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Ruling

Subject: PAYGW - payment to non resident entity

Question:

Is Company X required to withhold from payments made to a non resident entity for services provided to Company Y.

Answer:

No.

This ruling applies for the following period

Year ended 30 June 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

A foreign entity has been engaged to provide architectural design services for a building development project in Australia.

The foreign entity is an individual and a resident of County Z.

The foreign entity is responsible for its tax obligations in Country Z

The foreign entity will carry out the work in Country Z and will only visit Australia occasionally for meetings.

The Company Y will issue payments either through Company X, as the main consultant, or they will pay the foreign entity directly.

The foreign entity is contracted to Company Y. They are not a subcontractor for company X.

The foreign entity is not a director or employee of Company X.

Relevant legislative provisions

Taxation Administration Act 1953 Subsection Sch1-12-1(1)

Taxation Administration Act 1953 Section Sch1-12-35

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

Income Tax Assessment Act 1997 6-20(2)

International Tax Agreements Act 1953

Reasons for decision

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) states that an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

However, subsection 12-1(1) of Schedule 1 to the TAA provides that an entity need not withhold an amount under section 12-35 from a payment if the whole of the payment is exempt income of the entity receiving the payment.

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a foreign resident includes the ordinary income derived from all Australian sources during the income year.

Salary and wages are ordinary income.

Subsection 6-20(2) of the ITAA 1997 provides that ordinary income is exempt income to the extent that it is excluded whether expressly or by implication from assessable income by the ITAA 1997.

Article 14 (1) (Independent personal service) of Country Z Agreement provides that income derived by an individual who is resident of country Z in respect of professional services shall be taxable only in Country Z except in one of the following circumstances, when the income may also be taxed in the other Contracting State:

· if the individual has a fixed base regularly available to him or her in the other Contracting State for the purpose of performing his or her activities; in such a case, only so much of the income as is attributable to that fixed base may be taxed in that other Contracting State; or

· if the individual's stay in the other Contracting State is for a period or periods exceeding in the aggregate 183 days in any consecutive period of 12 months; in such a case, only so much of the income as is derived from his or her activities performed in that other State may be taxed in that other State.

Article 14 (2) provides clarification of the term professional services to include those performed as the independent activities of architects.

Therefore where a foreign resident derives ordinary income from sources outside Australia, that income is not included in their assessable income in Australia. The income is exempt income.

The foreign entity is a resident of Country Z who will be deriving salary and wages income from services performed in Country Z. None of the exclusions at Article 14(1) (a) or (b) apply. Therefore, such income will not be included as assessable income in Australia pursuant to subsection 6-5(3) of the ITAA 1997.

Accordingly Company X is not required to withhold an amount under the PAYG withholding system from the payments Company Y will make through Company X to the foreign entity for services performed in Country Z.