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Ruling

Subject: Pay As You Go (PAYG) withholding

Question 1

Is the Rulee required to withhold an amount pursuant to section 12-35 of Schedule 1 to the Taxation Administration Act 1953 under the arrangement by which the Country Y resident individuals are seconded to the Rulee in Australia?

Answer

No

This ruling applies for the following periods:

Years ended 30 June 2016 to 30 June 2019

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The Rulee and Company X are both members of a global network of member firms that provide professional services.

The Rulee is an Australian resident.

Company X is not an Australian resident entity and does not have a permanent establishment in Australia.

There are a number of Company X trainees (trainees) seconded from Country Y to undertake training in the Program with the Rulee.

The trainees

The trainees enter Australia on a 'work and holiday' visa.

The trainees will not be present in Australia for a period exceeding 3 months in an Australian year of income.

The trainees remain Country Y residents for tax purposes while in Australia. The trainees continue to be subject to tax in Country Y and Company X continues to withhold Country Y taxes on their salaries.

The overarching objective and intent of the trainees' assignment is to provide them with experience and skills able to be utilised in their employment by Company X.

The Program and relationship between the parties

The Program is created, owned and managed by Company X. Company X has identified that international experiences will be of benefit to its employees.

The primary objective of the secondment of the trainees to the Rulee is to provide foreign work-based training experience for Company X employees. The Program does not meet any short-term resource needs in Australia for the Rulee.

Company X selects the trainees for the secondments and has overall responsibility for the number of trainees seconded to Australia (as agreed with the Rulee).

The secondments are governed by a 'Secondment Program' between the Rulee and Company X.

The Program guidelines are contractually agreed to between the Rulee and Company X as an overview of the timing, contracts and costs of the secondment.

The trainees enter into employment contracts with Company X (Company X Agreement) before they are seconded to Australia.

The trainees also enter into an arrangement described as an employment agreement with the Rulee (Rulee Work Agreement). The Rulee Work Agreement is necessary for meeting the Rulee's management requirements and to comply with certain legal requirements.

The Rulee Work Agreement outlines the trainees' working conditions with the Rulee such as duration of secondment, normal working hours, work location and dress standard.

In providing the trainees with an Australian employment agreement there is no intention to create a formal financial contractual relationship between the Rulee and the trainee.

The Rulee Work Agreement is to be read in conjunction with the trainees' Company X Agreement. Certain clauses within the Rulee Work Agreement expressly refer to the terms of the trainees' Company X Agreement.

Terms relating to remuneration, leave entitlements and termination are based on the trainees' Company X Agreement.

The trainees' assignment may be terminated only in accordance with the terms of their Company X Agreement. As such, Company X can repatriate the trainees at any time. Company X also retains the authority to give notice and discontinue a trainee's employment.

The Rulee directs the duties and activities of the trainees during their secondment to Australia. The Rulee provides the trainees with instructions as to the activities to be undertaken which will be carried out at either the Rulee's work premises or at a client's premises under the control and responsibility of the Rulee.

While working in Australia, the trainees need to comply with the Rulee's regulations, risk management and quality control protocols.

Some trainees may undertake work which can be chargeable to clients of the Rulee. The extent of monetary reward to the Rulee will be determined by the amount of chargeable activity that the trainees are engaged in and will vary depending upon the individual trainee and the particular client which whom they may work.

The Rulee does not consider chargeable work a key element of the assignment. It may be incidental to the activity undertaken by the trainee as a requirement of due process.

The Rulee bears the responsibility for any work produced by the trainees and would be responsible for claims arising out of any defective work produced by the trainees or for any act of fraud or negligence during their training.

Company X is responsible for losses arising from the hiring, or the sending on secondment, of the secondee or from the employment relationship of the secondee with Company X.

Costs and allowances

The Program guidelines between the Rulee and Company X deal with the allocation of costs and allowances relating to the secondments.

The secondment of trainees to Australia is not intended to benefit the Rulee economically or result in material costs to the Rulee.

Company X does not charge the Rulee for the provision of trainees.

Company X will receive no compensation as a result of the trainees' presence in Australia.

The salary and social costs related to the trainees are borne by Company X and not recharged to the Rulee by Company X.

The Rulee may incur overhead costs relating to infrastructure set-up and potentially some reimbursement of business travel costs if the trainee was required to spend time away from the normal allocated office within Australia. All other tools and materials are put at the trainees' disposal by Company X.

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

Relevant legislative provisions

Taxation Administration Act 1953 subsection 12-1(1) of schedule 1.

Taxation Administration Act 1953 subsection 12-1(1A) of schedule 1.

Taxation Administration Act 1953 subsection 12-35 of schedule 1.

Income Tax Assessment Act 1936 subsection 6(1).

Income Tax Assessment Act 1997 subsection 6-5(1).

Income Tax Assessment Act 1997 subsection 6-5(3).

Income Tax Assessment Act 1997 subsection 995-1(1).

Agreement between the Commonwealth of Australia and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to certain other Taxes, and Protocol [1975] ATS 8, article 14.

Reasons for decision

Section 12-35 of Schedule 1 to the TAA 1953 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).

Taxation Ruling 2005/16 Income Tax: Pay As You Go - withholding from payments to employees (TR 2005/16) provides guidance as to whether an individual is paid as an employee for the purposes of section 12-35 of Schedule 1 to the TAA 1953. As stated in paragraph 12 of TR 2005/16:

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 1953. 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 1953 provides general exceptions to the PAYG withholding obligations. The payer entity need not withhold an amount from a payment if the whole of the payment is not assessable income and is not exempt income of the entity receiving the payment pursuant to subsection 12-1(1A) of Schedule 1 to the TAA 1953.

Is the trainee's income assessable?

A person is a resident for Australian tax purposes if the tests in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) are satisfied. In this case, the trainees are not residents of Australia for tax purposes because they are residents of Country Y and they are present in Australia for less than 183 days in the Australian year of income. A person who is not a resident of Australia for the purposes of the ITAA 1936 is a 'foreign resident' as defined under subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

Pursuant to subsection 6-5(3) of the ITAA 1997 the assessable income of a foreign resident includes ordinary and statutory income derived from Australian sources.

The trainees receive income from Company X relating to employment. Income derived from employment is ordinary income, included in assessable income under subsection 6-5(1) of the ITAA 1997. Income derived from employment is generally considered to be 'sourced' in the place where the duties or services are performed. As the trainees perform duties for the Rulee in Australia, their income from Company X is employment income sourced in Australia and therefore prima facie assessable in Australia.

However, because the trainees are foreign residents it is necessary to consider whether the applicable double tax agreement alters the general application of Australian tax laws.

The relevant double tax agreement in this case is the Country Y Agreement.

The Country Y Agreement operates to avoid the double taxation of income received by Australian and Country Y residents.

Application of the Country Y Agreement

The relevant Article of the Country Y Agreement deals with the treatment of income from employment. The relevant Article of the Country Y Agreement provides that remuneration derived by a resident of Country Y shall be taxable in Country Y unless the employment is exercised in Australia. If the employment is exercised in Australia then the income may be taxed in Australia.

In this case, the employment is 'exercised' in Australia because the trainees render their services in Australia in exchange for their income. Therefore, their employment income would be taxable in Australia under the rule in the relevant Article of the Country Y Agreement. However, the relevant Article of the Country Y Agreement contains a general exception to the rule. This exemption is known as the 'short-term visit exception'.

For income to qualify for the short-term visit exception the following three conditions prescribed in the relevant Article of the Country Y Agreement must be satisfied:

(a) The recipient is present in Australia for a period or periods not exceeding in the aggregate 183 days in the Australian year of income;

(b) The remuneration is paid by or on behalf of an employer who is not a resident of Australia; and

(c) The remuneration is not deductible in determining the profits of a permanent establishment or a fixed base which the employer has in Australia.

In this case, the trainees will be taxed in Country Y (their country of residence) and not in Australia if each of these three conditions is satisfied.

(a) Recipient present in Australia for less than 183 days

On the facts provided, the first condition is satisfied because the trainee is not present in Australia for a period exceeding 183 days in an Australian year of income.

(b) Remuneration paid by a non-resident employer

The second condition in the relevant of the Country Y Agreement is that remuneration is paid by or on behalf of an employer who is not a resident of Australia. The term 'employer' is not defined in the Country Y Agreement.

Taxation Ruling TR 2013/1 Income tax: the identification of 'employer' for the purposes of the short-term visit exception under the Income from Employment Article, or its equivalent, of Australia's tax treaties (TR 2013/1) considers the meaning of the term 'employer' under tax treaty articles such as the relevant Article of the Country Y Agreement.

In the context of the relevant Article of the Country Y Agreement, the 'employer' is the enterprise to which the non-resident Country Y trainees render their services in what would be considered an employment relationship (paragraph 5 of TR 2013/1).

In determining who the employer of a Country Y trainees is, the Commissioner must consider key indicators of an employment relationship arising from Australian domestic law as well as the context, object and purpose of the exception provided for by the relevant Article of the Country Y Agreement (paragraphs 7 and 8 of TR 2013/1).

The relationship between an employer and an employee is a contractual one. Whether a contractual relationship exists is a question of law considering the totality of the relationship between the parties (paragraphs 9 and 10 of TR 2013/1). It is necessary to consider the substance, and not merely form, of any contractual relations (paragraph 11 of TR 2013/1).

Key indicators of an employment relationship under Australian common law are listed in paragraph 13 of TR 2013/1, as follows:

• Who exercises ultimate control over the employee - 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 engagement - for example, entitlements to leave and who has obligations to deduct PAYG tax, 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.

No one factor is determinative and not all factors will be relevant in a particular case.

Factors that tend towards identifying an employment relationship between the trainees and the Rulee include:

• The trainees enter the Rulee Work Agreement with the Rulee, which is a form of employment agreement.

• The Rulee exercises practical, on-the-job control of the trainee while the trainee is on secondment. This is because the trainees will generally perform work at the Rulee's offices, take instructions and comply with the Rulee's regulations, risk management and quality protocols while working in Australia. Paragraph 99 of TR 2013/1 acknowledges this type of practical control in this type of secondment arrangement is not determinative.

• The Rulee bears the responsibility for any work produced by the trainees and would be responsible for any claims arising out of any defective work produced by the trainees or for any act of fraud of negligence.

• The Rulee may incur overhead costs relating to infrastructure set-up and potentially some reimbursement of business travel costs if the trainee was required to spend time away from the normal allocated office within Australia. These amounts are not reimbursed by Company X or the trainee. Paragraph 123 of TR 2013/1 illustrates that even the provision of significant equipment to a worker to perform their work is not conclusive of an employment relationship. In this case, the provision of equipment by the Rulee to the trainees for use while in Australia is not significant and not determinative of the employment relationship.

On the other hand, the following factors indicate an employment relationship between the trainees and Company X:

• The Rulee Work Agreement does not cover all terms peculiar to an employer-employee relationship. The Rulee Work Agreement is intended to create contractual rights with respect to certain legal requirements (occupational health and safety and confidentiality etc.) and quality and risk management requirements.

• By comparison with the Rulee Work Agreement, the Company X Agreement entered into between Company X and the trainee deals with a broader range of employer-employee issues including leave, remuneration and termination.

• The terms of the Program guidelines between the Rulee and Company X deals with the trainees employment status which relevantly states:

'[the trainees] will remain employees of [Company X] however they will sign an agreement similar to an employment contract with [Rulee] governing certain legal provisions (for instance, confidentiality) and to meet quality and risk management requirements.'

This express agreement between the parties reflects an intention between them that Company X remain the 'employer'. While the intention of the parties is not determinative, it is a nevertheless a relevant factor to be considered.

• Under the Company X Agreement, the trainees are entitled to be paid an agreed amount of remuneration by Company X while on secondment. The Program guidelines confirm that the remuneration is paid via Country Y payroll. There is nothing to suggest that the Rulee can influence the amount of remuneration a trainee receives while on secondment.

• Under the Company X Agreement, Company X can repatriate the trainees at any time and retains the authority to give notice and discontinue a trainee's employment. Paragraph 97 of TR 2013/1 acknowledges that the ability to withdraw a person from assignment and terminate their contract is reflective of ultimate control. Company X's ultimate control of the trainee is significant, even if day-to-day control is exercised by the Rulee.

• Paragraphs 106 and 107 of TR 2013/1 recognise that in work arrangements such as this, it is not determinative of an employment relationship that the Rulee benefits from the trainee's services rather than Company X. The purpose of the secondment is not to fill a short-term resourcing need of the Rulee. The trainee may undertake chargeable work for the Rulee, but this is not the purpose of the secondment. The purpose of the secondment is for trainees to gain training, experience and skills in audit and tax practices which can be applied in Country Y for the benefit of Company X.

• Paragraph 114 of TD 2013/1 indicates that terms of engagement relating to length of assignment may be a relevant consideration. The Rulee Work Agreement is expressly stated to be for a period of three months. The trainees are in Australia on a 'work and holiday' visa, confirming the temporary nature of their stay. The short and temporary nature of the assignment to the Rulee is in contrast to the ongoing relationship between the trainees and Company X.

• Company X bears the majority of the trainee's cost of secondment including their Assignment Services fee, visa costs, medical and travel insurance coverage, return economy airfare, airport transfer upon arrival, cost of accommodation and 'all other costs arising from the program'. None of the costs incurred by Company X are recharged or otherwise invoiced to the Rulee. Company X does not charge or invoice the Rulee for the provision of trainees.

• Company X is responsible for losses arising from the hiring or sending on secondment of the trainee or from the employment relationship of the trainee with Company X.

• The trainees remain residents of Country Y for tax purposes while working in Australia and continue to be subject to tax in Country Y. Company X continues to withhold Country Y taxes on the trainees' salaries.

A balanced and reasonable weighing of the relevant factors concludes that Company X is, in substance and form, the employer of the trainees for the purpose of the short-visit exception.

(c) Remuneration is not in Australia

Having concluded that the trainees' remuneration is paid for by Company X, the third condition requires that the remuneration is not borne by a permanent establishment or a fixed base which Company X has in Australia. On the facts provided, Company X is not an Australian resident entity and does not have a permanent establishment in Australia.

Conclusion

Income derived by the trainees in respect of an employment exercised with the Rulee in Australia is not assessable in Australia as a result of the application of the relevant Article of the Country Y Agreement. Accordingly, pursuant to subsection 12-1(1A) of Schedule 1 to the TAA 1953, the Rulee is not required to withhold an amount under section 12-35 of Schedule 1 to the TAA 1953.