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Ruling

Subject: Exempt employment income - government service

Question

Is the remuneration you derive from employment with the overseas financial institution exempt from tax in Australia?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You are a national of Country X.

You are not an Australian citizen.

You are a temporary resident of Australia, living and working in Australia while holding a temporary resident visa.

You are an employee of an overseas financial institution.

Your remuneration is in relation to your employment services for the overseas financial institution in Australia.

The overseas financial institution is 100% owned by the government of Country X, which has general authority to monitor operations and provide funding approval.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(3).

International Tax Agreements Act 1953 Section 4.

International Tax Agreements Act 1953 Section 5.

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 includes ordinary income derived directly or indirectly from all Australian sources during the income year.

In determining liability to tax on Australian sourced 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).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Australia has signed a double tax agreement with Country X which is called the Country X Convention. The Country X Convention operates to avoid the double taxation of income received by Australian and Country X residents.

Article X of the Country X Convention exempts from Australian tax remuneration paid by the Government of Country X to an individual for services rendered in the discharge of governmental functions for the Country X Government unless the individual is an Australian citizen or ordinarily resident in Australia.

However, Article X of the Country X Convention provides that Article X does not apply to payments in respect of services rendered in connection with a business carried on by the Country X Government.

In your case, the overseas financial institution is a fully controlled and funded financial institution of the Country X Government that does not compete commercially with other financial institutions.

We accept that the overseas financial institution is not carrying on a business, and accordingly Article X of the Country X Convention will not apply.

You are an employee of the overseas financial institution, and are discharging governmental functions for the Country X Government. Further, you are not an Australian citizen or ordinarily resident in Australia. Accordingly, the remuneration you receive from the Country X Government is exempt from tax in Australia under Article X of the Country X Convention.

Consequently, the remuneration you receive from the overseas financial institution as an employee in Australia is not assessable under subsection 6-5(3) of the ITAA 1997.