Edited version of private advice

Authorisation Number: 1051653885736

Date of advice: 07 April 2020

Ruling

Subject: Pay as you go (PAYG) withholding - non-resident entity / non-resident employees

Question

Is the Australian company required to withhold an amount pursuant to section 12-35 of Schedule 1 to the Taxation Administration Act 1953 under the arrangement by which overseas employees are assigned to the Australian company?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2018

Year ended 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2017

Relevant facts and circumstances

1. The overseas employer is incorporated in and is a tax resident overseas.
2. The overseas employer is a supplier of consulting and infrastructure support services overseas.
3. The Australian company was launched to provide consulting and infrastructure support services in Australia.
4. The overseas employer is the parent company to the Australian company.
5. The overseas employer has sent employees (the Employees) to undertake activities and oversee operations in Australia to ensure that quality is upheld and to support the Australian company.
6. The Employees are split into three bands based on their seniority and their duties.

7.    Some employees work with the Australian team on the specific project methodology including training transfer of knowledge from the overseas employer and identifying any synergies that can be gained from their experience in the overseas business. Other employees are more senior and have overall responsibility for oversight of the Australian activities.

8. The Employees are employed under an agreement with the overseas employer. There is no separate contract of employment in Australia. As such, they remain subject to the terms of their contract overseas for the duration of their assignment in Australia.
9. The Employees will continue to report to the overseas company. However, the Australia company will direct the duties and activities of the employees during their assignment on a day to day basis.
10. The Employees are overseas residents. The Employees will remain overseas resident for tax purposes while they are present in Australia.
11. The Employees are not present in Australia for a period exceeding three months in an Australia income year and will ordinarily be present in Australia for between 60-90 days.
12. The Employees will work in Australia on a Temporary Work (Short stay Activity) visa (subclass 400).
13. The Employees will continue to be remunerated by the overseas employer and the remuneration will be administered by the overseas employer. No payments will be paid by the Australian company to the employees. The Australia company will not be recharged for the work performed by the employees.
14. The Employees will continue to be subject to tax overseas and the overseas employer will continue to withhold taxes on their salaries paid.
15. The Employees will continue to contribute to retirement benefits and other social security schemes overseas.
16. The employees reside in hotels or other temporary accommodation when visiting Australia.

Relevant legislative provisions

Income Tax Assessment Act of 1936

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

Income Tax Assessment Act of 1997 Section 6-20

Income Tax Assessment Act of 1997 Section 995-1

International Tax Agreements Act 1953

Taxation Administration Act 1953 Schedule 1 Section 12-35

Taxation Administration Act 1953 Schedule 1 Section 12-1

Taxation Administration Act 1953 Schedule 1 Paragraph 12-1(1)

Reasons for decision

Summary

1. The Australia company is not required to withhold amounts from the Employees.

Detailed reasoning

2. In determining whether the employee is liable for PAYG withholding on salary paid to a non-resident we need to determine whether the salary is regarded as Australian or foreign sourced income.

3.    Section 12-35 in Schedule 1 of the Taxation Administration Act 1953 (TAA) 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).

4. If that individual is an employee and a resident of Australia for taxation purposes, then their employer would be required to withhold an amount under section 12-35 of Schedule 1 of the TAA.

5.    However, section 12-1 of Schedule 1 of the (TAA) provides general exceptions where PAYG withholding does not apply. At paragraph 12-1(1) it states:

An entity need not withhold an amount under section 12-35, 12-40, 12-45, 12-47, 12-50, 12-55, 12-60, 12-80, 12-90, 12-120 or 12-190 from a payment if the whole of the payment is exempt income for the entity receiving the payment.'

6.    Section 6-20 of the Income Tax Assessment Act of 1997 (ITAA 1997) provides the following definition of exempt income:

An amount of ordinary income or statutory income is exempt income if it is made exempt from income tax by a provision of this Act or another Commonwealth law.

7.    This section goes on to provide the following:

Ordinary income is also exempt income to the extent that this Act excludes it (expressly or by implication) from being assessable income.

8. Section 6-5(3) of the ITAA 1997 states that:

If you are a foreign resident, your assessable income includes:

(a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and

(b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source.

9. In determining whether the salary being paid to the Employees is regarded as exempt income under Australian tax law we need to determine whether the salary income is regarded as Australian or foreign sourced. If the income is regarded as foreign sourced exempt income to a non-resident then there would be no requirement to withhold any amount from it.
10. The term 'Australian sourced' is defined in section 995-1 of the ITAA 1997 as being income that is 'derived from a source in Australia for the purposes of the Income Tax Assessment Act of 1936 (ITAA 1936).'
11. The term 'sourced' is considered in detail in the case of Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 7 AITR 76; (1957) 11 ATD 288where the source of remuneration under a contract of employment or services was found to generally be the place where the work or services are performed.
12. Further, under the International Tax Agreements Act 1953 taxation agreements prevail where there is a conflict with ITAA.
13. In this instance, the Employees are merely in Australia to oversee operations of the Australia company upholds the quality required.
14. The Employees will continue to report to the overseas employer. The Employees are overseas residents and will remain overseas residents for tax purposes while they are present in Australia.
15. The Employees will work in Australia on a Temporary Work (Short stay Activity) visa (subclass 400). The will not be present in Australia for a period exceeding 3 months in an Australia income year and will ordinarily be present in Australia for between 60-90 days.
16. In accordance with the relevant taxation agreementthe Employee's salaries, wages and other similar remuneration would be taxable overseas.
17. Further, there would be no obligation for the Australia company to withhold any amount from payments of salary, wages or allowances to the Employees.