Edited version of your written advice

Authorisation Number: 1051430034906

Date of advice: 17 September 2018

Ruling

Subject: Assessablility of payments received

Question

Are the payments received from an Australian organisation exempt from income tax under the double tax agreement between Australia and Country A?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You are a citizen of Country A.

You entered Australia under a 457 working Visa.

You are a fully qualified medical specialist in Country A.

Your intention was to stay in Australia for two years to undertake two separate fellowships, and leave Australia permanently in early 20XX to return to Country A.

You found an opportunity for a fellowship position with an Australian organisation via the internet in 20XX. You submitted an application and you were offered the fellowship position from early 20XX to early 20XX.

The fellowship position was mainly practical in nature, and also has a significant training component, along with a teaching and research component. Your position was under constant supervision, and you were working as an interventional fellow under constant supervision.

You have supplied a copy of your employment agreement with the Australian organisation dated early in 20XX, and this confirms that you had access to certain employee benefits such as salary packaging and superannuation, and the agreement also clearly references time for training.

The employment agreement confirms your appointment start date as early in 20XX, and your appointment end date as early in 20XX.

You were not considered as a student by the Australian organisation during the fellowship program which you undertook, but rather as a qualified professional while you were there as a fellow, which is similar to that of a trainee.

Regarding the practical component of the fellowship, you were to learn and practice various tasks, which were to take place during normal working hours. You would also be engaged in other tasks outside of normal working hours.

Regarding the research component of the fellowship, you would be collaborating in various programs led by the Australian organisation.

You have also supplied a document from an overseeing Australian organisation which outlines your training program with the Australian organisation, which confirms the learning goals and objectives, including various practical activities, teaching activities, and research activities.

The Australian organisation advised you that the fellowship position would be conditional to the fact that they would not be providing any funding, and that you would have to organise the financial sponsorship for the fellowship position for the entire duration, and the amount was AUD $X.

The Australian organisation also stipulated that the funds had to be transferred to them prior to your commencement of your position as a fellow.

As your wish was to receive the associated training in Australia, you found yourself to be in a difficult position as time was running out to find a sponsor. Due to this you proposed to be your own sponsor by self-funding your fellowship year with your own savings.

As the Australian organisation indicated that it was illegal to hire an employee and not pay them, in order to self-fund the fellowship you needed to transfer the entire amount of salary for the fellowship period, which the Australian organisation would pay back to you as a regular salary.

The management of the Australian organisation further informed you that they would not accept any money from a private person. Due to this the funds for your fellowship had to be received via an association in the capacity as your sponsor.

Accordingly, early in 20XX you transferred an amount of money from your bank account in Country A to an organisation in Country A, who agreed to facilitate the transfer of the whole amount to the Australian organisation.

The Australian organisation received the funds in early 20XX, and the funds were used by them to pay you a regular salary amount between early 20XX and early 20XX.

The Australian organisation have also confirmed that they had met their obligations as your employer, by paying you your entitlements such as annual leave and sick leave, and withholding appropriate amounts of income tax and paying this amount to the ATO.

You have supplied letters from the Australian organisation and the organisation from Country A which confirm the fund transfers.

Once you completed your fellowship with the Australian organisation, you commenced the second fellowship with another Australian organisation, where you are receiving a normal salary.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

International Tax Agreements Act 1953

Reasons for decision

Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary and statutory income derived directly and indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business.

Application to your circumstances

In your case, despite the circumstances that led to the payments being received, the fact remains that you have received regular fortnightly payments of salary as an employee of the Australian organisation.

It is not considered that we are able to conclude that salary received by an employee is not ordinary income.

Therefore, these payments are ordinary income and will form part of your assessable income under section 6-5 of the ITAA 1997.

The Country A Convention

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 applicable double tax agreement (DTA).

Australia has signed a DTA with Country A which is called the Convention between Australia and the Country A confederation for the avoidance of double taxation of income with respect to taxes on income, with Protocol (the Country A convention).

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

Article 20 of the Country A convention provides that payments which a student or business apprentice who, is or was immediately before visiting Australia a resident of Country A and who is temporarily present in Australia solely for the purpose of their education or training services for the purposes of their maintenance, education or training shall not be taxed in Australia, provided that such payments arise from sources outside Australia.

The Commentaries on the articles of the Model Tax Convention (OECD commentary) do not define the meaning of either ‘student’ or ‘business apprentice’.

Paragraph 62 of Taxation ruling (TR) 2001/13 IT: Interpreting Australia’s DTA’s provides that the starting point for the interpretation of a substantive treaty provision should be the definitions provided in the treaty itself, and this could include the relevant article concerned, the general definitions article, or a miscellaneous or specific provisions article.

The International Tax Agreements Amendment Bill 2014 Explanatory Memorandum (EM) covers “Terms not specifically defined” and states:

1.41 Unless the context requires otherwise, a term not specifically defined in the Country A Convention will have the same meaning that it has under the law of the country applying the Convention at the time of its application. In that case, the meaning of the term under the taxation law of that country will have precedence over the meaning it may have under other domestic laws.

There were no articles in the Country A convention that define ‘student’ or ‘business apprentice’, nor are these defined in Division 995 of the ITAA 1997 – Definitions.

As such, the terms ‘student’ and ‘business apprentice’ will take their ordinary meaning.

The term ‘business apprentice’ is not defined in the Macquarie Dictionary, however the term ‘apprentice is defined as:

1. someone who works for another to learn a trade

The term ‘student’ is defined in the Macquarie Dictionary as:

1. someone who is engaged in a course of study and instruction, as at a college, university, or secondary school.

2. someone who studies a subject systematically or in detail.

Also, the term ‘fellow’, in respect of education, is defined in the Macquarie Dictionary as:

1. a scholar or postgraduate student in a college or university engaged primarily in research rather than undergraduate teaching.

2. a member of a university or other college, entitled to certain privileges and with certain responsibilities.

From early in 20XX to early in 20XX you completed a fellowship position with an Australian organisation, who confirmed that you were not performing the fellowship as a student, but rather as a qualified professional as a fellow, which is similar to that of a trainee, as you are qualified in your field in your home country.

Also, whilst it is clear that one of the objects of the fellowship program was to increase your skills and knowledge in your particular field, largely in a trainee / learning capacity, as you are already fully qualified in your home country, we not consider you to be a business apprentice.

However, with reference to the definition of ‘apprentice’ as defined in the Macquarie dictionary, we recognise that it may be arguable that your role as a fellow at the Australian organisation may fit in with that definition, given that it is quite a broad definition, and the fellowship had a certain training component.

Whilst we have taken this under consideration, The International Tax Agreements Amendment Bill 2014 Explanatory Memorandum (EM) states the following:

1.246 A payment for maintenance, education or training would not be expected to exceed the level of expenses likely to be incurred to ensure the student or business apprentice's maintenance, education or training (that is, a subsistence payment). On the other hand, if the remuneration is similar to the amounts paid to persons who provide similar services that are not business apprentices (that is, a salary equivalent), this would generally indicate that the payments constitute income from employment that would fall for consideration under Article 15 (Dependent personal services).

Likewise, if that business apprentice undertakes any other employment in Australia, the income earned from that employment may be subject to tax in Australia in accordance with Article 15.

With reference to paragraph 1.246 of the EM, whilst we consider that the payment amounts you received from the Australian organisation would most likely be less than that of a fully qualified practising Australian professional in your field, we consider the amount you received would exceed the amount of any payment for maintenance as outlined in the EM (a subsistence payment).

Given this, the payments received from the Australian organisation would constitute income from employment that would fall for consideration under Article 15 of the Country A convention (Dependant personal services).

As such, as you do not meet the definition of a student, and even if you were to meet the definition of a business apprentice, article 20 of the Country A convention has no application, as the fellowship payments would fall for consideration under article 15 (Dependant personal services).

Also, the fact that the payments received from the Australian organisation had an Australian source means that article 20 of the Country A convention has no application in your case.

Article 15(1) of the Country A convention provides that salary, wages and other similar remuneration derived by a resident of Country A shall be taxable only in Country A unless the employment is exercised in Australia, in which case such remuneration may be taxed in Australia.

However, Article 15(2) of the Country A convention states that you will be only taxed in Country A on your Australian income if:

● you are not present in Australia for more than 183 days of the income year;

● the remuneration is paid by an employer who is not a resident of Australia; and

● the remuneration is not borne by a permanent establishment or fixed based which the employer has in Australia.

In your case, whilst you were not present in Australia for over 183 days in the 20XX-XX year, you were present in Australia for more than 183 days in the 20XX-XX financial year, and your employer was an Australian organisation who paid you from Australia, and is not considered to be a resident organisation of Country A.

As such, the payments you received from the Australian organisation may be taxed in Australia under Article 15 of the Country A convention.

There are no other provisions in the Country A convention that applies to prevent taxation of the payments in Australia.

Also, there are no other possible exemptions that apply to exempt the payments you received from the Australian organisation from income tax in Australia.

Therefore, these payments you received are assessable in Australia and will need to be included in your income tax return.