Edited version of private advice

Authorisation Number: 1013030380103

Date of advice: 08 June 2016

Ruling

Subject: PAYG withholding

Question 1

Is the entity obliged to withhold tax from the payments made to workers pursuant to section 12-35 of Schedule 1 of the Taxation Administration Act 1953?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The entity is presently in the process of importing a vessel to Australia. The vessel will be used for charter in both International and Australian waters.

The entity is a resident Australian company with a resident Australian director. The company will operate the vessel as part of a charter fleet.

The vessel is owned by the entity and is registered overseas. All income earned will be returned as income to the company.

All the employees are foreign nationals except for one worker who is Australian. All the employees were initially contracted whilst the vessel was overseas before it was imported.

The entity as the employer, made an application to the Australian Department of Immigration to be an employer sponsor of staff, under a Visa, which was granted.

All the employees have been granted the Visa which allows them to enter Australia and to be employed by the employer for up to 12 months.

Under the Visa the employees are not entitled to receive any State or Commonwealth benefits or participate in the Australian Medicare system and the employer must indemnify the costs of such.

If the employees resign or are dismissed then they must leave Australia in accordance with the requirements of the Visa.

The employees are contracted under an agreement which is governed by international law. Their contracted remuneration is paid in Euros to the employees' nominated bank account. The important terms identified in the Agreement are:

• the requirement for the employee to be repatriated to the port in the Agreement on ceasing of employment
• Annual repatriation
• The Agreement is governed by the laws of the Flag State

The Agreement stipulates that the employer shall be responsible for the payment of wages and other amounts earned by the employee.

The Agreement states that a normal working day is based on an 8 hour day (48 hours a week), compensation for any additional hours worked is included in the consolidated monthly salary.

The Agreement specifies that the employees have an entitlement to 2.5 days leave per month of employment, accrued on a pro-rata basis. The employees are also entitled to 8 days per year of employment for bank holidays and public holidays and this will be accrued on a pro-rata basis.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Taxation Administration Act 1953 section 12-1

Taxation Administration Act 1953 section 12-35

Reasons for decision

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that under the PAYG withholding 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 under section 12-35 from a payment if the whole of the payment is exempt income of the recipient.

Section 12-1 of Schedule 1 of the TAA 1953 provides a number of exceptions to withholding. 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.

Subsections 6-5(2) and 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes the ordinary and statutory income derived directly or indirectly from all sources.

Subsections 6-5(3) and 6-10(5) of the ITAA 1997 limits the assessable income of an individual who is not a resident of Australia to:

• ordinary and statutory income derived directly or indirectly from all Australian sources, and
• ordinary and statutory income that a provision includes in assessable income on some basis other than Australian source.

You are an entity making a payment to individuals in respect of employment carried out in Australia. The source of the income is Australia. In addition to this, the income is not exempt income of the employees.

Therefore, the entity is required to withhold tax pursuant to section 12-35 of Schedule 1 of the Taxation Administration Act 1953.