Edited version of your written advice

Authorisation Number: 1012725301062

Ruling

Subject: PAYG withholding obligations

Question 1

Is the entity required to account for PAYG pursuant to section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) in respect of the usual arrangement?

Answer

No

Question 2

Is the entity required to account for PAYG pursuant to section 12-35 of Schedule 1 to the TAA in respect to an arrangement which is not the usual arrangement?

Answer

No

Question 3

Is there an obligation on the entity to withhold from specific payments made to participants in the Program under section 12-35 of Schedule 1 to the TAA?

Answer

No

Question 4

Does the type of visa obtained by the individual have any impact on the taxation outcome?

Answer

No

This ruling applies for the following periods

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commenced on

1 July 2014

Relevant facts

The usual arrangement

The entity is an Australian resident employer that is a member of a network of member firms.

The entity participates in the program, a program which all member firms participate in.

The program is not intended to meet any short-term resource needs in Australia.

The program offers work placements for the entity's employees under 183 days.

The assignees remain employed by their foreign employer while in Australia.

The foreign entity continues to pay the assignee's fixed salaries while they are in Australia. This salary is based on the foreign employment contract. The assignees continue to be subject to tax in their home country and the home country employer continues to withhold home country taxes on their salaries or they will pay tax on their salary.

Assignees enter Australia on a subclass 457 Temporary Work (Skilled) visa.

The foreign employer selects the candidates for the short-term assignments and has overall responsibility for the number of assignees assigned to Australia (however, agreed with the Australian firm).

The foreign employer is not an Australian resident entity and does not have a permanent establishment in Australia. The foreign employer derives no income from the assignment.

The assignees enter into employment contracts with the foreign employer before they are assigned to Australia (via the Home Agreement).

The assignees also enter into an agreement with the Australian firm (the Australian employment style work agreement).

The Australian employment style agreements:

• are necessary for meeting the Australian firm's risk management requirements and to comply with certain legal requirements

• are not intended to be a formal employment contract

• outline the assignee's working conditions with the Australian firm such as duration of assignment, normal working hours, work locations and dress standards

• are to be read in conjunction with the assignee's home agreement. Certain clauses within the Australian employment style agreement expressly refer to the terms of the assignee's Home Agreement.

There is no intention to create a formal contractual relationship between the Australian firm and the assignees

Terms relating to remuneration, leave entitlements and termination are based on the assignee's home agreement.

The Australian firm provides the assignees with instructions as to the activities to be undertaken which will be carried out at either the Australian firm's work premises or client premises under the control and responsibility of the Australian firm.

While working in Australia, the assignees will need to comply with the Australian firm's regulations, risk management and quality control protocols.

However, doing client work in Australia may be incidental to the activities undertaken by the assignees as the foreign employer will receive no compensation as a result of the assignee's presence in Australia.

The Australian firm bears the responsibility for any work produced by the assignees and would be responsible for claims arising out of any defective work produced by the assignees or for any act of fraud or negligence during their participation in the program.

Career development in a global environment

The overall purpose of the assignee's work at the Australian firm is career development. The program sets out the training and work experience program objectives. The assignees receive training in professional services and practices which can be applied in the home country.

The overarching objective and intent of the assignee's participation in the program is to provide them with international experience and skills able to be utilised in their employment by the foreign employer.

The assignment of assignees to Australia is neither intended to benefit the Australian entity economically nor result in material costs to the Australian firm.

Costs and allowances

The foreign employer does not charge the Australian firm for the provision of assignees. All the salary and social costs related to the assignees are borne by the home employer and not recharged to the entity by the foreign employer.

The Australian firm may:

• pay the assignees a daily amount to subsidise daily living expenses; and

• secure corporate housing for the duration of the assignee's stay.

The rate of the amount paid per day in Australia varies depending on the city of allocation.

A third party will fund certain costs payable in relation to the assignee.

Reimbursement of these expenses as well as any other assignment related expenses will be sought from the third party.

The Australian firm does not provide any other allowance in relation to the employment in Australia.

None of the costs incurred by the foreign employer are recharged or otherwise invoiced to the Australian firm.

The above facts are the usual arrangement where the assignee predominantly only undertakes training, development and networking activities, with some client related work.

Not the usual arrangement

One particular overseas tax resident was assigned to the entity in Australia under the program. This assignee did a much higher degree of client work for the entity in Australia.

Relevant legislative provisions

Taxation Administration Act 1953 Section 12-1 to Schedule 1

Taxation Administration Act 1953 Section 12-35 to Schedule 1

Taxation Administration Act 1953 Subsection 12-1(1A) to Schedule 1

Income Tax Assessment Act 1997 Section 6-5

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

Income Tax Assessment Act 1936 Section 6(1)

Australian Treaty Series 1979 No. 21 ([1979]) ATS 21

Reasons for decision

Question 1

Summary

There is no obligation on the entity to withhold from payments of wages made by the foreign employer to assignees in Australia (the usual arrangement).

Detailed reasoning

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) states 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).

Taxation Ruling TR 2005/16 "Income Tax: Pay As You Go - withholding from payments to employees" provides guidance as to whether an individual is paid as an employee.

Paragraph 12 of TR 2005/16 states a payment does not necessarily have to be between employer and employee for the payment to be covered by section 12-35 of Schedule 1 to the TAA. However, it is a requirement that the payment be made to the employee in their capacity as an employee, either of the payer or another entity.

Section 12-1 of Schedule 1 to the TAA provides general exceptions to the Pay As You Go (PAYG) withholding obligations.

Subsection 12-1(1A) of Schedule 1 to the TAA states an entity need not withhold an amount under Subdivision 12-B, Subdivision 12-C or section 12-120 or 12-190 from a payment if the whole of the payment is not assessable income and is not 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 ordinary income derived by the non-resident directly or indirectly from Australian sources and other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source. In other words, a non-resident is generally liable to Australian tax only on ordinary and statutory income from Australian sources.

Remuneration derived from employment is ordinary income under subsection 6-5 of the ITAA 1997.

As such, it is necessary to determine whether or not the assignee is a resident of Australia and then to determine the source of the income concerned.

Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) defines a resident or resident of Australia. In part it states:

• A person, other than a company, who resides in Australia and includes a person:

• whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside of Australia

• who has actually been in Australia, continuously or intermittently, during more than one half of the year of income, unless the Commissioner is satisfied that his usual place of abode is outside of Australia and that he does not intend to take up residence in Australia; or who is:

• a member of the superannuation scheme established by deed under the Superannuation Act 1990; or

• an eligible employee for the purposes of the Superannuation Act 1976; or

• the spouse, or a child under 16, of a person covered by sub-subparagraph (A) or (B) ...

In this case, the program supports short term mobility assignments of a period up to 183 days. The domicile of assignees is not in Australia, the assignees have not been continuously or intermittently in Australia during more than one half of the year of income and none of the three criteria under paragraph 6(1)(a)(iii) of the ITAA 1936 has been satisfied. As none of the conditions under subsection 6(1) of the ITAA 1936 have been met the assignees are not considered residents of Australia.

As assignees are considered non-residents, income derived can only be assessable in Australia if that income is sourced in Australia.

The source of income derived from employment is generally the place where the duties or services are performed. The remuneration received by the assignees while working in Australia has an Australian source.

In determining liability on tax on Australian-sourced income received by a non-resident it is necessary to consider not only the income tax laws in Australia but also any applicable double tax agreement.

The agreement outlines the treatment of income from employment. It provides that remuneration derived by a resident of the overseas country shall be taxable in that country unless the employment is exercised in Australia. If the employment is exercised in Australia then the income may also be taxed in Australia.

The agreement contains a general exception to that rule. This exemption generally concerns employment of short duration abroad.

For remuneration to qualify for the exemption, the following three conditions must be satisfied concurrently:

(a) the recipient is present in that other State for a period or periods not exceeding in the aggregate 183 days in the year of income or in the taxable period, as the case may be, of that other State; or

(b) the remuneration is paid by, or on behalf of, an employer who is not resident of that other State; and

(c) the remuneration is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has in that other State.

First condition

In this case the first condition has been met as the assignees are bound to only be assigned for a period of less than 183 days.

Second condition

The second condition is satisfied if the "employer" is deemed to be a non-resident entity. The term "employer" is undefined for the purposes of the short-term visit exception and takes its meaning from Australian domestic law, as well as the context, object and purpose of the short-term visit. When determining which entity is the "employer", a substance over form approach, should be adopted in analysing the relevant employment relationships. Under the economic employer approach, each case is examined to determine which entity exercises the main functions of the real employer. This is largely a matter of fact and degree having regard to all the relevant factors.

Paragraph 13 of Taxation Ruling TR 2013/1 lists a number of factors to be taken into consideration when determining which entity is the real employer, which in summary includes:

• who exercises ultimate control over the worker - the right to control in terms of the ability to withdraw a worker from an assignment and/or terminate the relationship with the worker

• who exercises day to day control over the worker - that is, the degree of actual control exercised in terms of, for example, how, when and what is to be done

• integration - the nature of the services rendered by the worker and whether they are an integral part of the business activities carried on by the enterprise to which the services are provided

• the terms of the engagement - for example entitlements to leave and who has obligations to deduct PAYG instalments, pay superannuation contributions and workers' compensation insurance

• who is responsible for payment of remuneration for the worker's services

• who bears the responsibility or risk for the results produced by the worker

• whether or not the contract is for the achievement of a specified result

• who provides or maintains the necessary equipment and resources to perform the work; and

• whether or not the work can be delegated by the worker.

From the information supplied on balance, it is considered that the entity in the overseas country is the real employer.

Third condition

The remuneration paid by the overseas employer to assignees is not deductible in Australia as it does not have a permanent establishment or a fixed base in Australia.

As all three conditions have been met the remuneration paid by the overseas entity to assignees in Australia will continue to be subject to tax in that country and is not liable for tax in Australia.

Subsection 12-1(1A) of Sch 1 to the TAA states in part an entity need not withhold an amount under Subdivision 12-B from a payment if the whole of the payment is not assessable income and is not exempt income of the entity receiving the payment.

In this case as discussed previously, the payment received by the assignees is not assessable income and is not exempt income of the assignees, as defined under section 6-20 of the ITAA 1997, consequently there is no obligation on the entity to withhold from the payments made to the assignees.

Question 2

Summary

There is no obligation on the entity to withhold from payments of wages made by the overseas employer to the assignee in Australia (not the usual arrangement).

Detailed reasoning

As explained previously the assignee is considered a non-resident of Australia therefore income derived by the assignee can only be assessable in Australia if that income is sourced in Australia.

In determining liability for tax on Australian sourced income received by a non-resident it is necessary to consider the applicable double tax agreement.

The agreement operates to avoid the double taxation of income received by a non-resident of Australia from Australian sources and provides that remuneration derived by a resident of the overseas country shall be taxable in that country unless the employment is exercised in Australia. If the employment is exercised in Australia then the income may also be taxed in Australia. There is an exemption to the above rule if three conditions are met. It has previously been established that all three conditions have been met.

As all three conditions have been met the salary amounts are exempted and will only be taxable in the overseas country. As the salary amounts are not assessable income nor exempt income to the assignee there is no requirement to withhold from the payments as outlined under subsection 12-1(1A) of Sch 1 to the TAA.

Question 3

Summary

There is no obligation on the entity to withhold from payments of a daily amount made by the entity to assignees in Australia.

Detailed reasoning

As explained previously the assignees are considered non-residents of Australia therefore income derived by assignees can only be assessable in Australia if that income is sourced in Australia.

In determining liability on tax on Australian sourced income received by a non-resident it is necessary to consider the applicable double tax agreement.

The agreement operates to avoid the double taxation of income received by a non-resident of Australia from Australian sources and provides that remuneration derived by a resident of the overseas country shall be taxable in that country unless the employment is exercised in Australia. If the employment is exercised in Australia then the income may also be taxed in Australia. There is an exemption to the above rule if three conditions are met. It has previously been established that the three conditions have been met therefore the amounts will only be taxable in the overseas country. As the amounts are not assessable income to the assignees and not exempt income there is no requirement to withhold from the payments under section 12-35 of Sch 1 to the TAA as outlined under subsection 12-1(1A) of Sch 1 to the TAA.

Question 4

Detailed reasoning

If assignees are considered non-residents of Australia and income received is sourced in Australia, provided all three conditions under Article 15(2) of the agreement are met, any income received from the overseas employer will not be assessable income in Australia to assignees irrespective of what sort of visa they have been granted.