Edited version of private advice

Authorisation Number: 1052172948248

Date of advice: 3 November 2023

Ruling

Subject: Double tax treaty

Question 1

Is the income the taxpayer derives from their contract, that they perform in Country B, assessable income in accordance with section 6-5 of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 2

If the taxpayer's income derived from their contract is assessable income in Australia, does the Australia - Country B double tax treaty apply to allocate the taxing rights to the Country B?

Answer

We recommend the taxpayer contact the equivalent to the taxation department in Country B to enquiry about the taxpayer's lodgment and reporting obligations in Country B.

Question 3

If the Australia - Country B double tax treaty applies, what proportion of the income (if any) is taxable in Australia?

Answer

The proportion of income the taxpayer derived from the Australian resident to perform their administrative services is assessable income in Australia. If the taxpayer is entitled to deductions, the taxpayer may then determine their taxable income.

This ruling applies for the following periods:

1 July 20XX to 30 June 20YY

1 July 20YY to 30 June 20ZZ

1 July 20ZZ to 30 June 20AA

The scheme commenced on:

1 July 20WW

Relevant facts and circumstances

The taxpayer is an Australia citizen residing in Country B. The taxpayer moved to Country B in 20MM.

The taxpayer has self-assessed themselves to be a non-resident for income tax purposes.

The taxpayer carries on a business as a sole proprietor providing administrative services remotely from Country B.

The taxpayer was offered a contract with an Australia based entity. The taxpayer entered into a contract with Entity A in 20XX. The taxpayer commenced their services with Entity A in 20XX. The contract was renewed commencing 20YY, the contract was dated XX Month A 20YY. The contract has continued to date.

The contract states the taxpayer performs the role of administrator for Entity A and the taxpayer is engaged for XX hours per week and the hours can vary as mutually agreed between the parties.

The taxpayer is registered for GST and has an ABN.

The taxpayer's duties have been described as predominately involving attending to a specifically named activity and they may be requested to carry out other associated duties. The taxpayer does not describe themself as a professional Z that is associated to independent personal service or providing a professional service.

Specific sections of the contractor agreement with Entity A state the agreement has been entered into in the jurisdiction of Australia.

The taxpayer receives payment for the work they were engaged to carry out into a bank account that was opened in Australia.

Since commencing the contract in 20XX, the taxpayer entered Australia for X days during 20ZZ. The taxpayer worked for Y of those days.

When the taxpayer has been making enquiries into this matter, they have been reviewing the Australia and Country B Tax Treaty. The taxpayer has referred to Article X titled Independent Personal Services. The taxpayer understands this Article closely represents the work they perform.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(1)

Income Tax Assessment Act 1997 subsection 6-5(2)

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides:

•         subsection 6-5(1) states your assessable income includes income according to ordinary concepts, which is called ordinary income.

•         subsection 6-5(2) states if you are an Australia resident for taxation purposes, your assessable income includes the ordinary income derived directly or indirectly from all sources whether in or out of Australia during the income year.

•         subsection 6-5(3) states if you are a foreign resident, your assessable income includes

o   (a) the ordinary income derived directly or indirectly from all Australia sources during the income year and

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

In the taxpayer's case, they have self-assessed they are a non-resident for Australian tax purposes.

Source of income

Reliance on Australia court cases

There is no specific definition of the term 'source' in the Income Tax Assessment Act 1997. Income Tax Assessment Act 1936 has a limited number of statutory source rules for particular type of income. Specifically these rules relate to dividends, royalties, natural resource income, insurance premiums and carriage of goods in Australia.

The application of the term 'source' has been addressed by the courts. The courts have held that determining the source of an item of income is a matter of facts and circumstances of each case. Isaacs J stated in Nathan v. Federal Commissioner of Taxation [1918] 25 CLR 183 at 189:

The Legislature in using the word 'source' meant, not a legal concept, but something which a practical man would regard as a real source of income... the ascertainment of the actual source of a given income is a practical, hard matter of fact.

Bowen J in Federal Commissioner of Taxation v Efstathakis (1979) 9 ATR 867 at ATR 870 ( the Efstathakis Case), stated to determine source:

... the answer is not to be found in the cases, but the weighing of the relative importance of the various factors which the cases have shown to be relevant.

Commissioner of Taxation v Cam & Sons Ltd (1936) 36 SR (NSW) 544 (the Cam Case) concerned wages paid to seamen employed to work on trawlers. They were engaged and paid in New South Wales, but most of their services were provided outside state territorial waters. Jordan CJ, with whom Street and Bavin JJ agreed in the Cam Case at 548, held that:

Where income is derived from wages or salary, again the source has several factors. Personal exertion may be involved in negotiating and obtaining the contract of employment, in performing the stipulated services, and in obtaining payment for them.... [I]n the ordinary case of the employment of a seaman... where there is nothing special, either in the circumstances of the contract of employment or in the payment, and where the work is both done and paid for in the ordinary course, the all-important factor is the doing of the work; and the contract of employment and the payment are relatively insignificant and formal elements. But this is not necessarily so with respect to all wages or salary. In the case of an appointment to a sinecure, the engagement and the payment may be the only significant factors.

Accordingly, the wages had to be apportioned based on 'working time in and out of New South Wales territorial waters (see the Cam Case at 553).

In Federal Commissioner of Taxation v French (1957) 98 CLR 398 (the French Case) the taxpayer was employed as an engineer by the Australian company CSR which carried on business in New South Wales and, relevantly, New Zealand. Each year, the taxpayer spent two or three weeks in New Zealand as an inspecting engineer for the company in its New Zealand business. At all other times, the taxpayer performed services for the company in New South Wales. The taxpayer's salary was paid monthly into a Sydney bank account. A majority of the High Court held that the wages paid in respect of the period in New Zealand were sourced in New Zealand, because this is where the services were performed, this being the most important factor in Mr French's situation (see French Case at 411, 417 and 422). However, the Court also made comments to the effect that this decision did not necessarily determine what would be most important in every personal services contract. For example, Dixon CJ in the French Case at 405 in relation to a director and at 406 in relation to an professional A procured to achieve a specified result, and Kitto J at 417-418 refers to a situation where remuneration was payable regardless of service, and to a person who worked sometimes overseas who was paid while on sick leave, and to where a period of overseas service might in substance be merely incidental to Australian service.

In Commissioner of Taxation of the Commonwealth of Australia v Mitchum (1965) 113 CLR 401, (the Mitchum Case) the taxpayer was an actor and a resident of the USA. He entered into a contract outside of Australia with a Swiss company, under which he agreed to provide services as a consultant to the producer and to act in two motion picture photoplays at such places as the company might from time to time designate. The agreement contained a number of provisions by which the taxpayer agreed to restrict his activities. If the Swiss company failed to utilise his services, provided that he performed all applicable terms of the agreement, he would be paid a salary. The taxpayer came to Australia for a period of time to act in a photoplay, and the issue was the source of the salary paid in respect of this time period.

The High Court stated, at 408-409, with reference to French Case, that:

Taylor J., as I read his reasons, was engaged in deciding a question of fact deriving what assistance he could from the decided cases. He said, speaking, of course, of a case of wages or salary for work done or services performed - "... if, as the statute requires, I am compelled to select as the source of an employee's remuneration either the locus of the contract of service, or, the place where the remuneration is payable thereunder, or, the place where the services are performed which give rise to the right of remuneration I am content to conclude that, in the absence of special circumstances, this third element should be chosen"" (1957) 98 CLR, at p 422.

"In so saying, his Honour was not, in my opinion, laying down a rule of law: he was expressing his reasons for the conclusion of fact to which he had come."

I do not feel compelled or persuaded by the decision of the Court in French's Case ((1957) 98 CLR 398) to hold that in every case where work forms the consideration for wages or salary paid, the source of the income constituted by the wages or salary is in the place where the work is done.

"... It is sufficient for present purposes to say that neither French's Case ((1957) 98 CLR 398) nor any other of which I am aware lays it down that for the purposes of the Act the source of wages, salary or remuneration for services performed is necessarily, in default of special circumstances, in the place where the work is done or the services performed.

The High Court of Australia in the Mitchum case decided to make a determination of the source of income for the purposes of the income tax law it is arrived at based on the facts and circumstances of the taxpayer. The case was referred back to the trial judge to obtain further facts to make a decision.

In the Efstathakis Case the taxpayer was a Greek National resident in Australia who was employed by the Greek Government as a secretary/typist in the Greek embassy. She had applied for the job in Greece, and the post had been gazetted there. She performed the services in Australia. Her net pay was compiled in Greece, a cheque was drawn on a bank in Greece and then received in Australia. A condition of her employment was that she could be posted anywhere in the world, but she would probably have resigned, as she had put down roots in Sydney, having child there, buying a unit, and marrying a naturalised Greek Australian. Bowen CJ, with whom Brennan and Deane JJ agreed, held that the wages paid to the taxpayer had an Australian source. His Honour considered the above factors, but gave most weight to, at 871

'...the residence of the taxpayer in Australia and the facts that the services were performed and payment received here [in Australia] are of greater significance. The payment of remuneration depended upon actual performance of the services. That Australia was the place of employment was not merely incidental but central to the earning of the income, to the personal circumstances of the taxpayer and to the nature of the employment.'

As per the court cases, source cases concerning the provision of personal services are decided by weighing up the outcomes of the considerations of the following three factors (with the weighting given to each determined by their relevance to the case):

•         the place where the contract of employment is entered into,

•         the place where remuneration is payable, and

•         the place where the services are performed.

We note, other than the three factors stated above, subject to the facts and circumstances of the case, other considerations may apply in cases where special skills or creative talents are being exercised. The remuneration from these other considerations could consist of director's fees or where independent personal services or professional services are being rendered. The Mitchum case is considered as the authority for the general proposition for the source of professional services. In these matters in determining where the income is sourced, factors such as the place of negotiation and conclusion of the contract and the place of payment are considered as significant.

In the taxpayer's case:

•         they have resided in Country B since 20MM.

•         they perform the administration services in Country B.

•         the administration services the taxpayer provides are not professional services.

•         the contract of employment was entered into in Country B by the taxpayer and in Australia by Entity A.

•         the remuneration the taxpayer received from the Entity A, is being paid into the taxpayer's Australian bank account.

•         Australian law applies to the contract.

Based on the information provided by the taxpayer, their circumstances are similar to the Cam, the French and the Efstathakis cases where it was held that the source of the income was where the taxpayer performed the services.

Although we have considered court cases that have determined the source of income, we will need to consider if any legislation existed that would need to be considered about the matter.

Tax Treaties and Source

In determining liability to tax on Australian sourced income received by a non-resident, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates the Agreements Act with the ITAA 1997 so that the two Acts are read as one.

Section 11D of the Agreements Act states the tax treaty entered into with the Country B, so far as those provisions affect Australian tax, have been deemed to have the force of law.

The Agreement between the Government of Australia and the Government of Country B for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (Australian- Country B Tax Treaty) contains the double tax convention between Australia and Country B. Country B Agreement operates to avoid the double taxation of income received by Australian and Country B residents.

Article F of Country B Agreement provides for the tax treatment of income derived from independent personal services. Article F states:

(1)             Income derived by an individual who is a resident of one of the Contracting States in respect of professional services or other independent activities of a similar character shall be taxable only in that State. However, if such an individual -

(a)         has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; or

(b)         in a year of income or taxable year, as the case may be, stays in the other Contracting State for a period or periods aggregating 183 days for the purpose of performing his activities; or

(c)         derives, in a year of income or taxable year, as the case may be, from residents of the other Contracting State gross remuneration in that State exceeding a certain amount in Australian dollars or its equivalent in Country B currency from performing his activities,

so much of the income derived by him as is attributable to activities so performed may be taxed in the other State.

(2)             The Treasurer of Australia and the Treasurer of Country B may agree in letters exchanged for the purpose to variations in the amount specified in subparagraph (c) of paragraph (1) and any variations so agreed shall have effect according to the tenor of the letters.

(3)             The term " professional services " includes services performed in the exercise of independent scientific, literary, artistic, educational or teaching activities, as well as in the exercise of independent activities of physicians, lawyers, engineers, architects, dentists and professional As.

In the taxpayer's case, they are a resident of Country B and they contend they are not a professional providing professional services such as a professional Z. However, the taxpayer is carrying on an independent activity of a similar character such as administrative services. The taxpayer:

•         does not have a fixed based regularly available to them in Australia to perform their activities or

•         have not stayed in Australia for a period or periods aggregating 183 days for the purposes of performing their activity however

•         have derived, in an income or taxable year, from Entity A, a resident of Australia, gross remuneration in Australia exceeding a certain amount in Australian dollars from performing their activities.

We have not identified a letter that the Treasurer of Australia and the Treasurer of Country B have exchanged that has varied the amount specified in subparagraph (c) of paragraph (1).

Article T of Country B Agreement provides for the determination of what is the source of the income. Article T states:

Income derived by a resident of one of the Contracting States which, under any one or more of Articles B to D and F to K may be taxed in the other Contracting State, shall, for the purposes of Article S and of the income tax law of that other State, be deemed to be income from sources in that other State.

In the taxpayer's case, Article T states that where income derived under Article F by a resident of Country B shall, for the purposes of Article S and of the income tax law of Australia, be deemed to be income from sources in Australia.

Therefore, in accordance with Article F of Country B Agreement, because the taxpayer is carrying on an independent activity of a similar character to professional services such as a professional Z, and the taxpayer has derived income from an Australian resident and the amount was more than a certain amount in Australian dollars, the source of the income is Australia. Article T confirms the source of income is Australia. The taxpayer is required to report the income as Australian sourced in accordance of section 6-5 of the ITAA 1997.