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Edited version of private ruling

Authorisation Number: 1011570970543

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Ruling

Subject: Pay As You Go (PAYG) withholding

Is the employer required to withhold an amount under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from the employment income paid to an employee while he is working in Country A?

No.

This ruling applies for the following periods:

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The employee is an Australian citizen.

The employee is employed by a company that is an Australian resident employer.

The employee has been seconded to work in Country A from 2008 to 2011 to carry out duties of his employment solely in Country A.

The employee and his wife and children moved to Country A.

He remained on the Australian payroll and received his salary, wages and secondment uplift in respect of his employment income.

He owns a principle residence in Australia which has been leased to an independent third party. He does not have a home available for his use in Australia.

The employee maintained his bank account in Australia and the remuneration from his employer in relation to his overseas assignment is paid into this account.

The employee is working full-time in Country A and returned to Australia for holidays on minimal and infrequent occasions.

The employer provides the employee with company housing whilst on assignment in Country A. This house is always available to him and the lease is renewed annually.

Relevant legislative provisions

Taxation Administration Act 1953 Section Sch1-12-35.

Taxation Administration Act 1953 Subsection Sch1-12-1(1).

Taxation Administration Act 1953 Subsection Sch1-12-1(1A).

Income Tax Assessment Act 1997 Subsection 6-5(2).

Income Tax Assessment Act 1997 Subsection 6-5(3).

Income Tax Assessment Act 1997 Subsection 6-15(2).

Income Tax Assessment Act 1997 Section 6-20(1).

Income Tax Assessment Act 1936 Subsection 6(1).

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

It is considered that the employee will be a resident of Country A while he is living and working in Country A. The salary payments the employer makes to the employee while he is working in Country A are considered to be ordinary income and to be from a Country A source.

Consequently, the employer will not be required to withhold any income tax under subsection 12-1(1A) of Schedule 1 to the TAA from these payments.

Detailed reasoning

PAYG withholding

Section 12-35 of Schedule 1 to the TAA provides that an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

However, subsections 12-1(1) and 12-1 (1A) of the TAA provide that an entity need not withhold an amount under section 12-35 of the TAA from a payment if the payment is exempt income or non-assessable non-exempt income of the entity receiving the payment.

Australian income tax legislation

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer for an income year includes the ordinary income derived by the taxpayer from all sources during that year.

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a foreign resident taxpayer for an income year includes the ordinary income derived by the taxpayer from all Australian sources during that year.

Salary payments are considered to be ordinary income for the purposes of these subsections.

The source of employment income is generally the place where the employment services are performed (Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 11 ATD 288; (1957) 7 AITR 76).

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

Subsection 6-20(1) of the ITAA 1997 provides that an amount of ordinary income is exempt income if it is made exempt from income tax by a provision of the Income Tax Assessment Act 1936 (ITAA 1936), the ITAA 1997 or another Commonwealth law.

Residency for the purposes of Australian tax

Subsection 6(1) of the ITAA 1936 provides four tests to determine whether a person is an Australian resident for the purposes of Australian tax. These tests are:

A person only needs to satisfy one of these tests to be considered an Australian resident.

The resides test

Under this test, a person who is considered to reside in Australia according to the ordinary meaning of the word 'reside' will be an Australian resident.

According to the Shorter Oxford English Dictionary, the ordinary meaning of the word 'reside' is 'to dwell permanently, or for a considerable time, to have one's settled or usual abode, to live in or at a particular place'.

The domicile and permanent place of abode test

Under this test, a person whose domicile is in Australia is will be an Australian resident unless the Commissioner is satisfied that their permanent place of abode is outside Australia.

Domicile

A person acquires at birth a domicile of origin, being the country of their father's permanent home.

A person retains their domicile of origin unless or until they acquire a different domicile of choice or by operation of law. 

For a person to show that they have acquired a domicile of choice in another country they must be able to prove that they intend to make their home indefinitely in that country, for example, through having obtained a migration visa.

Permanent place of abode

A place of abode refers to a person's residence, where one lives with one's family and sleeps at night.

Permanent does not mean everlasting or forever but is to be contrasted with temporary or transitory.

Taxation Ruling IT 2650 provides that the following factors are relevant in determining whether a person has established a permanent place of abode outside Australia:

The 183 day test

Under this test, a person who has been present in Australia for 183 days or more during the income year will be an Australian resident unless the Commissioner is satisfied that their usual place of abode is outside Australia and that they do not intend to take up residence in Australia. This test does not apply to your situation.

The Commonwealth superannuation fund test

Under this test, a person will be an Australian resident if that they are eligible to contribute to a Commonwealth superannuation fund or are the spouse or a child under 16 of a person who is eligible to contribute to such a fund. This test does not apply to your situation.

Your case

The employee will not be an Australian resident under the resides test as he is living in Country A.

It is considered that he will retain his Australian domicile while he is living in Country A as he does not intend to stay there indefinitely.

The following factors are considered relevant in determining whether the employee has established a permanent place of abode in Country A:

He originally intended to live in Country A for three years however, this has changed to approximately two years.

His wife and children have accompanied him to Country A.

He will return to Australia for holidays on minimal and infrequent occasions.

He has rented out his principal place of residence in Australia and does not have a home available for his use in Australia.

In Country A, he lives with his family in company housing provided by his employer.  

Based on these factors it is considered that the employee has established a permanent place of abode in Country A.

Conclusion

In view of the above, it is considered that the employee will be a resident of Country A while he is living and working in Country A.

The salary payments the employer makes to the employee while he is working in Country A are considered to be ordinary income and to be from a Country A source.

Consequently, the employer will not be required to withhold any income tax under subsection 12-1(1A) of Schedule 1 to the TAA from these payments.

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