Edited version of private advice

Authorisation Number: 1051652356263

Date of advice: 31 March 2020

Ruling

Subject: Salary and wages paid by an Australia company to a non-resident employee

Question One

Following consideration of the Double Taxation Agreement (DTA) between Australia and Country X, are salaries paid by an Australian employer to a resident of Country X, who is a non-resident for Australian income tax purposes, for work performed in Country X, recognised as Australian assessable income for the employee?

Answer

No

Question Two

Is Company Y required to withhold amounts of tax on income that is not assessable in Australia?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

XX XXXXXX 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Company Y is an Australia resident company.

During the 20XX income year Company Y employed an employee, who is a resident of Country X for income tax purposes.

The employee is not a resident of Australia for income tax purposes.

The employee was present in Australia until XXXXXXX 20XX but returned to Country X and is permanently residing in Country X.

The employee's duties and responsibilities include support of the business development manager in areas of: clearing out jobs, quoting, invoicing, general reporting and database clean up. All duties will be performed by the employee in Country X and the employee will not return to Australia to perform any of these duties.

The employee will be paid by Company Y into the employee's Country X bank account.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(3)

Taxation Administration Act 1953 Section 12-35 of Schedule 1

Taxation Administration Act 1953 Subsection 12-1(1) of Schedule 1

Reasons for decision

These reasons for decision accompany the Notice of private ruling for XX.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary - Question One

Following consideration of the Double Taxation Agreement (DTA) between Australia and Country X, are salaries paid by an Australian employer to a resident of Country X, who is a non-resident for Australian income tax purposes, for work performed in Country X, recognised as Australian assessable income for the employee?

Detailed reasoning

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, 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 to be exercised exclusively in Country X from XX XXXXXX 20XX.

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 the employee for duties exercised in Country X 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 was in Australia (before XX XXXXXX 20XX), will be considered to be sourced from Australia and therefore assessable in Australia.

Double Tax Agreement

In determining the employee's 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 11 of the Agreements Act in relation to the Agreement with Country X (Country X DTA) states as follows:

(1) Subject to this Act, on and after the date of entry into force of the XX agreement, the provisions of the agreement, so far as those provisions affect Australian tax, have, and shall be deemed to have had, the force of law:

(a) in relation to withholding tax-in respect of dividends or interest derived on or after 1 July 1971 and in relation to which the agreement remains effective; and

(b) in relation to tax other than withholding tax-in respect of income of the year of income that commenced on 1 July 1971 and of a subsequent year of income in relation to which the agreement remains effective.

The Country X DTA operates to avoid the double taxation of income received by residents of Australia and Country X.

Article 14 of the Country X DTA advises that salaries, wages and other similar remuneration derived by a resident of Country X shall be taxable only in Country X 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 X will only be taxable in Country X under the Country X DTA.

Summary Question Two

Is Company Y required to withhold amounts of tax on income that is not assessable in Australia?

Detailed reasoning

Pay As You Go (PAYG) withholding

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953(TAA 1953) 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 1953 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 Company Y's case, the employment income that is being paid to a non-resident taxpayer for employment services which are provided outside of Australia is exempt income of the taxpayer receiving the payment.

Accordingly, Company Y is not required to withhold any amounts from payments of salary and wages made to the non-resident employee where the employment services are performed overseas under subsection 12-1(1) of Schedule 1 to the TAA 1953.