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Ruling

Subject: Assessable income

Question

Is the stipend income you earned from service in Australia paid by a foreign resident company assessable in Australia?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You were a citizen and resident of a foreign country until moving to Australia, You worked for a religious organisation prior to your departure, and continued to be employed by this organisation in Australia.

You received stipend payments from your foreign employer into your overseas bank account. No tax was deducted from these stipend payments. You had not commenced employment in Australia at this time. Subsequent stipend payments were correctly made by your Australian employer into your Australian bank account after you had commenced employment.

You and your spouse are both living and working in Australia, and intend to remain in Australia for two years. You are travelling on a religious worker's visa, have obtained rental accommodation, and have made social and religious connections in your local area.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 995-1

International Tax Agreements Act 1953

Reasons for decision

Under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), if you are a resident of Australia, your assessable income includes income derived from all sources both in and out of Australia. If you are a foreign resident, your assessable income includes income derived from all Australian sources.

Is your income sourced in Australia?

Taxation Ruling IT 2674 addresses the assessability of gifts received by religious workers. IT 2674 states that If a church worker receives a gift because of, in respect of, for, or in relation to any income-producing activity of the church worker, the gift is assessable income. The income-producing activity can arise from the church worker's office or occupation or some service rendered or to be rendered by the church worker. In other words, a gift (even if it is a receipt of a one-off nature) is assessable income if it is possible to:

(a) relate the receipt of the gift by the church worker to any income-producing activity on his or her part; or

(b) point to any employment, personal exertion or other income-earning activity by the church worker of which the receipt of the gift is in a relevant sense a product or incident.

As the stipend you receive is considered to be assessable income, it is necessary to consider where that income is sourced. The stipend you receive can be likened to a payment for employment for the purpose of determining its source.

The source of remuneration under a normal contract of employment is generally considered to be the place where the duties or services are performed rather than where the salary is paid from. This principle was endorsed in FC of T v. French (1957) 98 CLR 398, where it was the opinion of the Full High Court that wage income is most usually found to have its source where the employment is performed.  

(1968) 18 TBRD Case T50 involved a taxpayer, an Italian national, who was employed by an Italian corporation in its Australian branch. The contract of service was entered into in Italy. Part of the taxpayer's salary was paid into a bank account in Rome and part paid to him in Australia. The amounts paid in Italy were subject to Italian income tax. The Tribunal, relying on FC of T v. French, held that the place where the services were performed was of decisive importance in determining the source of the taxpayer's income irrespective of where it was paid.

Although your employment contract had not commenced when you received the payments in question, IT 2674 states that the income producing activity can arise from the worker's office or occupation or some service rendered or to be rendered. As such, the payments in question can be related to the Australian income earning activity you subsequently commenced, and are therefore Australian sourced. It is considered that the income you derive in Australia will have a source in Australia as this is where you are performing the services from which you derive your income.

Therefore, whether you are an Australian resident or a foreign resident, you are still assessable in Australia on Australian sourced income. However, your residency status affects the rate of tax payable.

Residency

Are you considered to be a resident of Australia?

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

The primary test for deciding the residency status of an individual is whether the individual resides in Australia according to the ordinary meaning of the word 'resides'. If an individual resides in Australia according to the ordinary meaning of the word, the other statutory tests in the definition do not require consideration. (Taxation Ruling TR 98/17 paragraphs 11 & 12).

TR 98/17 provides the Commissioner's interpretation of the ordinary meaning of the word 'resides'.

In determining whether a person resides in Australia, the following factors are considered:

· the period of physical presence or length of time in Australia,

· whether 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,

· the intention or purpose of presence,

· family and business/employment ties,

· maintenance and location of assets, and

· social and living arrangements.

No single factor is necessarily decisive and many are interrelated. The weight given to each factor varies depending on individual circumstances.

You have been in Australia more than 12 months. You have lived continuously in Australia to the present date. Combined with other factors of your behaviour whilst in Australia; being: 

· your employment in Australia;

· your spouse is located in Australia;

· you intend to stay in Australia for two years; and

· you have established social and religious connections in Australia,

· it is considered that you have displayed the behaviour of a 'resident' during the period of time you have been in Australia. Therefore, you a resident of Australia for taxation purposes.

International agreement

The operation of the ITAA 1936 & ITAA 1997 can also be affected by the provisions of the International Tax Agreements Act 1953, which takes precedence over the ITAA 1997.

The agreement between Australia and the foreign country determines who has taxing rights over certain income. Under the agreement, Australia has the primary taxing right in relation to your salary and wage income.

Even if the foreign country were to consider you a resident, Australia would still retain the primary taxing right in relation to your salary and wage income (with the exception of short term visits to Australia). This is because the source country retains the primary taxing right in relation to salary and wage income (Taxation Ruling 2001/13).