Edited version of private advice

Authorisation Number: 1052272476310

Date of advice: 25 July 2024

Ruling

Subject: Assessable income

Question 1

Is the employment income derived by a non-resident employee (the Employee) working outside of Australia for an Australian based company (the Employer) assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Is the Employer required to withhold amounts of tax on the income that is not assessable in Australia under subsection 12-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

•                     The Employer is an Australian private company.

•                     The Employer is registered for pay as you go withholding on a monthly basis.

•                     The Employer employed the Employee on XX XXXX 20XX, whom was an Australian resident for taxation purposes.

•                     The Employee left Australia permanently in XXXX 20XX and is a tax resident of another Country.

•                     The Employee remains employed by the Employer, and carries on their employment outside of Australia.

•                     Since the Employee left, the Employer has continued to withhold from the Employee's salary or wages and continued to pay superannuation guarantee for the Employee.

Relevant legislative provisions

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

Taxation Administration Act 1953 section 12-35 schedule 1

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

International Tax Agreement Act 1953 section 4

International Tax Agreement Act 1953 schedule 4

International Tax Agreement Act 1953 schedule 4, article 15(1)

International Tax Agreement Act 1953 schedule 4, article 15(2)

Reasons for decision

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year and other ordinary income that a provision includes as assessable income on some basis other than having an Australian source.

Salary and wages are ordinary income under subsection 6-5(3) of the ITAA 1997.

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

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Schedule 4 to the Agreements Act contains the tax treaty between Australia and Country Z. This agreement operates to avoid the double taxation of income received by Australian and Country Z residents.

Article 15

Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by individual who is a resident of the Contracting States 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.

Notwithstanding the provisions mentioned in the above paragraph, remuneration derived by an individual who is a resident of one of the Contracting States in respect of employment exercised in the Other Contracting State shall be taxable only in the first mentioned State if:

•                     the recipient is present in Australia for a period not exceeding 183 days in any 12-month period commencing or ending in the year of income concerned

•                     the remuneration is paid by, or on behalf of, an employer who is not a resident of Australia

•                     the remuneration is not deductible in determining the taxable profits of a permanent establishment or fix base which the employer has in Australia, and

•                     the facts indicate that all requirements of Article 15(1) of the Agreement are satisfied. The taxpayer's Australian sourced income will therefore not be subject to tax in Australia.

In addition, the facts conclude that 15(2) is not applicable as the Employee was present in the other State for a period longer than 183 days.

Accordingly, taxing rights are assigned to Country Z and the taxpayer's income is not assessable in Australia under section 6-5(3) of the ITAA 1997.

Question 2

Is the Employer required to withhold amounts of tax on the income that is not assessable in Australia under section 12 of the Income Tax Assessment Act 1953 (TAA)?

Summary

No. The Employer is not required to withhold amounts of tax on the income that is not assessable in Australia.

Detailed reasoning

Pay as you go withholding

Section 12-35 of Schedule 1 to the TAA provides that an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee.

However, subsection 12-1(1) of Schedule 1 to the TAA provides that an entity need not withhold an amount under this section from a payment if the whole of the payment is exempt income of the entity receiving the payment.

In your case, the employment income that is being paid to your foreign resident taxpayer that is being sourced from outside of Australia is exempt income of the taxpayer receiving the payment.

Accordingly, you are not required to withhold any amounts under subsection 12-1(1) of the TAA.