ATO Interpretative Decision

ATO ID 2003/1078

Income Tax

• This ATOID has been amended to remove references in the Reasons for Decision to repealed legislation dealing with foreign tax credit rules. With effect from 1 July 2008 the foreign tax credit system will be replaced by the foreign tax offset system.
  This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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

Are the salary and wages received by a taxpayer, who is both a resident of Australia and the United States (US) for income tax purposes, assessable under subsection 6-5(2) of Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The salary and wages received by the taxpayer, who is both a resident of Australia and the US for income tax purposes, are assessable under subsection 6-5(2) of the ITAA 1997.

Facts

The taxpayer is a citizen of Australia.

The taxpayer is a resident of Australia and the US for income tax purposes.

The taxpayer receives salary and wages from a US employer.

The taxpayer has a permanent home available to him in Australia and does not have a permanent home available in the US.

The taxpayer has spent in excess of 183 days in the US.

Reasons for Decision

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

In determining liability to Australian tax on foreign sourced income 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).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one.

Schedule 2 to the Agreements Act contains the double tax convention between Australia and the US (the US Convention). Schedule 2A to the Agreements Act contains the US Protocol amending the US Convention (US Protocol). The US Convention and the US Protocol operate to avoid the double taxation of income received by Australian and US residents.

Article 4(2) of the US Convention provides rules (the 'tie-breaker' rules) to ensure that a dual resident individual is treated as a resident of only one of the countries for the purposes of the US Convention. A dual resident individual is an individual who is a resident of both Australia and the US for income tax purposes.

Article 4(2)(a) of the US Convention provides that an individual shall be deemed to be a resident of the country in which they have a permanent home. For the purposes of this paragraph, in determining an individual's permanent home, regard shall be given to the place where they dwell with their family.

As the taxpayer has a permanent home in Australia but not the US, the taxpayer will be deemed to be a resident of Australia under Article 4(2)(a) of the US Convention.

Article 15(1) of the US Convention provides that salary, wages and other similar remuneration derived by an individual who is a resident of Australia in respect of employment shall be taxable only in Australia unless the employment is exercised or the services are performed in the US. If the employment is so exercised or the services so performed, such remuneration as derived from that exercise or performance may be tax in the US.

Article 15(2) of the US Convention provides that remuneration derived by an individual who is a resident of Australia in respect of an employment exercised in the US shall be taxable only in Australia if:

(a)

the recipient is present in US for a period or periods not exceeding in the aggregate 183 days in the taxable year of the US;

(b)

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

The taxpayer's salary and wages is paid by an employer who is a resident of the US and the taxpayer is present in the US for periods exceeding 183 days in the taxable year. Therefore, not all the conditions of Article 15(2) are satisfied and the salary and wages can be taxed in Australia and the US.

Article 22(2) of the US Convention provides that, subject to the provisions of the law of Australia, a credit for any tax paid in the US will be allowed against Australian tax paid on income from US sources.

Subsection 160AF(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where the assessable income of a resident contains foreign sourced income and foreign tax has been paid on that income a foreign tax credit will be allowed. The foreign tax credit allowed against Australian income tax is the lesser of :

•

the amount of that foreign tax paid, reduced in accordance with any relief available to the taxpayer under the law relating to that tax; or

•

the amount of Australian tax payable in respect of the foreign income.

The salary and wages received by the taxpayer are included in their assessable income under subsection 6-5(2) of the ITAA 1997. As foreign tax has been paid in relation to this income, a foreign tax credit will be allowed.

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   subsection 6-5(2)

Keywords
Dual residence
Residence in Australia
Salary and wages income
Unites States

Siebel/TDMS Reference Number:  3626075

Business Line:  Public Groups and International

Date of publication:  28 November 2003

ISSN: 1445-2782