1011716144652 | Legal database

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Edited version of private ruling

Authorisation Number: 1011716144652

Ruling

Subject: PAYG withholding obligation; foreign employment income

Question

Is the taxpayer required to withhold tax under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from payments made to specific employees for employment duties performed overseas?

Advice/Answers

No, the taxpayer is not required to withhold tax under section 12-35 of Schedule 1 to the TAA as the payments made to specific employees are exempt from income tax under section 23AG of the Income Tax Assessment Act 1936.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

The scheme has commenced.

Relevant facts

The employees are residents of Australia for tax purposes.

The employees are required to perform their employment duties overseas.

The employees are on duties overseas for continuous periods in excess of 9l days.

Assumptions

All other conditions of section 23AG are met in particular:

1. Payments made by the taxpayer to the employee performing duties overseas are not exempt from income tax in the foreign country only because of any of the reasons listed in subsection 23AG(2) of the Income Tax Assessment Act 1936 (ITAA 1936); and

2. Payments made to employees qualifies as foreign earnings under subsection 23AG(7) of the ITAA 1936.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Subsection 23AG(1)

Income Tax Assessment Act 1936 Subsection 23AG(1AA)

Income Tax Assessment Act 1936 Subsection 23AG(2)

Income Tax Assessment Act 1936 Subsection 23AG(7)

Taxation Administration Act 1953 Schedule 1 Subsection 12-1(1)

Taxation Administration Act 1953 Schedule 1 Section 12-35

Reasons for decision

Summary

The taxpayer is not required to withhold tax under section 12-35 of Schedule 1 to the TAA from payments made to the employees performing employment duties overseas.

Detailed reasoning

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.

However, subsection 12-1(1) of Schedule 1 to the TAA provides that an entity need not withhold an amount under section 12-35 of Schedule 1 to the TAA from a payment if the whole of the payment is exempt income of the entity receiving the payment.

Therefore, if the salary paid to the employees while they are performing their employment duties overseas is exempt income in their hands, then the taxpayer will not be required to withhold an amount from those payments.

Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that, where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from this foreign service are exempt from Australian tax.

However, subsection 23AG(1AA) of the ITAA 1936 provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the conditions set out under subsection 23AG(1AA).

In this instance, the employees satisfy the requirements under subsection 23AG(1AA) of the ITAA 1936.

Subsection 23AG(1) of the ITAA 1936 is subject to subsection 23AG(2) so that the exemption from Australian tax does not apply if the foreign earnings are exempt from foreign tax only because of any of the reasons set out in subsection 23AG(2) of the ITAA 1936.

As the foreign service of the employees is directly attributable to their deployment outside Australia within subsection 23AG(1AA) of the ITAA 1936 and the service is performed for a continuous period of not less than 91 days, their earnings from the foreign service would be exempt from Australian tax under section 23AG(1) of the ITAA 1936. However, the exemption can only apply if those earnings from the foreign service is not exempt from income tax in the foreign country only because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936.

Consequently, if the conditions under subsection 23AG(2) are satisfied in respect of the foreign earnings of the employees then the taxpayer is not required to withhold tax pursuant to subsection 12-1(1) of Schedule 1 to the TAA from payments made to the employees while they are deployed overseas.

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