employer' and 'current employee' as defined in subsection 136(1) of the FBTAA. As a result, the non-resident employer and the Australian resident employee will be an 'employer' and an 'employee' respectively as these expressions are defined in subsection 136(1) of the FBTAA.
Other matters
24. As a practical matter, it is considered that the circumstances giving rise to an obligation to withhold will be infrequently encountered. In many common situations where Australian resident taxpayers work overseas, the non-resident employer is unlikely to have a physical business presence in Australia. The circumstances are most likely to arise in the case of a multinational business which carries on business in Australia.
25. If amounts are paid by an entity other than the non-resident employer to a person as employee of the foreign employer working overseas any withholding obligation by that payer entity must be separately considered from the perspective of that payer.
26. There is no withholding obligation where a payment is wholly exempt from tax pursuant to a double tax agreement.[18]
Appendix 2 - Your comments
27. You are invited to comment on this draft Determination. Please forward your comments to the contact officer by the due date.
28. A compendium of comments is also prepared for the consideration of the relevant Rulings Panel or relevant tax officers. An edited version (names and identifying information removed) of the compendium of comments will also be prepared to:
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- provide responses to persons providing comments; and
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- publish on the Tax Office website at www.ato.gov.au.
Please advise if you do not want your comments included in the edited version of the compendium.
| Due date: | 28 May 2010 |
| Contact officer details have been removed following publication of the final ruling. | |
Footnotes
All legislative references are to Schedule 1 of the TAA unless otherwise stated.
Nor does the withholding obligation apply where a payment is non-assessable, non-exempt income - see section 12-1(1A).
See section 3 of The Statute of Westminster 1931 (UK) adopted in Australia by the Statute of Westminster Adoption Act 1942; New South Wales v. Commonwealth [1975] HCA 58; (1975) 135 CLR 337, in particular the judgement of Jacobs J at CLR 497-498; Trustees Executors & Agency Co Ltd v. Federal Commissioner of Taxation (1933) 49 CLR 220; [1933] HCA 32; per Evatt J at CLR 235. Note also the comments of Mason J in Koowarta v. Bjelke-Petersen [1982] HCA 27; (1982) 153 CLR 168 at CLR 223.
This presumption was explained by O'Connor J in Jumbunna Coal Mine NL v. Victorian Coal Miners' Association [1908] HCA 87; (1908) 6 CLR 309 at CLR 363 as follows:
In the interpretation of general words in a Statute there is always a presumption that the legislature does not intend to exceed its jurisdiction. Most Statutes, if their general words were to be taken literally in their widest sense, would apply to the whole world, but they are always read as being prima facie restricted in their operation within territorial limits.See further for example Dixon CJ in R v. Foster; Ex parte Eastern and Australian Steamship Co Ltd [1959] HCA 10; (1959) 103 CLR 256 at CLR 275.See also Paragraph 21(1)(b) of the Acts Interpretation Act 1901, which gives statutory recognition to this presumption.
For example, in Birmingham University and Epsom College v. Federal Commissioner of Taxation [1938] HCA 57; (1938) 60 CLR 572, the High Court found that section 21(1)(b) of the Acts Interpretation Act did not apply to restrict the territorial application of a particular taxation exemption where the corresponding taxing provision was expressed to apply to non-residents of Australia and to foreign income of Australian residents.
Isaacs J in Morgan v. White [1912] HCA 50; (1912) 15 CLR 1 at 13; Kumagai Gumi Co Ltd v. Federal Commissioner of Taxation (1999) 161 ALR 699; [1999] FCA 235 per Hill J at ALR 707.
Section 3 of the TAA provides that the Act extends to every external Territory. Section 17 of the Acts Interpretation Act 1901 together with section 122 of the Commonwealth of Australia Constitution Act 1901 defines external Territory to broadly mean Territories not otherwise included within Australia, which are governed by the Commonwealth of Australia, such as Norfolk Island. Notwithstanding that section 3 extends the operation of the TAA to these external Australian Territories, it does not prevent the broader extraterritorial application of provisions within the TAA where it is required either expressly or by necessary implication (see for instance section 255-40, Division 263 and subsection 284-145(3) of the Income Tax Assessment Act 1997 (ITAA 1997)).
Part 2-5.
Section 11-1 of Schedule 1 to the TAA. See paragraph 11-1(a) and the Income Tax Act 1986 which imposes income tax and under section 4 incorporates the Income Tax Assessment Act 1936 (ITAA 1936) (which itself includes the ITAA 1997 under the definition of 'this Act' in section 6).
See section 6-5 of the ITAA 1997. Section 23AG of the ITAA 1936 provides an exemption for residents in limited circumstances in respect of their foreign service income. Amendments applying from 1 July 2009 have narrowed the type of foreign service covered by this exemption.
When looking to the manner in which a law may apply extra-territorially, a specific application of the general assumption against legislation operating extra-territorially is the presumption that general words do not extend to cases governed by foreign law: Pearce, DC and Geddes, RS, 2006, Statutory interpretation in Australia, 6th edn, Butterworths, Australia, p. 171. This is also referred to as the comity of nations. For example, in XYZ v. Commonwealth (2006) 227 CLR 532; [2006] HCA 25, the High Court considered legislation which expressly provided for extra territorial application. The High Court stated:
Legislation, including criminal legislation, is commonly expressed without territorial reference, and is construed and applied on the understanding 'that the legislature of a country is not intending to deal with persons or matters over which, according to the comity of nations, the jurisdiction properly belongs to some other sovereign or State': [Niboyet v. Niboyet (1878) 4 PD 1 at 7, cited by Dixon J in Barcelo v. Electrolytic Zinc Co of Australasia Ltd [1932] HCA 52; (1932) 48 CLR 391 at 424. See also R v. Jameson [1896] 2 QB 425 at 430 per Lord Russell of Killowen CJ]. This legislation is expressed to apply to conduct outside Australia, but only where engaged in by persons over whom Australia, according to the comity of nations, has jurisdiction.
See Wanganui-Rangitikei Electric Power Board v. Australian Mutual Provident Society (1934) 50 CLR 581 and Kay's Leasing Corporation Pty Ltd v. Fletcher (1964) 116 CLR 124.
Section 204 of the Income and Corporations Tax Act 1970 (UK).
The other two Lords in the majority in the decision in Clark (Inspector of Taxes) v. Oceanic Contractors [1983] 1 All ER 133; [1983] 2 WLR 94 gave different reasons for reaching the same conclusion as Lord Scarman. Lord Wilberforce gave emphasis to the fact that the payer entity was within the UK company tax system. Lord Roskill adopted the reasons of both Lord Scarman and Lord Wilberforce without indicating which analysis he preferred. Lord Roskill did however indicate that he was attracted to the view that if the employee's income was subject to taxation in the UK, that would be sufficient connection for the purposes of the PAYE provisions to apply.
Trustees Executors & Agency Co Ltd v. Federal Commissioner of Taxation [1933] HCA 32; (1933) 49 CLR 220 per Evatt J at CLR 239:
The extent of extra-territorial jurisdiction permitted, or rather not forbidden, by international law cannot always be stated with precision. But certainly no State attempts to exercise a jurisdiction over matters or things with which it has absolutely no concern.Re Trade Practices Commission v. Australia Meat Holdings Pty Limited 83 ALR 299 per Wilcox J at 355.
As defined in section 9-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Section 3AA of the TAA incorporates the definitions from the ITAA 1997. Section 995-1(1) of the ITAA 1997 defines enterprise to have the meaning given by section 9-20 of the GST Act.
At the time this draft Determination was issued the value of penalty unit was $110: see section 4AA of the Crimes Act 1914. Whilst the Criminal Code applies to this offence (see section 2A of the TAA), it is noted for completeness that where the non-resident employer has a registered office or a head or principal office in Australia the failure to withhold can be taken to have been committed in Australia: see subsection 8ZC(2) of the TAA.
Nor does the withholding obligation apply where a payment is exempt income or non-assessable, non-exempt income pursuant to a provision of the domestic tax law (for instance section 23AG of the ITAA 1936).
Not previously issued as a draft
References
ATO references:
NO 1-1Y12AEA
Related Rulings/Determinations:
TR 2006/10
Subject References:
Australians overseas
foreign salary and wages
fringe benefits tax
non-resident employers
overseas employers
PAYG
salary and wages income
Legislative References:
FBTAA 1986
FBTAA 1986 136(1)
ITAA 1936
ITAA 1936 6
ITAA 1936 23AG
ITAA 1997
ITAA 1997 6-5
ITAA 1997 995-1(1)
TAA 1953
TAA 1953 2A
TAA 1953 3
TAA 1953 3AA
TAA 1953 8ZC(2)
TAA 1953 Sch 1 Pt 2-5
TAA 1953 Sch 1 Div 263
TAA 1953 Sch 1 11-1
TAA 1953 Sch 1 12-1
TAA 1953 Sch 1 12-1(1)
TAA 1953 Sch 1 12-1(1A)
TAA 1953 Sch 1 12-35
TAA 1953 Sch 1 16-25
TAA 1953 Sch 1 16-30
TAA 1953 Sch 1 16-140
TAA 1953 Sch 1 255-40
TAA 1953 Sch 1 284-145(3)
ANTS(GST)A 1999 9-20
Acts Interpretation Act 1901 17
Acts Interpretation Act 1901 21(1)(b)
Commonwealth of Australia Constitution Act 1901 122
Crimes Act 1914 4AA
Income Tax Act 1986
Income Tax Act 1986 4
Income Tax Act 1986 6
Income Tax Act 1986 11-1(a)
Statute of Westminster Adoption Act 1942
The Statute of Westminster 1931 (UK) 3
Income and Corporations Tax Act 1970 (UK) 204
Case References:
Barcelo v. Electrolytic Zinc Co of Australasia Ltd
[1932] HCA 52
(1932) 48 CLR 391
Birmingham University and Epsom College v. Federal Commissioner of Taxation
[1938] HCA 57
(1938) 60 CLR 572
Clark (Inspector of Taxes) v. Oceanic Contractors
[1983] 1 All ER 133
[1983] 2 WLR 94
13 ATR 901
Jumbunna Coal Mine NL v. Victorian Coal Miners' Association
[1908] HCA 87
(1908) 6 CLR 309
Kay's Leasing Corporation Pty Ltd v. Fletcher
(1964) 116 CLR 124
Koowarta v. Bjelke-Petersen
[1982] HCA 27
(1982) 153 CLR 168
Kumagai Gumi Co Ltd v. Federal Commissioner of Taxation
[1999] FCA 235
(1999) 90 FCR 274
(1999) 161 ALR 699
99 ATC 4316
(1999) 41 ATR 363
Morgan v. White
[1912] HCA 50
(1912) 15 CLR 1
New South Wales v. Commonwealth
[1975] HCA 58
(1975) 135 CLR 337
Niboyet v. Niboyet
(1878) 4 PD 1
R v. Foster; Ex parte Eastern and Australian Steamship Co Ltd
[1959] HCA 10
(1959) 103 CLR 256
R v. Jameson
[1896] 2 QB 425
Re Trade Practices Commission v. Australia Meat Holdings Pty Limited
(1988) 83 ALR 299
[1988] FCA 244
Trustees Executors & Agency Co Ltd v. Federal Commissioner of Taxation
[1933] HCA 32
(1933) 49 CLR 220
Wanganui-Rangitikei Electric Power Board v. Australian Mutual Provident Society
(1934) 50 CLR 581
XYZ v. Commonwealth
[2006] HCA 25
(2006) 227 CLR 532
Other References:
Pearce, DC and Geddes, RS 2006, Statutory interpretation in Australia, 6th edn, Lexis Nexis, Australia