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Edited version of your written advice
Authorisation Number: 1012872082161
Date of advice: 3 September 2015
Ruling
Subject: Assessability of income and withholding requirements
Questions and answers:
1. Is the employment income derived by a foreign resident employee where the employment is exercised outside of Australia assessable in Australia?
No.
2. Are you required to withhold amounts of tax on income that is not assessable in Australia?
No.
This ruling applies for the following period:
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
The scheme commenced on
1 July 2014
Relevant facts and circumstances
You have employed an employee who is a resident of Country Y for income tax purposes.
The employee is not a resident of Australia for income tax purposes.
The employee duties include invoicing, reviewing and advising on internal systems, devising pricing structures and providing quotations for customers.
All of the employee's duties are exclusively exercised from Country Y with the exception of returning to Australia for a short period each year.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5(3)
Taxation Administration Act Section 12-35 of Schedule 1
Taxation Administration Act Subsection 12-1(1) of Schedule 1
Reasons for decision
Assessable income
Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a foreign resident taxpayer includes ordinary income that is sourced directly or indirectly from all Australian sources during the income year.
Employment income is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.
Generally, Australian courts have held that the source of employment income is where the employee performs their duties (C of T (NSW) v. Cam and Sons Ltd (1936) 36 SR (NSW) 544; 4 ATD 32 and FC of T v. French (1957) 98 CLR 398; (1957) 7 AITR 76; 11 ATD 288). The courts also confirmed that it is appropriate to apportion income earned to reflect the source of income. Thus, any employment income earned while carrying out duties inside of Australia is considered to be sourced inside of Australia.
In the case of the employee that you have employed, they are a foreign resident for income tax purposes and not a resident of Australia. The employment duties that are required to be performed by the employee are exercised exclusively from County Y with the exception of a short period which the employee returns to Australia.
Therefore consistent with the principals established in (C of T (NSW) v. Cam and Sons Ltd (1936) and FC of T v. French (1957), the employment income derived by this employee for duties exercised in Country Y is not assessable in Australia under subsection 6-5(3) of the ITAA 1997.
Please note, employment income derived by the employee for the period that the employee returns to Australia for a short period to exercise their employment, will be considered to be sourced from Australia and therefore assessable in Australia.
Double Tax Agreement
In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.
Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).
Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country Y Agreement is listed in section 5 of the Agreements Act.
The Country Y Agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The Country Y Agreement operates to avoid the double taxation of income received by residents of Australia and Country Y.
Article 15(1) of the Country Y Agreement advises that salaries, wages and other similar remuneration derived by a resident of Country Y shall be taxable only in Country Y unless the employment is exercised in Australia. If the employment is exercised in Australia then the income may also be taxed in Australia.
Accordingly, any income that an employee derives from employment exercised in Country Y will only be taxable in Country Y under the Country Y DTA.
Pay As You Go (PAYG) withholding
Section 12-35 of Schedule 1 to the Taxation Administration Act (TAA) provides that an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee.
However, subsection 12-1(1) of Schedule 1 to the TAA provides that an entity need not withhold an amount under this section from a payment if the whole of the payment is exempt income of the entity receiving the payment.
In your case, the employment income that is being paid to your foreign resident taxpayer that is being sourced from outside of Australia is exempt income of the taxpayer receiving the payment.
Accordingly, you are not required to withhold any amounts under subsection 12-1(1) of the TAA.