ATO Interpretative Decision

ATO ID 2002/181

Income Tax

• This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
  Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.

Issue

Is a non-resident taxpayer's employment income assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) where the taxpayer only works intermittently in Australia.

Decision

Yes. Only the Australian sourced employment income will be included in the taxpayer's assessable income under section 6-5 of the ITAA 1997.

Facts

An Australian resident company has employed the taxpayer who is a resident of the United States of America (USA).

The taxpayer's employment contract requires the taxpayer to spend 2 months working in the USA and 1 month working in Australia on an alternating basis.

The taxpayer is a not a resident of Australia for tax purposes.

Reasons for Decision

Subsection 6-5(3) of the ITAA 1997 provides that ordinary income derived by a non resident directly or indirectly from Australian sources, as well as other ordinary income included by a provision on a basis other than having an Australian source, is assessable. Statutory income from all Australian sources, or included by a provision on a basis other than having an Australian source, is also included in a non resident's assessable income under section 6-10(5) of the ITAA 1997.

Salary and wages are ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

Generally, Australian courts have held that the source of employment income is where the employee performs their duties (C of T (NSW) v. Cam and Sons Ltd (1936) 36 SR (NSW) 544; 4 ATD 32 and FC of T v. French (1957) 98 CLR 398; (1957) 7 AITR 76; 11 ATD 288). The courts also confirmed that it is appropriate to apportion income earned to reflect the source of income. Thus, employment income earned while carrying out duties in Australia is considered to be sourced in Australia. Employment income earned while being carried out overseas is considered to be sourced in that overseas country, unless it is merely incidental to the performance of the taxpayer's duties in Australia.

In determining the liability to tax on Australian sourced income received by a non resident, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Schedule 2 to the Agreements Act contains the double tax agreement between Australia and the USA (the United States Convention). The United States Convention operates to avoid the double taxation of income received by Australian and USA residents.

Paragraph (1) of Article 15 of the United States Convention provides that salary and wages derived by a USA resident for employment exercised in Australia may be taxed in Australia.

However paragraph (2) of Article 15 of the United States Convention provides that the income will only be taxed in the USA if:

(a)

the taxpayer is present in Australia for a period or periods not exceeding 183 days in the Australian income year;

(b)

the remuneration is paid by, or on behalf of, an employer or company who is not a resident of Australia; and

(c)

the remuneration is not deductible in determining taxable profits of a permanent establishment, a fixed base or a trade or business which the employer or company has in Australia.

As the taxpayer's employer is an Australian resident for tax purposes, the conditions for this exception to operate will not be met.

The non resident taxpayer receives salary and wage income for intermittent periods of employment in Australia. Under the United States Convention, the salary and wages paid by the taxpayer's Australian employer may be taxed in Australia. The employment income will need to be apportioned and the Australian component included in the taxpayer's assessable income under section 6-5 of the ITAA 1997.

Year of income:  Year ended 30 June 2001 Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 6-5
   subsection 6-5(3)

Case References:
C of T (NSW) v. Cam and Sons Ltd
    (1936) 36 SR (NSW) 544
   4 ATD 32

Keywords
Double tax agreements
United States
Foreign source income
Personal exertion income
Personal services income

Siebel/TDMS Reference Number:  DW226152

Business Line:  Small Business/Individual Taxpayers

Date of publication:  28 February 2002

ISSN: 1445-2782