Edited version of your written advice

Authorisation Number: 1051481406069

Date of advice: 8 February 2019

Ruling

Subject: PAYG Withholding

Question

Are Country A nationals hired as short-term visa class 400 employees, subject to PAYG withholding tax while working in Australia if they are paid by a Country A entity?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances:

Entity ABC is a Country A entity which has a Permanent Establishment (PE) according to the definition contained in subsection 6(1) of the ITAA 1936 in Australia. Entity ABC has a branch office in Australia.

Entity ABC is planning to hire subclass 400 visa employees to work in Australia. All workers brought to Australia will be Country A nationals. These workers will work in Australia for less than 183 days in one year.

The Country A workers working on subclass 400 visas will be paid by the Country A entity.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1997 Subsection 6-5(1)

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

Income Tax Assessment Act 1997 Subsection 6-20(1)

Income Tax Assessment Act 1997 Section 11-5

Income Tax Assessment Act 1997 Section 11-15

Section 12-1 of Schedule 1 to the TAA 1953

Section 12-35 of Schedule 1 to the TAA 1953

Section 5 of the International Tax Agreements Act 1953

Subsection 4(1) of the International Tax Agreements Act 1953

The Country A Convention

Reasons for decision

When determining a person’s liability to pay tax in Australia, it is necessary to consider the domestic income tax laws and any applicable double tax agreements.

Domestic law

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) requires an entity to withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee, subject to the general exceptions contained in section 12-1 of Schedule 1 to the TAA 1953. Those exceptions include, amongst other things:

● if, in the hands of the recipient the whole of the payment is not assessable income and is not exempt income (subsection 12-1(1A)).

‘Exempt income’ has the meaning given by subsection 6-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997). It provides that an amount of ordinary or statutory income is exempt income if it is made exempt from income tax by a provision of this Act or another Commonwealth law. The note to this subsection provides that summary lists of provisions about exempt income are contained in sections 11-5 and 11-15 of the ITAA 1997.

Ordinary income is defined in subsection 6-5(1) of the ITAA 1997 as including income according to ordinary concepts.

Subsection 6-5(3) of the ITAA 1997 provides that a foreign resident’s assessable income includes:

● ordinary income derived directly or indirectly from all Australian sources during the income year; and

● other ordinary income that a provision includes in assessable income for the income year on some basis other than having an Australian source.

Applicable double tax agreements

Subsection 4(1) of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Agreements listed within section 5 of the Agreements Act (subject to its provision) have the force of law according to its tenor. The Country A Convention (Agreement between the Government of Australia and the Government of Country A for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income), which on the facts is the relevant agreement to consider, is listed in section 5 of the Agreements Act. The Agreement operates to avoid the double taxation of income received by residents of Australia and Country A.

Article X of the Agreement deals with income from employment. Paragraph 2 of that agreement provides -

(2) Notwithstanding the provisions of paragraph (1), remuneration derived by an individual who is a resident of one of the Contracting States in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:

(a) the recipient is present in that other State for a period or periods not exceeding in the aggregate 183 days in a year of income of that other State;

(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of that other State; and

(c) the remuneration is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has in that other State.

The employees will arrive in Australia on subclass 400 short-term visas and will be residents of Country A. Wages in respect of employment with Entity ABC according to Paragraph 2 of Article X should only be taxable in Country A subject to three conditions.

The first is that these employees will not be in Australia for a period exceeding 183 days in any 12 month period of Australia’s fiscal year; they meet this requirement.

The second is that the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State. These employees will be paid by the Country A entity, which is not a resident of Australia.

The third is that the remuneration is not deductible in determining taxable profits of a PE which the employer has in the other State. Clearly, as the wages will be paid by the Country A entity, this condition will be satisfied.

The Country A subclass 400 employees meet all the requirements of paragraph 2 of Article X. Therefore, notwithstanding paragraph 1 of the same Article, remuneration in respect of employment exercised in Australia is taxable in Country A and is not taxable in Australia.

Should PAYG be remitted?

Section 12-35 of Schedule 1 of the TAA 1953 requires an entity to withhold an amount from wages paid to an employee, subject to the general exceptions in section 12-1 of Schedule 1 to the TAA 1953. One of those exceptions is subsection 12-1(1A) which includes circumstances where, in the hands of the recipient, the whole of the payment is not assessable income and is not exempt income.

Subsection 6-5(3) of the ITAA 1997 provides that a foreign resident’s assessable income includes:

● ordinary income derived directly or indirectly from all Australian sources during the income year; and

● other ordinary income that a provision includes in assessable income for the income year on some basis other than having an Australian source

It has been established that these employees will not derive ordinary income directly or indirectly from an Australia source. Therefore they will not receive assessable income in Australia.

‘Exempt income’ has the meaning given by subsection 6-20(1) of the ITAA 1997. It provides that an amount of ordinary or statutory income is exempt income if it is made exempt from income tax by a provision of this Act or another Commonwealth law. Provisions detailing what is exempt income are contained in sections 11-5 and 11-15 of the ITAA 1997. None of them are relevant to these employees. Accordingly they will not have exempt income.

As they will not have assessable or exempt income, there is no requirement for Entity ABC to withhold an amount from their wages according to section 12-35 of Schedule 1 of the TAA 1953.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).