Edited version of private advice

Authorisation Number: 1052181157544

Date of advice: 28 November 2023

Ruling

Subject: Assessable income - remuneration

Question

Is any of the remuneration you receive from the company in relation to the management role assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, to the extent that it relates to any employment activities undertaken for the company while you were in Australia.

This ruling applies for the following period:

Income year ended 30 June 2023

Income year ended 30 June 2024

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

1.     You are a citizen of Country A and permanently live in Country A.

2.     You have never permanently resided in Australia and you are not a resident of Australia for taxation purposes.

3.     You came to Australia, arriving on xx/xx 2022 and departing on xx/xx 2022, to meet the previous owner of a company, being the business you were involved in purchasing. You also appointed and met with a business lawyer to legalise the sale of the business name and assets and to set up a new business and with contractors and clients.

4.     The new business was registered on xx/xx 2022, with the principal place of business located in Australia.

5.     You are one of two original directors of the company and hold five of the original ten fully paid ordinary shares issued in the company.

6.     The company operates business that commenced on xx/xx 2022 in Australia, with local employees being recruited by the company.

7.     You have been engaged by the company as a manager which involves you working 30 to 35 hours per week, with you receiving $XX per month from the company for you to undertake the following activities:

•         Managing accounts receivable and payable

•         Providing quotes

•         Organising dates and times for the jobs to be undertaken

•         Day-to-day administration of the Company, such as maintaining taxation and ASIC compliance requirements

•         Recruitment of employees

•         Payroll activities, including to paying wages to employees and complying with superannuation requirements

•         Organising employees to attend jobs and meet with clients for quoted jobs.

8.     The payments you receive from the company are in relation to your manager role as an employee and not in relation to your role as a director of the company, or in relation to your shareholding in the company.

9.     The company has reported the remuneration as a director loan because it was not known under what account/s the payments to you should be recorded, with there being no requirement for you to repay any of the remuneration to the company.

10.  You perform most of your management activities for the Company in Country A. However, during the ruling period you have come to Australia to undertake activities for the company, with only limited private aspects involving going out for dinner and some shopping.

11.  During the ruling period you came to Australia on the following occasions:

Table 1: During the ruling period, you came to Australia on the following occasions and the activities undertaken:

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 15-2

International Tax Agreements Act 1953 Schedule 11 Article 4

Reasons for decision

Summary

The remuneration you received from the company in relation to the management role is assessable under section 6-5 of the ITAA 1997 to the extent that it relates to any employment activities undertaken for the company while you were in Australia.

Detailed reasoning

Ordinary income

The assessment of ordinary income is affected by the residence-status of the person who derives it.

The assessable income of an Australian residentwill include the ordinary income derived directly or indirectly from all sources, whether in or out of Australia under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

On the other hand, subsection 6-5(3) of the ITAA 1997 states the assessable income of a foreign resident includes:

•         the ordinary income derived directly or indirectly from all Australian sources during the income year (paragraph 6-5(3)(a) of the ITAA 1997); and

•         other ordinary income which is included in assessable income on some basis other than its Australian source (paragraph 6-5(3)(b) of the ITAA 1997).

In working out whether you have derived an amount of ordinary income, and (if so) when you have derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct (subsection 6-5(4) of the ITAA 1997).

Remuneration for services provided as an employee, such as salary and wages, is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

Even if this is not the case, section 15-2 of the ITAA 1997 includes in assessable income the value to you of all allowances, gratuities, compensation, benefits, bonuses and premiums provided to you in respect of, or in relation directly or indirectly to, any employment of services rendered by you.

ATO Interpretative Decision ATO ID 2002/181 Income Tax Non-resident in receipt of Australian sourced employment income outlines that were a non-resident taxpayer receives salary and wage income for intermittent periods of employment in Australia from an Australian employer, the employment income needs to be apportioned and the Australian component needs to be included in the taxpayer's assessable income in Australia under section 6-5 of the ITAA 1997.

Australia's taxing right is also considered in any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Double taxation agreement

Sections 4 and 5 of the Agreements Act incorporate that Act with the ITAA 1936 and the ITAA 1997 and provide that the provisions of a double tax agreement have the force of law.

The double taxation agreement between Australia and NZ is contained in Schedule 4 of the Agreements Act, being the Convention between Australia and New Zealand for the Avoidance of Double Taxation with respect to taxes on income and fringe benefits and the Prevention of Fiscal Evasion (the DTA).

Article 14 of the DTA provides the following in relation to payments made in relation to employment:

Article 14

INCOME FROM EMPLOYMENT

1)    Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.

2)    Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:

a)      the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the year of income of that other State, and

b)      the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, or is borne by or deductible in determining the profits attributable to a permanent establishment which the employer has in the first-mentioned State, and

c)      the remuneration is neither borne by nor deductible in determining the profits attributable to a permanent establishment which the employer has in the other State.

Article 16 of the DTA relates to director's fees, Article 18 relates to pensions and Article 19 relates to government service.

Application to your situation

In your case, you received remuneration from carrying out employment services and it is evident that the remuneration is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997. This is so even though the amounts were initially placed in a director's loan with the company for your future benefit.

You undertook the majority of the activities in your role as manager for the company in Country A during the ruling period, with some activities being undertaken during your visits to Australia.

Article 14(1) of the DTA provides that your employment income is taxable in Country A and may also be taxable in Australia if the employment services are carried out here. It is noted that Article 14(2) does not apply as your employer is an Australian resident.

To the extent that you undertook the activities in relation to your employment with the Company during the ruling period in:

•         Country A, any remuneration earned during that period will not be assessable in Australia under section 6-5 of the ITAA 1997 in accordance with Article 14(1) of the DTA; and

•         Australia, any remuneration earned in relation to any period/s you were in Australia will be assessable in Australia under section 6-5 of the ITAA 1997 in accordance with the principles contained in ATO ID 2002/181.

Any payment period that relates to both employment in and out of Australia will need to be apportioned to account for the period the activities were undertaken in Australia.