ATO Interpretative Decision

ATO ID 2006/107

Income tax

• This ATO ID has been amended to remove references in the Reasons for Decision to repealed legislation dealing with foreign tax credit rules.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 will by replaced by a foreign tax offset.
  This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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 a dual resident of Australia and of Singapore, for employment performed in the Joint Petroleum Development Area (JPDA), assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The salary and wages received by a taxpayer, who is a dual resident of Australia and of Singapore, for employment performed in the JPDA are assessable under subsection 6-5(2) of the ITAA 1997.

Facts

The taxpayer is an Australian resident for income tax purposes.

The taxpayer is also a resident of Singapore for Singapore tax purposes.

The taxpayer is an individual who has been employed by an Australian company, on behalf of another Australian company, to work in the JPDA.

Neither Australian company is a resident of Singapore.

The taxpayer worked on the mainland of Australia and in the JPDA for a period spanning two Australian financial years. In each year, the taxpayer was present in Australia for less than 183 days.

The taxpayer has homes in Australia and in Singapore which are available for the taxpayer's permanent use throughout the period of their presence in Australia.

The taxpayer has an habitual abode in Australia and in Singapore throughout the period of their presence in Australia.

The taxpayer's personal and economic ties are closer with Singapore than with Australia.

Reasons for Decision

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes the ordinary income derived by the taxpayer directly or indirectly from all sources, whether in or out of Australia, during the income year.

Employment income is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

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, whether in or out of Australia, during the income year.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.

Section 11-15 of the Income Tax Assessment Act 1936 (ITAA 1997) lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the ITAA 1936 which deals with overseas employment income.

Subsection 23AG(1) of the ITAA 1936 provides that where a resident taxpayer is engaged in 'foreign service' for a continuous period of not less than 91 days, any 'foreign earnings' derived will be exempt from tax in Australia.

Subsection 23AG(7) of the ITAA 1936 defines 'foreign service' as service in a foreign country as the holder of an office or in the capacity of an employee, and 'foreign earnings' include salary, wages, commission, bonuses or allowances.

Section 23AG of the ITAA 1936 is only available to resident taxpayers who derive foreign earnings from service in a foreign country. The area can only be treated as part of a 'foreign country' where it is clearly deemed to be a 'foreign country' for the purposes of section 23AG of the ITAA 1936.

The Timor Sea between northern Australia and East Timor contains proven petroleum resources in the seabed. Australia and East Timor have competing claims to the resources of this seabed. The Timor Sea Treaty (Treaty) (which is contained in Schedule 1 to the Petroleum (Timor Sea Treaty) Act 2003) enables Australia and East Timor to jointly develop the petroleum resources of a major part of the seabed of the Timor Sea, defined in Article 3 of the Treaty as the JPDA, pending agreement to a seabed boundary with East Timor.

The Treaty was signed between the Government of East Timor and the Government of Australia on 20 May 2002. The Treaty entered into force on 2 April 2003 but is taken to have effect and all of the provisions will apply and be taken to have applied on and from the date of signature, 20 May 2002.

Both Australia and East Timor continue to have sovereignty over the area and therefore, for the purposes of Australian law, the area is considered part of Australian territory. Article 2 of the Treaty recognises that the treaty is without prejudice to both Australia's and East Timor's legal claims to the seabed in the Timor Sea.

Further, Article 13 of the Treaty provides that the JPDA shall be deemed to be, and treated by Australia as part of Australia (and by East Timor as part of East Timor) for the purposes of taxation law related directly or indirectly to:

(i)

the exploration for or the exploitation of petroleum in the JPDA, or

(ii)

acts, matters, circumstances and things touching, concerning arising out of or connected with such exploration and exploitation.

Therefore, the JPDA is treated by Australia as part of Australia's maritime zones under the arrangements.

Therefore, as the JPDA is not a 'foreign country', exemption under section 23AG of the ITAA 1936 cannot therefore apply to earnings derived from service in the JPDA.

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 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one.

Schedule 5 to the Agreements Act contains the agreement between Australia and Singapore (Singapore Agreement).

As the taxpayer is a dual resident, it is necessary to consider the tie breaker rules in the Singapore Agreement.

Article 3(2) of the Singapore Agreement sets out the tiebreaker rules for residency for individuals. The tiebreaker rules ensure that the individual is only treated as a resident of one country for the purposes of working out liability to tax on their income under the Singapore Agreement. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes.

Article 3(2) of the Singapore Agreement provides that if an individual is a resident of both Australia and Singapore:

(a)

they will be treated solely as a Singapore resident -

(i)

if they have a permanent home available in Singapore and not in Australia;

(ii)

if (i) is not applicable, if they have an habitual abode in Singapore and not in Australia;

(iii)

if (i) or (ii) are not applicable, if their personal and economic relations are closest with Singapore.

(b)

they will be treated solely as an Australian resident -

(i)

if they have a permanent home available in Australia and not in Singapore;

(ii)

if (i) is not applicable, if they have an habitual abode in Australia and not in Singapore;

(iii)

if (i) or (ii) are not applicable, if their personal and economic relations are closest with Australia.

The terms 'permanent home', 'habitual abode' and 'personal and economic relations' are otherwise undefined in the Singapore Agreement. Article 2(4) of the Singapore Agreement provides that any term not defined shall, unless the context otherwise requires, have the meaning which it has under the law relating to taxes of the country applying the Singapore Agreement.

Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting double tax agreements. Paragraph 104 provides that the OECD Model Tax Convention and Commentary will often need to be considered in interpreting double tax agreements.

The OECD Commentary provides that in relation to a 'permanent home':

(a)

for a home to be permanent, an individual must have arranged and retained it for his or her permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short duration. The dwelling has to be available at all times continuously and not occasionally for the purposes of a stay, which owing to the reasons for it is necessarily of short duration (eg travel for pleasure, business travel, attending a course etc)

(b)

any form of home may be taken into account, including a house or apartment belonging to or rented by the individual and a rented furnished room.

In relation to a habitual abode, the OECD Commentary provides that all stays in each country, regardless of the purpose for the stays, must be considered in order to assign a preference to a particular country.

In relation to a taxpayer's personal and economic relations, the OECD Commentary provides that regard should be had to factors such as family and social relations, occupation, political, cultural or other activities and place of business.

The taxpayer has a permanent home and a habitual abode in both countries during the period of presence in Australia. Therefore, as the taxpayer's personal and economic ties are closer with Singapore than with Australia, the taxpayer will be treated as a resident of Singapore for the purposes of applying the provisions of the Singapore Agreement.

Article 11 of the Singapore Agreement provides that remuneration or other income derived by an individual who is a resident of Singapore in respect of personal (including professional) services shall be subject to tax only in Singapore unless the services are performed or exercised in Australia. If the services are so performed or exercised such remuneration or other income as is derived therefrom shall be deemed to have a source in, and may be taxed in, Australia.

However, Article 12 of the Singapore Agreement provides that the remuneration shall be exempt from tax in Australia if -

(a)

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

(b)

the services are performed or exercised for or on behalf of a person who is a resident of Singapore; and

(c)

the remuneration or other income is not deductible in determining the profits for tax purposes in Australia of a permanent establishment that person has in Australia.

The taxpayer performed their employment for an Australian resident company in mainland Australia and in the JPDA over two Australian financial years. In both years, the taxpayer was present in Australia for less than 183 days.

However, as Article 12(b) of the Singapore Agreement is not satisfied, Article 12 will not apply. As the taxpayer performs their services in Australia (including the JPDA), the income received by the taxpayer for those services may be taxed in Australia under Article 11 of the Singapore Agreement. The salary and wages may also be taxed by Singapore.

In addition to the Singapore Agreement, the provisions of the Treaty must also be considered in determining the taxpayer's liability to Australian tax.

Annex G to the Treaty sets out the taxation arrangements for income earned in the JPDA.

Article 13(1) in Annex G of the Treaty provides that income derived by an individual who is a resident of Australia in respect of employment exercised in the JPDA may be taxed in Australia and East Timor as reduced by the reduction percentage. In the case of Australia, the reduction percentage is 90% and for East Timor the reduction percentage is 10% (see Article 1 of the Treaty).

Article 13(2) in Annex G of the Treaty provides that notwithstanding the above, Australia may tax its residents on such income without reduction. In such a case, Australia will provide a tax offset against the tax payable on that income by the individual for the tax paid in East Timor.

Australia's practice is to tax Australian resident taxpayers on 100% of their JPDA income under subsection 6-5(2) of the ITAA 1997 and to give a tax offset for East Timor tax paid on 90% of this income.

Therefore, the salary and wages received by the taxpayer, who is a dual resident of Australia and of Singapore, for employment performed in the JPDA are assessable under subsection 6-5(2) of the ITAA 1997.

Subsections 136AA(1) and (4) of the ITAA 1936 define an 'area covered by an international tax sharing treaty' as an area covered by an agreement between Australia and another country under which Australia and the other country share tax revenues from activities undertaken in that area.

The JPDA is an area covered by an international tax sharing treaty. Therefore, the taxpayer is entitled to a foreign tax credit for tax paid in East Timor on income derived from duties performed in the JPDA.

Year of income:  Year ended 30 June 2004 Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1936
   section 23AG
   subsection 23AG(1)
   subsection 23AG(7)
   subsection 136AA(1)
   subsection 136AA(4)

Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/13

Related ATO Interpretative Decisions
ATO ID 2004/288

Other References:
Timor Sea Treaty between the Government of Australia and the Government of East Timor, Dili, 20 May 2002

Keywords
Double tax agreements
Exempt income
Foreign income
Foreign salary & wages
International law
International tax
Timor Sea Zone of Cooperation
Treaties

Siebel/TDMS Reference Number:  4137796

Business Line:  Public Groups and International

Date of publication:  13 April 2006

ISSN: 1445-2782