Edited version of private ruling

Authorisation Number: 1011804673606

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Ruling

Subject: PAYG withholding

Question 1

Is Employer X required to withhold pay as you go amounts under Part 2-5 of Schedule 1 to the Taxation Administration Act 1953 in relation to salary paid to an employee who will be living and working in Country Y for a period of 2 ¼ years?

Answer: No.

This ruling applies for the following period:

Income year ending 30 June 2011

Income year ending 30 June 2012

Income year ending 30 June 2013

The scheme commences on:

May 2011

Relevant facts and circumstances

The employee was born in Australia.

The employee is a dual national of both Australia and Country Z.

The employee has been a resident of Australia since 2003.

The employee owns a house in Australia. The house is currently leased and will be leased out for the duration of the employee's posting overseas. The employee maintains a bank account in Australia primarily to receive rental income from the house.

The employee will be posted to Country Y in his employment for Employer X for a period of 2 ¼ years.

The employee intends to return to Australia at the end of his posting.

The employee will open a bank account in the overseas destination.

The employee will be required to acquire and maintain a suitable residence in Country Y commensurate with his employment position.

The employee will have his wife and children living with him for the duration of his posting in Country Y.

The employee will not be required to return to Australia during the period of his posting.

Neither the employee nor his spouse are members of the superannuation scheme established by deed under the Superannuation Act 1990 or are eligible employees for the purposes of the Superannuation Act 1976.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 6(1).

Income Tax Assessment Act 1997 section 6-5.

Income Tax Assessment Act 1997 section 6-5.

Income Tax Assessment Act 1997 section 6-10.

Taxation Administration Act 1953 Division 12

The Domicile Act 1982 section 10

Reasons for decision

Residency

Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 36) defines the term resident of Australia as follows:

resident or resident of Australia means -

(a) a person, other than a company, who resides in Australia and includes a person -

(i) whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside Australia;

(ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence in Australia; or

(iii) who is:

(A) a member of the superannuation scheme established by deed under the Superannuation Act 1990; or

(B) an eligible employee for the purposes of the Superannuation Act 1976; or

(C) the spouse, or a child under 16, of a person covered by subsubparagraph (A) or (B);

Income Tax Ruling IT 2650 Income Tax: Residency - permanent place of abode outside Australia (IT 2650) provides guidelines on the application of the definition in subsection 6(1) of the ITAA 1936 to the situation where an individual leaves Australia temporarily to live overseas, e.g. on temporary overseas work assignments.

Paragraph 3 of IT 2650 states:

The above definition, in effect, provides four tests to ascertain whether an individual is a resident:

a. residence according to ordinary concepts;

b. the domicile and permanent place of abode test;

c. the 183 day test; or

d. the Commonwealth superannuation fund test.

Paragraph 5 of IT 2650 states that the following factors need to be taken into account when determining residence according to ordinary concepts. The weight to be given to each factor will vary with individual circumstances of each case and no single factor is conclusive.

(a) the intended and actual length of the individual's stay in the overseas country;

The employee intends to stay overseas in Country Y for a period of 2 ¼ years.

(b) any intention either to return to Australia at some definite point in time or to travel to another country;

The employee expects to return to Australia at the end of his posting in Country Y.

(c) the establishment of a home outside Australia;

The employee will be required to acquire and maintain a suitable residence in Country Y commensurate with his employment position.

(d) the abandonment of any residence or place of abode the individual may have had in Australia;

The employee owns a residential home in Australia which will be rented out for the duration of his posting overseas.

(e) the duration and continuity of the individual's presence in the overseas country;

The employee's posting in Country Y is for 2 ¼ years and he will not be required to return to Australia during the posting.

(f) the durability of association that the individual has with a particular place in Australia.

The employee owns a residential home in Australia which will be rented out for the duration of his posting overseas. The employee maintains a bank account in Australia primarily to receive rental income from the house.

The employee's family will be living with him in Country Y during his posting and his further immediate family ties are in Country Z rather than Australia.

The Domicile Act 1982, section 10, provides that the intention a person must have in order to acquire a domicile of choice in a country is the intention to make his home indefinitely in that country.

In these circumstances the employee's domicile remains Australia as there is no evidence that his intention is to make Country Y his home indefinitely.

Therefore, consideration must be given to where the employee has his permanent place of abode during the period of his posting in Country Y.

The leading case on whether a permanent place of abode is outside Australia is F.C. of T. v. Applegate (79 ATC 4307; (1979) 9 ATR 899). The taxpayer, whose domicile was in Australia, had been sent by his employer to establish a branch office in Vila, New Hebrides. His absence was to be for an unspecified period but it was expected that it would be of a substantial length. It was also expected that later he would be recalled to Australia. In fact, he returned to Australia after two years, his stay being cut short by illness. In that case, it was decided that, because the taxpayer could not be considered to have resided in Australia under the ordinary meaning of the word "reside", the extended definition of "resident" contained in paragraph (a)(i) had to be considered. Both the Supreme Court of New South Wales and, on appeal, the Full Court of the Federal Court of Australia held that the taxpayer had a permanent place of abode outside Australia. He was therefore a non-resident in the year of income concerned.

In the case of F.C. of T. v. Jenkins 82 ATC 4098; (1982) 12 ATR 745, a bank officer was transferred to the New Hebrides for three years. He returned to Australia after only 18 months because of ill health. The taxpayer had tried to sell the family home before going overseas but was unable to find a buyer. The Australian home was eventually leased and the taxpayer retained a bank account in Australia. It was held that the taxpayer had a permanent place of abode outside Australia during the period he was overseas even though he had not at any material time formed an intention to remain indefinitely in the New Hebrides in the sense in which the word "indefinitely" is used in Applegate. Sheahan J considered that if a stay of 10 years could not sensibly be regarded as "temporary", neither should a stay of three years be so regarded.

The employee will be living and working in Country Y for the duration of his posting. He is going to acquire and maintain a residence. He will open a local bank account and his wife and children will be living with him. In addition, he will not be required to return to Australia during the period of his posting.

The employee's effective connection with Australia during his posting in Country Y will be maintaining a residential property which is rented out and a bank account primarily to receive rental income.

The employee has no immediate family living in Australia and neither he nor his wife are members of the superannuation scheme established by deed under the Superannuation Act 1990 or are eligible employees for the purposes of the Superannuation Act 1976.

In conclusion, weighing all the circumstances, with particular reference to the case examples in paragraphs 35 and 36 of IT 2650 which are along similar circumstances, the Commissioner accepts that the employee will be considered a non-resident of Australia for the duration of his posting in Country Y.

PAYG withholding

The general provisions of the income tax legislation, sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 97), under which the income of taxpayers is brought to taxation, distinguish between residents and non-residents. Under these provisions, the assessable income of an Australian resident includes his or her ordinary and statutory income from all sources, whether inside or outside Australia, for the income year in question.

By contrast, the assessable income of a non-resident is, for the most part, confined to his or her ordinary and statutory income from Australian sources only.

As stated above, the employee will be considered a non-resident of Australia for the duration of his posting in Country Y, and therefore will generally be exempt from taxation in Australia on both ordinary income (section 6-5(3) of the ITAA 1997) and statutory income (6-10(5) of the ITAA 1997) unless the income has an Australian source.

The source of a taxpayer's income is the place where the services are performed: French v. FC of T (1957) 98 CLR 398.

In these circumstances, the salary and wages income the employee derives from Employer X during his posting in Country Y, are sourced in Country Y because his services are performed in Country Y. Therefore, they would not be included in the Australian assessable income of the employee.

The definition of exempt income in section 995-1 of the ITAA 1997 has the meaning given by section 6-20 of the ITAA 1997. Subsection 6-20(2) states:

Ordinary income is also exempt income to the extent that this Act excludes it (expressly or by implication) from being assessable income.

The salary and wage income derived by the employee during his posting in Country Y will be excluded (by implication) from his Australian assessable income under section 6-5(3) of the ITAA 1997 because it does not have an Australian source, and will therefore satisfy the definition of exempt income under subsection 6-20(2) of the ITAA 1997.

Section 12-1 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) contains the PAYG withholding general exceptions provisions. Subsection 12-1(1) of Schedule 1 to the TAA 1953 provides that an entity need not withhold an amount from a payment of salary and wages to an employee if the whole of the payment is exempt income of the employee receiving the payment.

Accordingly, as the salary and wages income derived by the employee during his posting in Country Y is exempt income in Australia, the PAYG withholding provisions under Subdivision 12-B of Schedule 1 to the TAA 1953 will not apply.

Note: The International Tax Agreements Act 1953 has no application in these circumstances as Australia does not have a double tax agreement with Country Y.