Edited version of private ruling

Authorisation Number: 1011806645266

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Ruling

Subject: Director's Fees - Foreign Resident

Question:

As a non resident, were you liable to pay the highest marginal rate of tax plus Medicare Levy on Director's Fees you derived from working in Australia not quoting a Tax File Number (TFN)?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 2010.

The scheme commenced on:

1 July 2009.

Relevant facts

You are a Country A citizen living in Country A.

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

You do not have a TFN in Australia.

In the 200X-Y income year you served as a Director on the board of an Australian Company.

You received a Director's fee of a specific amount of which another specific amount of tax was deducted.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 6-10(5)

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

Reasons for decision

Subsection 6-5(3) of the Income Tax Assessment Act ITAA 1997 (ITAA 1997) provides that ordinary income derived by a foreign resident directly or indirectly from Australian sources, as well as other ordinary income included by a provision on a basis other than having an Australian source, is assessable.

Statutory income from all Australian sources, or included by a provision on a basis other than having an Australian source, is also included in a foreign resident's assessable income under subsection 6-10(5) of the ITAA 1997.

Director's fees which are paid to you as remuneration or as a reward for your personal services provided as the director of a company forms part of your assessable income under subsection 6-5(3) of the ITAA 1997.

However, the Tax Treaties that Australia has with various countries under the International Tax Agreements Act 1953 (Agreements Act) operates to prevent the double taxation of income. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

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

A specific Article of the Country A Convention states that Director's fees and other similar payments derived by a resident of Country A in that person's capacity as a member of the board of directors, or similar body, of a company which is a resident of Australia may be taxed in Australia.

Generally, Australian courts have held that the source of employment income is where the employee performs their duties (C of T (NSW) v. Cam and Sons Ltd (1936) 36 SR (NSW) 544; 4 ATD 32 and FC of T v. French (1957) 98 CLR 398; (1957) 7 AITR 76; 11 ATD 288). Thus, employment income earned while carrying out duties in Australia is considered to be sourced in Australia.

In your case, the service is performed in Australia, as a director of an Australian company - which gives the remuneration an Australian source.

Therefore, the remuneration paid to you in respect of the personal services provided by you in Australia as a director of an Australian company, will be assessable under subsection 6-5(3) of the ITAA 1997.

Accordingly, if you did not quote a TFN, claim an exemption from quoting a TFN on the declaration or did not provide a declaration, your employer was required to withhold tax at the top marginal rate (plus Medicare levy for non-residents) from all payments they made to you.

However, if you did supply a TFN, the tax rates your employer was supposed to withhold for you as a foreign resident for income tax purposes are below:

Foreign Resident Tax rates 2009-10:

Foreign residents are not required to pay the Medicare levy.

Note:

If you would wish to apply for a TFN in Australia, please go to the Australian Tax Office website at www.ato.gov.au.