Edited version of private ruling

Authorisation Number: 1011634746876

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Ruling

Subject: Foreign source income

Is the remuneration derived by you from working in Australian waters for a foreign employer assessable in Australia?

No.

This ruling applies for the following period:

1 July 2009 to 9 December 2009

Relevant facts and circumstances

You are a foreign resident of Australia for income tax purposes.

You work on board a ship.

You work 28 to 35 days duty followed by a 28 to 35 days leave period.

You return to Country X for your leave period.

Your salary is paid into your bank account and you do not have a bank account in Australia.

You have a subclass 457 visa that permits you to work in Australia.

You pay tax on your income in Country X.

You do not qualify for any Australian benefits.

Reasons for decision

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a foreign resident for the income year includes ordinary income derived directly or indirectly from all Australian sources and other ordinary income that a provision includes in assessable income on some basis other than having an Australian source.

Salary and wages are ordinary income under subsection 6-5(3) of the ITAA 1997.

The source of remuneration for services rendered will depend on the facts of each case. However, the source is generally the place where those services are performed (see Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 11 ATD 288; (1957) 7 AITR 76) where Williams J stated at CLR 414; ATD 296; AITR 85 that:

...the locality of the source of income derived from personal exertion in the capacity of employee or in relation to any services rendered surely must be where such personal exertion took place...

As you perform employment duties in Australian waters, and receive ordinary income as remuneration for these, that remuneration would normally be assessable under subsection 6-5(3) of the ITAA 1997.

However, in determining the liability to tax on employment income received by a foreign resident, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act). If there is an inconsistency, the provisions of the Agreements Act will prevail over those of the ITAA 1997 (subsection 4(2) of the Agreements Act).

The Agreements Act contains the tax treaty and the protocol between Australia and the Country X. The agreement operates to avoid the double taxation of income received by Australian and Country X residents.

The Agreement provides that employment income derived by a resident of Country X shall be taxable only in Country X unless the employment is exercised in Australia. If the employment is exercised in Australia it may be taxed in Australia.

However, the Agreement provides that such income will be taxable only in Country X if:

(a) the recipient is present in Australia for a period or periods not exceeding in the aggregate 183 days in any 12 month period commencing or ending in the year of income or year of assessment of Australia, and

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

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

Furthermore, the Agreement provides that notwithstanding the provisions of this article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of Australia may be taxed in Australia.

As a result of further information requested of your employer, your Contract of Employment specifically states that you were employed by, a Country Y entity.

Furthermore, an analysis of the company meeting minutes, concluded that, a Country Y company which owns the ship through another Country Y entity, is a foreign "economic employer" as per Taxation Ruling TR 2003/11.

As your employer is a Country Y resident, a specified Article applies. Since you are working on board the ship, which is a Country Y vessel, another Article of the Country X Agreement would not apply.

Accordingly, your remuneration derived from employment exercised aboard a ship operated by a Country Y entity is not assessable in Australia under subsection 6-5(3) of the ITAA 1997.