Edited version of private advice

Authorisation Number: 1051949688132

Date of advice: 17 February 2022

Ruling

Subject: Employment income - double tax agreement

Question 1

Is the income you derive from your employment with the University in Country X assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the income you derive from your employment with the University in Country X subject to tax only in Australia under the double tax agreement between Australia and Country X?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a citizen of both Australia and Country Y.

You are a tax resident of Australia.

You are employed by a University situated in Country X.

Although the role originally involved you physically working at the University in Country X, this did not eventuate, and you remained working for the University in Australia.

Country X income tax has been withheld from your employment income since you commenced working for the University.

The University has informed you that its employees are classified as public servants.

The Country X tax authorities have informed you that the University is a public entity under County X law and your employment income falls under the government service Article of the double tax agreement between Australia and Country X.

The Country X tax authorities have informed you that the double tax agreement operates so that Country X has the sole right to tax your employment income regardless of whether your employment activities are carried out in Australia or Country X.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-15(2)

Income Tax Assessment Act 1997 subsection 6-20(2)

International Tax Agreements Act 1953

Reasons for decision

Question 1

The assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year (section 6-5 of the ITAA 1997).

Income derived from rendering personal services is ordinary income for the purposes of section 6-5 of the ITAA 1997.

Therefore, the income you derived from your employment with the University in Country X is assessable income and forms part of your taxable income, unless it is made non-assessable or exempt by another provision of the tax law.

Question 2

Subsection 6-15(2) of the ITAA 1997 states that if an amount is exempt income then it is not assessable income.

Subsection 6-20(2) of the ITAA 1997 states that ordinary income is exempt income to the extent that 'this Act' excludes it (expressly or by implication) from being assessable income.

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 therefore forms part of 'this Act'. 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 double tax agreement (DTA) between Australia and Country X is listed in section 5 of the Agreements Act and operates to avoid the double taxation of income received by residents of Australia and Country X by allocating taxing rights between the two countries.

In your case, either the government service or employment Articles of the DTA may apply to the income you derive from your employment with the University.

Article X

Article X deals with government service and provides that remuneration paid to an individual in respect of services rendered in the discharge of governmental functions to one of the states may be taxed in that state. However, any such remuneration, not being a pension, shall be taxable only in the other state if the services are rendered in that other state and the recipient is a resident of that other state who:

(a) is a citizen or national of that state; or

(b) did not become a resident of that state solely for the purpose of performing the services.

Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting double tax agreements. Paragraph 104 provides that the OECD Model Tax Convention and Commentary will often need to be considered in interpreting double tax agreements.

Paragraph 2 of the OECD Commentary concerning government service states that the Article is based on the principle that the paying State shall have an exclusive right to tax the payments:

The principle of giving the exclusive taxing right to the paying State is contained in so many of the existing conventions between OECD member countries that it can be said to be already internationally accepted. It is also in conformity with the conception of international courtesy which is at the basis of the Article and with the provisions of the Vienna Conventions on Diplomatic and Consular Relations. It should, however, be observed that the Article is not intended to restrict the operation of any rules originating from international law in the case of diplomatic missions and consular posts.........but deals with cases not covered by such rules.

Paragraph 4 of the OECD Commentary confirms that there is an exception from the principle of giving exclusive taxing power to the paying State:

It is to be seen against the background that, according to the Vienna Conventions mentioned above, the receiving State is allowed to tax remuneration paid to certain categories of personnel of foreign diplomatic missions and consular posts, who are permanent residents or nationals of that State.

In your case, the Article reads that remuneration paid to you in respect of services rendered in the discharge of governmental functions to the Country X may be taxed in Country X.

However, any such remuneration will be taxable only in Australia if the services are rendered in Australia and you are a resident of Australia who is a citizen of Australia. Further, you also did not become a resident of Australia solely to perform the services.

Our view on the application of the government service Article to your circumstances is based on a plain reading of the Article and we do not believe that there is anything in the OECD Commentary that indicates that this should not be the case.

Consequently, if your employment falls under the Article, the income you derive from your employment is taxable only in Australia as you have been rendering the services in Australia and you are a resident of Australia who is a citizen of Australia.

Whether a university located in any given country can be considered to be discharging governmental functions is a matter of fact and depends on various factors. For a university to be providing services of a governmental nature we would expect a significant number of the following indicators to be present:

• the entity was created by an Act of Parliament
• the government has legal ownership of the entity
• the entity's board appointments are made by government
• employees are employed as 'public servants'
• the entity's budgets are approved by government as part of the government appropriation process
• the entity's decisions are approved by government before they can come into effect or are made by delegation or authorisation of a Ministerial power
• the entity's strategic decisions and directions are aligned with the priorities of the government at all times
• the organisation has a non-business/non-commercial function - eg, it is dependent on government support for a proportion of its total funding

•         the organisation carries on a regulatory function on behalf of government that a commercial enterprise is unable to conduct.

In your case, you have been unable to provide sufficient information for the Commissioner to determine whether your employment with the University constitutes rendering services in the discharge of governmental functions. Therefore, the Commissioner is currently unable to determine whether the government service Article applies to your employment income.

However, as mentioned above, if your employment does fall under the Article, the Commissioner considers that Australia at present has the sole taxing right to your income, and Country X does not have a taxing right.

If Article X does not apply, then Article Y will apply to your employment income.

Article Y

Article Y deals with income from employment and states that salaries, wages and other similar remuneration derived by a resident of one of the states in respect of an employment shall be taxable only in that state unless the employment is exercised in the other state. If the employment is so exercised, such remuneration as is derived from that exercise may be taxed in that other state.

In your case, the Article reads that the remuneration derived by you as a resident of Australia in respect of your employment is taxable only in Australia unless the employment is exercised in Country X.

Therefore, your employment income is currently taxable only in Australia under Article Y of the DTA.

Summary

The income you have derived from your employment with the University in Country X is assessable in Australia under section 6-5 of the ITAA 1997 as it is not made exempt by the International Tax Agreements Act 1953.

Further, as the DTA gives Australia the sole right to tax your income regardless of whether Article X or Article Y applies, tax should not be levied on your employment income in Country X.