Edited version of your written advice

Authorisation Number: 1012731042441

Ruling

Subject: Foreign employment remuneration

Question and answer

Is your foreign employment remuneration assessable in Australia?

No.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You commenced employment with an international organisation in country X.

Your employment contract is for a period of three years with an option to extend.

Your employment contract states that the remuneration you receive is exempt from tax in country X.

The exemption is provided for by an agreement between the international organisation and country X.

Prior to taking up your foreign employment contract you were employed in Australia by an Australian Government department.

You have taken leave without pay for the duration of the foreign employment position and will remain a member of the Public Sector Superannuation Scheme (PSS) during this period.

You are living in country X with your spouse and have taken up a three year lease on an apartment in your name with an option to extend.

You have purchased a car, opened a bank account and obtained a credit card in country X.

Your salary is paid into your country X bank account.

You qualify as a resident of country X for tax purposes.

You continue to maintain your home in Australia which is occupied by your child who is attending university.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1936 Subsection 6(1)

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 5

Reasons for decision

Australian residency

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. 

Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes.

One of the four residency tests is known as the 'superannuation test'. A person will be considered a resident under this test if they are:

• a member of the superannuation scheme established under the Superannuation Act 1990 (the Public Sector Superannuation Scheme (PSS)); or

• an eligible employee for the purposes of the Superannuation Act 1976 (the Commonwealth Superannuation Scheme), or

• the spouse, or child under 16, of a person covered by either of the above schemes.

In your case, you will continue to be a member of the PSS for the duration of your foreign employment position. Therefore, you will remain a resident of Australia under this test for the period you are living and working in country X.

Residency under double tax agreement

In determining liability to Australian tax on foreign sourced income received by a resident it is necessary to consider not only the income tax laws but also any double tax agreement contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

The double tax agreement with country X (the Agreement) is listed in section 5 of the Agreements Act. The Agreement operates to avoid the double taxation of income received by residents of Australia and country X.

In your situation, you are a resident of both country X and Australia for tax purposes under the domestic laws of each country. Therefore, it is necessary to refer to the 'tiebreaker' rules contained in the Agreement to determine whether you will be treated solely as a country X resident or an Australian resident.

The Agreement states that where an individual is both a country X resident and an Australian resident, he or she will be treated solely as a country X resident:

• if he or she has a permanent home available to them in country X and has not a permanent home available to them in Australia;

• if the above is not applicable, then if he or she has an habitual abode in country X and has not an habitual abode in Australia;

• if neither of the above is applicable, then if the Contracting State with which his or her personal and economic relations are closest is country X.

Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements states that the OECD Model Tax Convention and Commentary (OECD Commentary) provides appropriate guidance when interpreting the terms used in double tax agreements.

In relation to a 'permanent home', the OECD Commentary states that:

….this home must be permanent, that is to say, the individual must have arranged and retained it for his permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short duration.

As regards the concept of home, it should be observed that any form of home may be taken into account (house or apartment belonging to or rented by the individual, rented furnished room). But the permanence of the home is essential; this means that the individual has arranged to have the dwelling available to him at all times continuously….

In your situation, you have leased an apartment in country X in which you and your spouse will live during the period of your employment contract. You are also maintaining your home in Australia.

Therefore, you are considered to have a permanent home in both countries and it must now be ascertained in which country you have a 'habitual abode'.

The OECD Commentary states that a comparison should be made over a 'sufficient' length of time to determine in which country the residence of the individual is habitual. This would usually be the country in which the individual spends most of his or her time.

In your situation, you will be living with your spouse in a leased apartment and working in country X for at least three years. Therefore, you are considered to have a habitual abode in country X.

Consequently, you will be treated solely as resident of country X under the Agreement.

Assessability of employment remuneration

In regard to the taxation of remuneration in respect of personal services, the Agreement states:

……. remuneration or other income derived by an individual who is a resident of one of the Contracting States in respect of personal (including professional) services shall be subject to tax only in that Contracting State unless the services are performed or exercised in the other Contracting State. If the services are so performed or exercised such remuneration or other income as is derived therefrom shall be deemed to have a source in, and may be taxed in, that other Contracting State.

In your case, you are a resident of country X under the Agreement. Therefore, your employment remuneration is only subject to tax in country X and is not assessable in Australia.

Although your employment remuneration will be exempt from tax in country X, the Agreement operates to give country X the sole taxing rights to your remuneration.