Edited version of private advice

Authorisation Number: 1052133845628

Date of advice: 26 July 2023

Ruling

Subject: PAYG withholding

Question

Does the overseas entity have a Pay as You Go Withholding (PAYGW) obligation under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA)in respect of its employees in Australia?

Answer

No.

This ruling applies for the following periods:

Period ending 30 June 2024

Period ending 30 June 2025

Period ending 30 June 2026

Period ending 30 June 2027

Period ending 30 June 2028

Period ending 30 June 2029

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

The overseas entity is a public broadcaster established by the Government of Country A.

The overseas entity assigns one employee to work in Australia for a period of X years.

The employees are citizens of Country A.

The employees reside in Country A until they are assigned to work in Australia and return to Country A immediately after their assignment.

There is only one employee working in Australia at any time, except when there is overlap between a departing and arriving employee.

The employees have no assets in Australia except for a bank account which is used for day-to-day expenses.

The employees stay in rented accommodation in Australia.

The employees have limited social and sporting connections to Australia.

Relevant legislative provisions

International Agreements Act 1955 subsection 4(1)

International Agreements Act 1955 subsection 4(2)

International Agreements Act 1955 section 5

International Agreements Act 1955 subsection 5(1)

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

Taxation Administration Act 1953 section 12-35 of Schedule 1

Reasons for decision

Section 12-35 of Schedule 1 to the TAA provides that an entity must withhold an amount from any salary, wages, commission, bonuses or allowances that it pays to an individual as an employee, subject to the general exceptions in subsection 12-1(1) of Schedule 1. One of the exceptions in subsection 12-1(1) of Schedule 1 is where the whole payment is exempt income in the hands of the recipient.

In order to determine whether or not the overseas entity has a PAYGW obligation, it is necessary to determine whether the salary and wages paid to an employee would be assessable income.

Subsection 4(1) of the International Tax Agreements Act 1953 (ITAA 1953) provides that the Double Tax Agreements (DTA) listed in the ITAA 1953 are to be read with the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 as one Act. Subsection 4(2) of the ITAA 1953 further provides that if there are inconsistencies between the provisions in the Tax Acts and the ITAA 1953, the ITAA 1953 will prevail. This is reflected in paragraph 6 of Taxation Ruling TR 2001/13 Income Tax: Interpreting Australia's Double Tax Agreements which states that 'Subsection 4(2) of the ITAA 1953 deals with possible conflicts by effectively providing that the terms of the DTAs override those of the Assessment Act'.

Further, section 5 of the ITAA 1953 provide that the agreements listed within subsection 5(1) have the force of law according to their tenor on and after the date of entry into force. The Country A - Australia DTA ('the DTA') is listed in section 5 of the ITAA 1953.

What does the DTA say?

To determine whether or not the employees are exempt from paying income tax in Australia, it is necessary to consider whether or not they are made exempt by the DTA. Article X of the DTA relevantly provides that salaries, wages and other similar remuneration paid by a Contracting State or a political subdivision or local authority thereof to an individual in respect of services rendered to that Contracting State or political subdivision or local authority, in the discharge of functions of a governmental nature, shall be taxable only in that Contracting State.

What is a 'function of a governmental nature'?

To determine whether or not the employees are exempt from paying income tax under Article X of the DTA, it is necessary to consider whether public broadcasting is a function of a governmental nature.

The second dot point in paragraph 15 of Taxation Ruling TR 2005/8 Income tax: the meaning of particular terms in the Government Service Articles of Australia's tax treaties (TR 2005/8) provides:

...the term 'services rendered in discharge of governmental functions' or such similar wording, when read with the other words of the GSA, is a reference to services rendered by the employee or office holder in completing or performing any functions undertaken by a government.

Paragraph 61 of TR 2005/8 states:

As the terms 'in discharge of governmental functions' or 'governmental functions' are not defined in Australia's tax treaties, they may take on their domestic law meaning (see paragraph 25 to 28). Australia's domestic tax law does not define what is meant by the term 'governmental function', nor is there unequivocal case law that provides a definitive, domestic law meaning.

Although there is no definition of 'governmental functions' in Australian tax law and its definition has not been considered by the courts in the context of treaties, its definition has been considered in other contexts. In South Australia v. The Commonwealth (1942) 65 CLR 373the High Court had to determine what constitutes a 'governmental function'. Latham CJ gave the term a broad definition, ultimately finding that 'any activity may become a function of government if parliament so determines'. His Honour also found that when determining whether or not a function is governmental it is not important whether it is essential or non-essential.

In Ex Parte Professional Engineers' Association,Taylor J (1959) 107 CLR 208 also gave a broad definition to the word 'governmental', stating 'any activity undertaken by a state or state authority is properly so described'.

In summation, if a court was to consider the definition of 'functions of a governmental nature', it would likely find that it encompasses any activity which the government has undertaken.

Is public broadcasting a function of a governmental nature?

The following factors support the view that the overseas entity's broadcasting services are an activity undertaken by the Country A Government:

•                     The overseas entity was created by an act of Country A's government.

•                     The overseas entity budget must be approved by Country A's government.

•                     All decisions made by the executive board must be approved by Country A's government.

•                     The Broadcast Law and the Articles of incorporation for the overseas entity each provide that its role is to provide programs for public welfare.

•                     In addition, the overseas entity is responsible for researching programs and broadcasting technologies and must make that research available to the public.

•                     The overseas entity is responsible for issuing and regulating the licensing of other broadcasters in Country A.

Therefore, the public broadcasting carried on by the overseas entity is a government service under the DTA.

Are the employees nationals of Country A or residents of Australia?

In accordance with Article X of the DTA, the next step is to consider whether the employees are nationals of Country A or if they have become resident of Australia for any reason other than, or in addition to, rendering services for the overseas entity.

The employees are citizens of Country A.

It is the Commissioner's view that the employees are not residents of Australia. The following factors support this view:

•                     They lived in Country A immediately before being assigned to Australia and intend to return to Country A immediately after.

•                     Their sole purpose for being in Australia is to undertake their duties in their capacity as employees.

•                     They own no assets in Australia except for a bank account which is used for day-to-day expenses.

•                     They have limited social and sporting connections in Australia.

Is the overseas entity carrying on a business?

Importantly, Article X of the DTA provides that the income tax exemption will not apply where the remuneration is paid in respect of services rendered in connection with a business carried on by a Contracting State or a political subdivision or local authority thereof. This means that it is necessary to determine whether or not the overseas entity is carrying on a business.

The overseas entity is wholly owned, controlled and funded by Country A's government. The overseas entity's primary function is to conduct broadcasting to the whole of Country A and it is prohibited from undertaking profit-making activities. The employees in Australia are remunerated by Country A's government through the overseas entity for services rendered in furtherance of these functions. Accordingly, the overseas entity is not carrying on a business in Australia and as a result, Article X of the DTA does not apply to the employees in Australia.

Conclusion

The government services exemption in Article X of the DTA applies to the remuneration of the overseas entity's employees in Australia because it is paid in respect of services rendered to Country A's government in the discharge of public broadcasting which is a function of a governmental nature when carried out by the overseas entity. Further, the overseas entity is not carrying on a business in Australia meaning that Article X does not apply.

Subsection 12-1(1) of Schedule 1 to the TAA provides that there is no obligation to withhold an amount from an exempt payment. This means that because the remuneration paid to the employee is exempt, the overseas entity does not have a PAYGW obligation pursuant to section 12-35 of Schedule 1.