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Ruling

Subject: Business reporting

Question 1:
Do you have Pay As Yo Go Withholding (PAYGW) obligations for wages paid to your employees who live and work abroad?
Answer:

No.
Question 2:
Are you liable for Superannuation Guarantee Contribution for your employees who live and work abroad?

Answer:
No.

Question 3:
Is a business deduction available for wages paid to your employees who live and work abroad?
Answer:

Yes.
This ruling applies for the following period
Year ending 30 June 2013

The scheme commenced in

1 July 2012

Relevant facts and circumstances

You will commence a business in Australia employing overseas staff who will complete the work and return it to you. None of the overseas employees are connected to Australia. They will not work or live in Australia as they want to remain in their own country.

Relevant legislative provisions

Taxation Administration Act 1953 section 12-35 to schedule 1
Taxation Administration Act 1953 subsection 12-1(1) to schedule 1
Income Tax Assessment Act 1997 subsection 6-5(3)
Income Tax Assessment Act 1997 section 8-1
Superannuation Guarantee (Administration) Act 1992 section 27

Reasons for decision

PAYGW

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

Subsection 12-1(1) of Schedule 1 to the TAA however, provides that an entity need not withhold an amount from a payment if the whole of the payment is exempt income of the recipient.

Under subsection 6-20(1) of the Income Tax Assessment Act 1997 (ITAA 1997), an amount of ordinary income or statutory income will be treated as exempt income if it is made exempt by a provision of the Act. Subsection 6-20(2) provides that ordinary income may also be exempt income if it is excluded expressly or by implication from being assessable income. Ordinary income includes salary and wages income.

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a foreign resident includes ordinary income derived directly or indirectly from all Australian sources. The source of remuneration for services rendered is generally the place where those services are performed (Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 11 ATD 288; (1957) 7 AITR 76).

Therefore where a foreign employee is performing services overseas, the source of the income is the country where the services are performed. As such the income is not Australian sourced and not included in the assessable income in Australia. The income is exempt income of the employee. Consequently, an Australian employer is not required to withhold a PAYG amount from the salary and wages paid to the foreign employee pursuant to subsection 12-1(1) of Schedule 1 to the TAA.

Superannuation

Section 27 of the Superannuation Guarantee (Administration) Act 1992 provides that salary and wages paid to an employee who is not a resident of Australia for work done outside Australia are not to be taken into account for the purpose of making a calculation for the Superannuation Guarantee payment.
Wage deduction

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature.

For expenses to be an allowable deduction under section 8-1 of the ITAA 1997 there must be a sufficient connection between the outgoing and the activities directed at gaining or producing assessable income. The decision in Ronpibon Tin v. FCT (1949) 78 CLR 47; (1949) 8 ATD 431, confirms that for an outgoing to be deductible, a taxpayer has to establish that there is a sufficient nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of the assessable income.

In your case the payment of wages to your employees is an allowable deduction as there is a sufficient nexus between the outgoing and the production of assessable income.