Edited version of private advice

Authorisation Number:1052195061586

Date of advice: 22 November 2023

Ruling

Subject: Foreign income

Question

Is the salary and wages paid by A Co to the individual working remotely in Australia considered foreign sourced income for the 201X to 201Y income years?

Answer

Yes

Question

Is the salary and wages paid by A Co to the individual working remotely in Australia considered foreign sourced income for the period between 1 July 201Y and 31 December 202Y?

Answer

Yes

This ruling applies for the following periods:

Period between 1 July 201N to 31 December 202Y

Relevant facts and circumstances

A Co is a Country A headquartered organisation (parent entity) with a global presence.

A Co engaged with an individual (the individual) who held a key leadership position within A Co. The individual's role was to manage the global business operations (specific to Country A, Australia and Country B), reporting to the Country A parent entity.

The individual is an Australian citizen who had permanently relocated out of Australia since 2002.

The individual established Country B as their primary place of residence. They performed their leadership role from Country B, but travelled to Country A to attend investor-related and other business-related meetings, and other jurisdictions as required for business-related reasons. This was reflected on their Services Agreement with A Co.

The contract of employment was formulated and executed in Country A. The individual was never directed by A Co to work from Australia.

A Co does not have a permanent establishment in Australia but has an Australian subsidiary, A Co Australia Pty Ltd. The individual did not provide any services to A Co Australia Pty Ltd and did not receive any payment for services rendered from that entity (or any other Australian entity). No amount of their salary was deductible for any Australian entity.

The individual was paid by A Co on a monthly basis via the Country A payroll directly into the individual's Country B bank account.

Due to family circumstances, from the 201X income year the individual was required to spend an increased amount of time in Australia. Whilst in Australia, the individual would work remotely.

Whilst working remotely from Australia, the individual mainly worked Country A hours (at night and from home) to service, and meet the business needs, of A Co. The individual did not work out of any A Co office whilst in Australia.

The individual did not own a property in Australia.

The only reason for the individual's visits to Australia was due to their specific family circumstances. The individual continued to treat the Country B as their primary place of residence and maintained a way of life with close personal relationships in Country B. At no stage did the individual intend to move back to Australia.

The individual spent less than 183 days each year in Australia from 1 July 201N to 31 December 202Y. The days spent in Australia prior to the COVID-19 pandemic were mostly weekends.

The individual has provided a detailed statement explaining their specific family circumstances which caused them to spend an increased amount of time in Australia from the 201X income year and later.

The nature of the work undertaken by, and the role of, the individual did not change in or since the 201X income year as a result of them having to spend more time in Australia. Their responsibilities regarding A Co's business interests in Australia did not increase, nor did the economic impact or result of their work relating to Australia.

Reasons for decision

Questions 1 and 2

Summary

The salary and wages paid by A Co to the individual working remotely in Australia is considered foreign sourced income for the 201X to 202Z income years.

Detailed reasoning

In Nathan v. Federal Commissioner of Taxation 25 CLR 183 at 189-190 it was recognised that the ascertainment of the actual source of a given income is a practical, hard matter of fact.

As stated by Bowen J in Federal Commissioner of Taxation v. Efstathakis (1979) 9 ATR 867; 79 ATC 4256 (the Efstathakis Case) at ATR 870; ATC 4259, 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 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 the case 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 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. 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 accountant 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. He entered into a contract 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, 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.

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 'the residence of the taxpayer in Australia and the facts that the services were performed and payment received [in Australia]... The payment of remuneration depended upon actual performance of the services (the Efstathakis Case at ATR 871; ATC at 4260).

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 3 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.

In the Cam, the French and the Efstathakis Cases it was held that the source of the income was where the taxpayer performed the services. However, in those cases the place where the taxpayer was located was the same as where the taxpayer did the work, where it was given effect to and where the outcome of the work occurred:

•                     the Cam Case - the fishermen undertook fishing activities putting nets into the water and fished, obtaining fish from the sea which all occurred where the boat on which he was working on at the time was located

•                     the French Case - the professional services the taxpayer provided in undertaking inspections were in relation to things he inspected in the locations that he was in at the time he conducted his inspections and which he subsequently reported on, and

•                     the Efstathakis Case - the taxpayer undertook secretarial duties and typing work. The effect of those secretarial, her typed work and the outcome of the other work always occurred at the same location as she was in at that time.

Whilst the time spent by the individual in Australia increased during the 201X to 202Z income years, and the time the individual physically performed their role remotely in Australia also increased over this period, it is considered that the individual's presence in Australia was merely incidental to the performance of their activities generally, to the earning of their income and to the nature of their employment for reasons including:

•                     the individual's role with A Co remained unchanged, that is, they remained responsible for the management of A Co's global operations and continued to report to A Co and its Chairman of the Board

•                     the work the individual did was to serve the interests of A Co (a Country A entity) and the individual had no connection with any Australian business

•                     the economic impact or result of the individual's work did not increase in relation to Australia

•                     consistent with their Services Agreement, the individual continued to perform their employment duties predominantly from their primary place of residence in Country B

•                     consistent with their Services Agreement, the individual's role continued to require them to travel to other jurisdictions, including Australia, for business-related reasons

•                     the extra time spent in Australia was primarily due to unforeseen personal reasons and, to a lesser extent in the latter years, due to Government imposed travel restrictions and often included weekends on which the individual was not required to work; it was not due to any directive from A Co

•                     the individual's place of employment was not in Australia, and

•                     the payment of the individual's salary did not depend upon actual performance of the role in Australia.

Relevantly, the individual's contract of employment was formulated, prepared and executed in Country A, and the individual's remuneration was paid by their foreign employer (A Co) directly into their Country B bank account.

All of the above factors weighed together lean towards the remuneration paid by A Co to the individual for the performance of services in Australia from 1 July 201N to 31 December 202Y being foreign sourced income.