ATO Interpretative Decision
ATO ID 2003/1195
Income Tax
Assessability of employment income received by a dual resident of Australia and the United StatesFOI status: may be released
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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is employment income received by a taxpayer who is a resident of Australia and of the United States (US) assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) where the taxpayer exercises the duties of their employment wholly outside Australia?
Decision
No. The employment income received by a taxpayer who is a resident of Australia and of the US is not assessable under subsection 6-5(2) of ITAA 1997 where the taxpayer exercises the duties of their employment wholly outside Australia.
Facts
The taxpayer is a citizen of the US.
The taxpayer is a resident of Australia for taxation purposes.
The taxpayer is also a resident of the US for US taxation purposes.
The taxpayer is employed by a company that is a non-resident of Australia.
The taxpayer has been employed by the company for many years.
The taxpayer's employment is based in the US.
The taxpayer's employment does not require them to travel to Australia.
The taxpayer receives employment income from their employer in the US.
The taxpayer owns residences in Australia and the US which are available to the taxpayer at all times continuously.
The taxpayer spends a similar amount of time in Australia and in the US during the year.
When the taxpayer returns to Australia, they reside with their partner.
The taxpayer has no dependants in Australia.
The taxpayer has a family member in the US.
The taxpayer maintains an Australian credit union account; an Australian superannuation account and a home loan with an Australian bank.
The taxpayer maintains US credit union accounts, US credit card accounts and holds US health insurance.
The taxpayer also owns US shares & options.
Reasons for Decision
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, 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 Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that those Acts are read as one.
Schedule 2 to the Agreements Act contains the double tax agreement between Australia and the US (the US Convention). Schedule 2A to the Agreements Act contains the US Protocol amending the US Convention (the 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 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 under the US Convention. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes.
Article 4(2) provides that if an individual is a resident of both Australia and the US, the individual shall be deemed to be a resident of the country:
- (a)
- in which the individual maintains their permanent home,
- (b)
- if the provisions of subparagraph (a) do not apply, in which the individual has an habitual abode if they have a permanent home in both countries or in neither of the countries, or
- (c)
- if the provisions of subparagraphs (a) and (b) do not apply, with which the individual's personal and economic relations are closer if they have a habitual abode in both countries or in neither of the countries.
Article 4(2) of the US Convention further provides that in determining an individual's permanent home, regard shall be given to the place where the individual dwells with their family, and in determining the country with which an individual's personal and economic relations are closer, regard shall be given to their citizenship (if the individual is a citizen of one of the countries).
The terms 'permanent home', 'habitual abode' and 'personal and economic relations' are otherwise undefined in the US Convention. Article 3(2) of the US Convention 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 US Convention.
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.
As the taxpayer owns residences in both countries which are available at all times continuously for the taxpayer's permanent use, the taxpayer has a permanent home in Australia and in the US.
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.
As the taxpayer spends approximately the same amount of time at their homes in Australia and the US, the taxpayer has a habitual abode in both countries.
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 personal and economic ties with Australia and the US. However, given the longstanding duration of the taxpayer's employment in the US and the fact that the taxpayer is a US citizen, it is considered that the taxpayer's personal and economic ties are closer with the US than with Australia.
Accordingly, the taxpayer will be treated as a resident of the US for the purposes of applying the provisions of the US Convention.
Article 15(1) of the US Convention provides that salaries, wages and other similar remuneration derived by an individual who is a resident of the US in respect of an employment shall be taxable only in the US unless the employment is exercised in Australia. If the latter applies, the income may also be taxed in Australia, subject to the exception provided in Article 15(2) of the US Convention.
As the taxpayer exercises their employment solely in the US, the employment income shall be taxed only in the US.
Therefore, the employment income received by a taxpayer who is a resident of Australia and the US is not assessable under subsection 6-5(2) of the ITAA 1997.
Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1936
section 23AG
subsection 23AG(3)
subsection 6-5(2) International Tax Agreements Act 1953
section 4
Schedule 2
Schedule 2, Article 3(2)
Schedule 2, Article 4(2)
Schedule 2, Article 15(1)
Schedule 2, Article 15(2)
Schedule 2A
Related Public Rulings (including Determinations)
Taxation Determination TD 94/58
Taxation Ruling TR 2001/13
Other References:
OECD Model Tax Convention on Income and on Capital
Keywords
Double tax agreements
International law
Residency
Salary & wages income
Treaties
United States
ISSN: 1445-2782