Edited version of private ruling

Authorisation Number: 1011769058754

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Ruling

Subject: PAYG withheld

Question 1

Are you a resident of Australia for income tax purposes?

Answer

No.

Question 2

Is the income you received for your services in Australia assessable in Australia?

Answer

No.

Question 3

Are you entitled to a refund of the amount that was withheld on the income you received for your services in Australia?

Answer

Yes.

This ruling applies for the following period:

1 July 2010 - 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are a citizen of Country A and you live in Country A.

You are a resident of Country A for income tax purposes.

You are an engineer who works on a free-lance basis.

You entered into a contract with a company, Company X which is based in Country A to supervise some construction works at a construction site in Australia which is being developed by Company Y.

Company X provided services which you supervised at this construction site.

You arrived in Australia in 2010 and left two months later and you worked at the construction site during this period.

Company X paid you for your services in Australia.

Company X withheld 5% of your payment.

Company X has a subsidiary in Australia called Subsidiary.

Company X in Country A is a large international company with three main divisions.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 995-1(1)
Income Tax Assessment Act 1936 Subsection 6(1)
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Subsection 6-5(3)
Taxation Administration Act 1953 Section 12-315 of Schedule 1
Taxation Administration Act 1953 Section 18-65 of Schedule 1

Reasons for decision

Residency

In order to determine if you will have to pay any Australian income tax on the salary and wages you received for work performed in Australia, your residency status for Australian income tax purposes will have to be determined.

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines an Australian resident as a person who is a resident of Australia for the purpose of the Income Tax Assessment Act 1936 (ITAA 1936).

The terms resident and resident of Australia, in regard to an individual, are defined in subsection 6(1) of the ITAA 1936. The definition provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. These tests are:

· The resides test

· The domicile test

· The 183 day test

· The superannuation test

The resides test

The ordinary meaning of the word 'reside', according to the Macquarie Dictionary, 2001, rev. 3rd edition, The Macquarie Library Pty Ltd, NSW, is 'to dwell permanently or for a considerable time; having one's abode for a time', and according to the Compact Edition of the Oxford English Dictionary (1987), 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'.

Taxation Ruling TR 98/17 considers the residency status of individuals entering Australia and states that the period of physical presence or length of time in Australia is not, by itself, decisive when determining whether an individual resides here. However, an individual's behaviour over the time spent in Australia may reflect a degree of continuity, routine or habit that is consistent with residing here.

In your case it appears from the facts provided in relation to your domestic situation that you are not an Australian resident for tax purposes. This is based on the following:

· You were present in Australia for only two months and

· You came to Australia to work and once that work finished, you returned to Country A.

Based on the information you have provided, it is considered that you are not an Australian resident for tax purposes as your behaviour in Australia does not reflect a degree of continuity, routine or habit that is consistent with residing here.

The domicile test

If a person is considered to have their domicile in Australia they will be considered an Australian resident unless the Commissioner is satisfied they have a permanent place of abode outside of Australia.

You are a citizen of Country A and you live in Country A. Thus, your domicile is Country A. Consequently, you would not satisfy this residency test.

The 183-day test

Where a person is present in Australia for 183 days during the year of income the person will be a resident, unless the Commissioner is satisfied that the person's usual place of abode is outside Australia and the person does not intend to take up residence in Australia.

You do not satisfy this test as you were present in Australia for less than 183 days.

The superannuation test

An individual is still considered to be a resident if that person is eligible to contribute to the Public Service Superannuation Scheme (PSS) or the Commonwealth Service Superannuation Scheme (CSS), or that person is the spouse or child under 16 of such a person. Generally Commonwealth Government employees are eligible to contribute to the PSS or CSS.

The Commonwealth superannuation test is not applicable in your case.

Your residency status

As you are not deemed to be a resident of Australia under any of the four tests, you are not considered to be an Australian resident for taxation purposes.

Income you received for your services in Australia assessable in Australia

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

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

A double tax agreement will generally override the ITAA 1997 where there are inconsistent provisions.

Schedule A of the International Tax Agreements Act 1953 contains the double tax agreement between Australia and Country A (the Country A Agreement). The Country A Agreement operates to avoid the double taxation of income received by Australian and Country A residents.

Article X of the Country A Agreement is about employment income. Paragraph (1) of Article X of the Country A Agreement provides that remuneration derived by a resident of Country A shall be taxable only in Country A unless the employment is exercised in Australia. If the employment is exercised in Australia then the income may also be taxed in Australia.

An exception to this rule is contained in paragraph (2) of Article X of the Country A Agreement. This exception states that remuneration derived by a Country A resident in respect of employment exercised in Australia is only taxable in Country A if:

· the recipient is present in Australia for 183 days or less during the income year;

· the remuneration is paid by or on behalf of an employer who is not a resident of Australia; and

· the remuneration is not borne by a permanent establishment or a fixed base which the employer has in Australia.

You are a resident of Country A for income tax purposes and you entered into a contract with Company X to supervise some construction works at a construction site in Australia.

You were present in Australia for less than 183 days during the income year.

Company X is a Country A company which is not a resident of Australia and Company X paid you for your services in Australia.

Accordingly the first two factors are satisfied.

In relation to the third factor, the issue of whether Company X has a permanent establishment or a fixed base in Australia arises.

Company X does not have a permanent establishment in Australia

Article Y of the Country A Agreement is about "permanent establishments". Paragraph 1 of Article Y states that "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on.

Paragraph 2 of Article Y includes construction projects which exist for more than six months in the definition of permanent establishment.

However, the construction site is being developed by Company Y and not Company X. Thus, this fact alone does not result in Company X having a permanent establishment in Australia.

Paragraph 6 of Article Y also qualifies the general definition of a permanent establishment in paragraph 1 by stating that a company which is resident in Country A and controls a company which is a resident of Australia shall not make the Australian resident company a permanent establishment of the Country A resident company.

Company X has a subsidiary in Australia called Subsidiary. Due to paragraph 6 of Article Y, this fact alone does not result in Company X having a permanent establishment in Australia.

Paragraph 3(e) of Article Y also qualifies the general definition of permanent establishment in paragraph 1 by stating that an enterprise shall not be deemed to have a permanent establishment merely by reason of "the maintenance of a fixed place of business solely for the purpose of activities which have a preparatory or auxiliary character for the enterprise".

In interpreting the wording of tax treaties, the Commissioner accepts in Taxation Ruling TR 2001/13 that it is appropriate to have reference to the OECD Commentary on the Model Tax Convention on Income and Capital (Condensed Version 2005) (the OECD Model Commentary).

The OECD Model Commentary provides that the mere fact that an enterprise has a certain amount of space at its disposal, which is used for business activities, is sufficient to constitute a place of business. This is subject to the fact that the place is at the disposal for a sufficiently long period of time so as to constitute a "fixed place of business" and the activities that are performed go beyond the activities that are preparatory or auxiliary in character.

The OECD Model Commentary also provides that the decisive criterion in distinguishing between activities which have a preparatory or auxiliary character and those which have not is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole.

Company X's main business activity in Australia is "engineering consulting services" according to ATO records.

Company X in Country A is a large international company with three main divisions.

Applying the OECD Model Commentary, it follows that Company X's main business activity in Australia is "engineering consulting services" are only preparatory or auxiliary in character because they do not form an essential and significant part of the activity of Company X as a whole which has two other main divisions.

Accordingly, Company X does not have a permanent establishment in Australia based on these facts. Thus, your remuneration in Australia was not borne by a permanent establishment of Company X.

Therefore, you satisfy all three conditions in paragraph (2) of Article X of the Country A Agreement. It follows that as your income is only taxable in Country A, it is not assessable in Australia.

Tax withheld on the income you received for your services in Australia

Section 12-315 of Schedule 1 to the Taxation Administration Act 1953 (TAA) imposes an obligation on payers to withhold an amount from certain types of payments made to foreign residents.

For the purposes of paragraph 12-315(1)(b), a prescribed payment pursuant to regulation 44C of Taxation Administration Regulations 1976 is a payment made under a contract entered into for works or related activities. Subregulation 44C(3) defines works as works in the construction, infrastructure and resource sectors in Australia.

Pursuant to subregulation 44C(2), an amount of 5% is to be withheld from each payment made for works or related activities.

Subsection 18-65 (1) of Schedule 1 to the TAA states that a payer must refund the recipient an amount if:

· the payer withheld an amount under Sections 12-315 of Schedule 1 to the TAA;

· the amount was withheld or paid to the Commissioner in error;

· either the payer becomes aware of the error or the recipient applies to the payer for the refund before the end of the financial year in which the amount was withheld or paid to the Commissioner; and

· any relevant information requested by the payer has been given to the payer.

Pursuant to section 12-315 of Schedule 1 of the TAA and regulation 44C, Company X withheld 5% of your payment when it paid you for your services in supervising some construction works at the construction site.

As your payment is not assessable in Australia, the amount withheld by Company X was withheld in error.

Consequently, pursuant to subsection 18-65(1) of Schedule 1 to the TAA, you are entitled to request a refund of the amount withheld on your payment for your services in Australia from your payer, Company X before the end of 30 June 2011.