Edited version of private advice

Authorisation Number: 1052220100001

Date of advice: 8 February 2024

Ruling

Subject: Foreign sourced income

Question 1

Is the salary paid to me by a country A company to be reported on my country B 20XX tax return as overseas income?

Answer

Yes the salary paid by an country A company should be reported on both your country A and B tax returns for the year ended 30 June 20XX.

Only the remuneration you received in country A will be reported on the country A tax return compared to all sources of income earned being reported on the country B tax return.

Question 2

Will the income paid to me by a country A company be exempted from tax in country A?

Answer

No, the country A income is not exempt income and will be taxed at non-resident tax rates on your country A income tax return.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

X XX 20XX

Relevant facts and circumstances

You are a director and employee of country A based company.

You and your husband left country A to live and work in country B on the XX XX 20XX

You have not returned to country A and you intend to remain in country B for several years.

You were paid a salary for the period X XX 20XX to XX XX 20XX from the country A company.

The work you performed included:

•         Editing and recording an audiobook (available globally)

•         Producing a podcast (available globally)

•         Selling online courses (available globally).

You received specialist tax advice from an accountant who advised you and your husband will be considered non-residents of country A for tax purposes.

You were also advised the salary you received while permanently living in country B should be declared to country B Tax authority.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5(3)

Income Tax Assessment Act 1997 section 15-2

Income Tax Assessment Act 1936 section 23AG

Income Tax Assessment Act 1936 section 23AF

Income Tax Assessment Act 1936 section 23AI

Income Tax Assessment Act 1936 section 23AK

ATO Interpretative Decision ATO ID 2002/181

Double Taxation Agreement DTA between country A and country B

Reasons for decision

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 resident will 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.

A non-resident individual who lives and works abroad (with no intention of returning to Australia) is liable to Australian income tax only on:

              i.        income derived from sources in Australia (except for interest, dividends and royalties which are subject to withholding tax), and

             ii.        certain statutory income that is taxable on a basis other than source (such as certain capital gains).

Taxpayers are only exempt from Australian tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) if they engage in foreign service or under section 23AF if they work on an approved overseas project.

Taxpayers are also exempt from Australian tax in relation to work for certain international organisations and if you are an Australian Defence Member performing overseas duties.

Additionally, certain government pensions including the disability support pension paid by Centrelink to a person who is under the age-pension age are exempt income, as are invalidity service pensions paid under the Veterans' Entitlements Act 1986 where the veteran is under the age-pension age.

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

The double taxation agreement between country A and country B is contained in Schedule 4 of the Agreements Act, being the Convention between country A and country B 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 17 and 18 of this Convention, 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 from that exercise may be taxed in that other State.

2 Notwithstanding the provisions of paragraph 1 of this Article, 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 fiscal year or 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; and

(c) the remuneration is not deductible in determining taxable profits of a permanent establishment which the employer has in the other State.

Eligibility for the foreign income tax offset

You may be able to claim a foreign income tax offset (FITO) for foreign tax paid in another country. The offset provides relief from paying double tax on your foreign and worldwide income.

To claim a foreign income tax offset, you must:

•         have actually paid or deemed to have paid an amount of foreign income tax

•         include the foreign income or gain on which you paid the tax on in either your:

­   Australian assessable income

­   non-assessable non-exempt income under section 23AI or 23AK of the ITAA 1936.

Your foreign income tax offset reduces your tax payable for an income year. It applies in the income year in which your foreign income or gain forms part of your income in Australia'.

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.

You received an Income statement from your country A employer.

The Income received from your country A employer should be reported on both your country A and B tax returns for year ended 30 June 20XX. Only the income from your country A sources will be reported on the country A tax return compared to all sources of income earned in the country B being reported on country B tax return.

As the country A income is not exempted income you will be taxed at non-resident tax rates.

A non-resident individual who lives and works abroad with no intention of returning to country A is liable to country A income tax only on income derived from sources in country A except for interest, dividends and royalties which are subject to withholding tax, and certain statutory income that is taxable on a basis other than source such as certain capital gains.

Foreign residents and Australian sourced income

The assessable income of a foreign resident generally includes all their ordinary and statutory income from Australian sources.

A foreign resident is someone who is not an Australian resident for taxation purposes.

Income you must declare from Australian sources include:

•         Employment income such as salary and wages, including lump sum payments, allowances, cash and tips and reportable fringe benefits

•         Government payment and allowances

•         Investment income.

Non-resident withholding tax

When you are not an Australian resident for tax purposes, you are required to declare any Australian sourced income in an Australian tax return. However, if the only Australian income you receive is interest or dividends, you may not be required to declare that income in Australia.

Once your Australian income has been assessed in Australia, you may be able to claim a credit for the Australian tax paid against your tax liability in your own country, if there is a double-taxation agreement with Australia. This means you will not be taxed on the same income twice. You should contact your country's tax authority for more information on how you can claim this credit.