Edited version of administratively binding advice

Authorisation Number: 1052310718108

Date of advice: 02 October 2024

Advice

Subject: Foreign superannuation fund

Question 1

Where it is determined that the remuneration derived by a non-resident employee whilst in Australia is not from Australian sources under section 6-5 of the Income Tax Assessment Act 1997, is it reasonable to conclude that the interpretation of the definition of 'work done outside of Australia' in paragraph 27(1)(b) of the Superannuation Guarantee (Administration) Act 1992 ('SGAA') should also take into account the source of income for income tax purposes, and therefore exempt Entity A from remitting superannuation on income derived by a non-resident employee while in Australia working remotely for the foreign company, for a period of less than several weeks in a rolling 12-month period?

Answer 1

No.

Question 2

If the answer to question 1 is no, please confirm whether there are any exemptions under section 27 of the SGAA for Entity A to pay superannuation to their employees who will be working remotely in Australia for a period of less than several weeks in a rolling 12-month period?

Answer 2

No.

Question 3

Are the partners of Entity A considered employees for the purposes of section 12 of the SGAA while they work remotely in Australia for a period of less than several weeks in a rolling 12-month period?

Answer 3

No.

This advice applies for the following periods:

For the income year ended 30 June 20XX

For the income year ended 30 June 20XX

For the income year ended 30 June 20XX

For the income year ended 30 June 20XX

Relevant facts and circumstances

Entity A, an employer, is a resident of a foreign country, Country X. Entity A has implemented an arrangement that allows its employees to request to work remotely overseas, carrying out their normal Country X duties, for up to several weeks in a rolling 12-month period.

Features of this working remotely arrangement include:

•                     Individuals employed by Entity A are (ordinarily) required to physically reside in Country X to fulfil their roles. Working overseas is not part of regular/frequent working arrangement, instead it is an occasional option to provide individuals with increased flexibility in practically balancing work and life.

•                     The working remotely arrangement applies to all employees and partners. It does not form part of the employee's contract and it may be amended or withdrawn at any time.

•                     Employees must only work from a country where they are permitted to, under the relevant country's immigration laws. Entity A will not support requests for sponsorship or applications for the right to work to accommodate personal travel.

•                     Employees can work remotely overseas for up to several weeks in a rolling 12-month period. Any time spent overseas beyond this, unless an extension is granted in exceptional circumstances, will require the individual employee utilising personal leave or unpaid leave.

•                     Working overseas for personal reasons under this arrangement will need the right to work in the country in question. This is not the same as business travel, which is generally for short periods.

•                     Any work performed from outside Country X can only be temporary so as not to create a taxable presence or permanent establishment of the Country X firm in the second jurisdiction. Under the arrangement, an employee whilst working remotely is to avoid certain activities for example, an employee cannot authorise, sign, conclude or amend engagement letters and contracts in the name of Entity A whilst working remotely.

•                     Whilst working remotely, the employee's pensions and benefits will continue as normal as long as they are being paid and remain on Entity A's payroll.

•                     Entity A will not provide travel insurance for personal trips. Employees are encouraged to take out their own policy for travel insurance with respect to their personal travel and time working remotely.

•                     There is a related entity, Entity Z in Australia. Whilst working remotely, Entity A's employees will be undertaking work for Entity A and there will be no association with Entity Z. Entity A's employees will not provide any work for Entity Z. Employees will not be working from the offices of Entity Z.

•                     The contract of employment between the employee and Entity A was entered into in Country X. The employees who choose to work remotely in Australia will retain this Country X contract of employment.

•                     The employees will remain on the Country X payroll of Entity A and their remuneration will be paid into their Country X bank account.

•                     During their short visit to Australia (no more than several weeks in a rolling 12-month period), the employee will continue to work for Entity A and provide services to Entity A. They will not be providing services to Australian clients whilst in Australia.

•                     It is the employee's responsibility to ensure that their mobile devices work and that they have internet access that will support their role requirements whilst overseas.

Further:

•                     The employees are non-residents of Australia for the purposes of the Income Tax Assessment Act 1936.

•                     The employees and partners are not prescribed employees under section 27(1)(d) of the SGAA and they do not hold a position as a senior executive of a company operating in Australia or establishing a business activity in Australia on behalf of Entity A.

•                     Entity A's partners are self-employed (partner to a business partnership) and are not employed by Entity A.

For the purpose of this advice, Entity A's employees will be working in Australia for no more than several weeks in a rolling 12 month period.

Relevant legislative provisions

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

Superannuation Guarantee (Administration) Act 1992 paragraph 27(1)(b)

Superannuation Guarantee (Administration) Act 1992 paragraph 27(1)(c)

Superannuation Guarantee (Administration) Act 1992 paragraph 27(1)(ca)

Superannuation Guarantee (Administration) Act 1992 paragraph 27(1)(d)

Superannuation Guarantee (Administration) Act 1992 paragraph 27(1)(e)

Superannuation Guarantee (Administration) Regulations 2018 section 11

Superannuation Guarantee (Administration) Regulations 2018 section 12

Reasons for decision

Question 1

Detailed reasoning

Source of income

The first issue for consideration in Question 1 is determining the source of income which is derived by the employees during the time that they are working in Australia.

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) relevantly provides that ordinary income derived by a foreign resident directly or indirectly from Australian sources, is assessable in Australia.

Salary and wages are ordinary income for the purposes of subsection 6-5(3).

The income tax provisions provide no guidance as to the meaning of the term 'Australian sources' in subsection 6-5(3). The source of income has been judicially considered in a number of cases. 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.

In relation to employment income, courts have held that the source of employment income is where the employee performs their duties (Commissioner of Taxation (NSW) v. Cam and Sons Ltd (1936) 36 SR (NSW) 544 (the Cam Case); 4 ATD 32 and Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 11 ATD 288; (1957) 7 AITR 76) (the French Case).

In the Cam Case, seamen were 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, .... 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.

In the French Case, an engineer was employed 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 in the French Case also made comments to the effect that this decision did not necessarily determine what would be most important in every personal services contract.

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 FC of T v Efstathakis 79 ATC 4256 (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 provided 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.

It was held by the court that in determining the source of income, the circumstances of the case must be evaluated and weight given to some factors in preference to others. Upon consideration of the various factors, the court found that the wages paid to the taxpayer had an Australian source.

Although the circumstances under which the taxpayer's employment was obtained and the remuneration paid included some factors occurring outside Australia, they were not significant enough to outweigh the importance of other factors relating to the employment which took place in Australia. Payment of the taxpayer's remuneration depended upon actual performance of the services. The fact that Australia was the taxpayer's place of employment was not merely incidental but was central to the earning of the income, to the personal circumstances of the taxpayer and the nature of her employment.

From these court cases, there are three factors (with the weighting given to each factor determined by their relevance to the case) that are to be considered in determining the source of income from the provision of personal services:

•                     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 present circumstances, the contract of employment between the non-resident employees and Entity A was entered in Country X. The employees will retain this contract of employment whilst working in Australia. Therefore, this factor leans towards the source of income being in the Country X.

The renumeration for the work performed by the non-resident employee during their time in Australia will be paid from Country X. In this regard, the remuneration will be paid by Entity A, a Country X entity into the Country X bank account of the non-resident employee. This factor also tends to favour the source of the income being in the Country X.

In relation to the third factor, 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.

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

In the present case, the performance of services by Entity A's employees differs from the facts presented in the Cam, French and Efstathakis in several aspects:

•                     Entity A employees' work will originate from Country X, and not Australia

•                     The employees will continue to work for Entity A and provide services to Entity A while in Australia. They will not be providing services to Australian clients whilst in Australia. The effect of the outcome of the work was connected to and originated in the Country X.

•                     Entity A employees' salary will be paid from Country X and their contract of employment originated from Country X.

•                     Employees are required to fulfil in their duties in Country X, except when permission is provided under the Entity A's remote working overseas policy to work in Australia (or anywhere else in the world).

The physical presence of the non-resident employees in Australia would point to the income having an Australian source. However, this factor alone is not decisive as the other factors concerning the performance of services which are listed above, such as the continuing obligation for an employee to perform their duties in Country X, the payment of remuneration, are also relevant. Considering these factors which are listed above, it is considered that these factors would lean towards the Country X as being the source of income.

As the non-resident employees' employment duties have no relationship with Australia, other than the employees being physically present in Australia, it is considered that the income derived by these employees whilst performing their duties in Australia is not derived from Australian sources for the purposes of section 6-5.

Paragraph 27(1)(b) exclusion

The next issue to determine is whether the interpretation of the phrase 'work done outside of Australia' as used in paragraph 27(1)(b) of the Superannuation Guarantee (Administration) Act 1992 (SGAA) should also have regard to the source of an employee's income as determined under the income tax provisions in section 6-5 of the ITAA 1997. It was concluded above that the source of renumeration, which was derived by Entity A's employees, was not from Australia sources under the income tax provisions.

The SGAA requires that an employer must provide the required minimum level of superannuation support each quarter for its eligible employees.

The term 'employee' is defined in section 12 of the SGAA.

As the employees are considered 'employees' of Entity A under the SGAA, a minimum Superannuation Guarantee is required for the employees unless one of the exclusions applies under section 27 of the SGAA.

Relevantly, paragraph 27(1)(b) of the SGAA excludes:

Salary or wages paid to an employee who is not a resident of Australia for work done outside Australia (except to the extent that the salary or wages relate to employment covered by a certificate under section 15C).

Work done outside Australia

The phrase 'work done outside Australia' in paragraph 27(1)(b) is neither defined in a specific section or within the general definitions contained within subsection 6(1) of the SGAA.

In ATO Interpretative Decision ATO ID 2015/24 Superannuation guarantee: work done outside Australia the Commissioner considers the phrase 'work done outside of Australia' in paragraph 27(1)(b) in connection to a non-resident employee. The non resident employee performed their work at a location outside of the outer limits of Australia's 'coastal sea', including the Territory of Cocos (Keeling) Islands, the Territory of Christmas Island, the 'coastal sea' of each of those Territories, and the JPDA (Joint Petroleum Development Area) Australia.

It was concluded by the Commissioner that 'Australia' in paragraph 27(1)(b) is used in the geographical sense and extends to the outer limits of Australia's coastal sea and includes the territories of Norfolk Island, the Coral Sea Territory, the Territory of Ashmore and Cartier Islands, the Territory of Cocos (Keeling) Islands, the Territory of Christmas Island, the Territory of Heard Island and the McDonald Islands and the coastal sea of each of those Territories. It also includes the offshore areas for the purposes of the Offshore Petroleum and Greenhouse Gas Storage Act 2006.

Importantly, the Commissioner concluded that as the work was done at sea outside these areas, it was 'work done outside Australia' for the purpose of paragraph 27(1)(b).

From the above decision, it is considered that the sole determinative factor in determining whether 'work is done outside of Australia' for the purposes of paragraph 27(1)(b) is the location or place where the non-resident employee performs their work i.e. the place where the employee is physically present when they perform their work.

In contrast, the source of a non-resident employee's salary and wages under the income tax provisions is decided by weighing up the outcomes of the considerations of a number of factors. These factors include not only the place where the employee's services are performed but also the where the contract of employment is entered into and the place where renumeration is payable.

As such, it is considered that the source of an employee's salary and wages for the purposes of section 6-5 is irrelevant in determining whether a payment of salary and wages is for 'work done outside' of Australia for the purposes of paragraph 27(1)(b).

The proposed work, which will be undertaken by Entity A's employees for up to several weeks under this policy, would be performed whilst the employees were physically present within Australian waters. The performance by Entity A's employees of their duties in 'Australia' does not satisfy the terms of the phrase 'work done outside of Australia'.

Accordingly, as the payment of salary and wages paid to the Entity A's employees is not in respect of 'work done outside of Australia', the exclusion in paragraph 27(1)(b) will not apply.

Therefore, the exclusion in paragraph 27(1)(b) would not apply to Entity A's employees working remotely in Australia.

It is noted that the exclusion in paragraph 27(1)(b) contains an exception regarding salary or wages that relate to employment covered by a certificate under section 15C. As the exclusion in paragraph 27(1)(b) does not apply to Entity A's employees, it is not necessary to consider this exception.

Notwithstanding this, the eligibility of Entity A's employees to obtain a certificate under section 15C is considered below in the discussion regarding the availability of the exclusion in paragraph 27(1)(e), which is discussed in Question 2, below.

Question 2

Detailed Reasoning

Section 27(1) also provides for the following exclusions from making superannuation guarantee contributions:

(c)           salary or wages paid by an employer who is not a resident of Australia to an employee who is a resident of Australia for work done outside Australia

(ca)             salary or wages paid by an employer to an employee who is not a resident of Australia for work done in the Joint Petroleum Development Area (within the meaning of the Petroleum (Timor Sea Treaty) Act 2003)

(d)          salary or wages paid to an employee who is a prescribed employee for the purposes of this paragraph;

(e)          salary or wages prescribed for the purposes of this paragraph.

In the present circumstances, the salary or wages will be paid by Entity A, a non-resident employer to employees who are also non-residents. Further, the salary or wages will be to Entity A's employees for work performed within Australia. In this regard, there is no evidence that Entity A's employees will be performing work within the JPDA.

Accordingly, the exclusions in paragraphs 27(1)(c) and (ca) do not apply to your circumstances.

In relation to the exclusion in paragraph 27(1)(d), 'prescribed employees' are broadly, foreign executives who hold certain visas and meet further conditions - see section 11 of the Superannuation Guarantee (Administration) Regulations 2018 ('SGAR').

The visas listed in section 11 include the following:

•                     Subclass 456 (Business (Short Stay)

•                     Subclass 400 (Temporary Work (Short Stay Specialist)

•                     Subclass 482 (Temporary Skill Shortage) visa or a Subclass 457 (Temporary Work (Skilled) visa

Entity A's employees are not prescribed employees under section 27(1)(d) of the SGAA. There is no evidence that Entity A's employees hold one of the above listed visas

Accordingly, the exclusion in paragraph 27(1)(d) does not apply.

Section 12 of the SGAR lists certain salary and wages that are prescribed for the purposes of the exclusion in paragraph 27(1)(e). Relevantly, this includes salary and wages paid where a scheduled international social security agreement provides that the employer is not subject to the Superannuation Guarantee in respect of the work for which the payment is made (see paragraph 12(1)(e) of the SGAR).

A scheduled international social security agreement (as defined in section 5 of the Social Security (International Agreements) Act 1999) addresses the problem of double coverage of employees.

This can occur where an employee is sent to work temporarily in another country and their employer is required to make superannuation contributions for them under the legislation of both countries. To overcome that problem, Australia has entered into scheduled international social security agreements with other countries, which have the effect that only the home country's superannuation scheme will apply.

Section 15C of the SGAA sets out the procedures for the application and issue of a certificate of coverage where a scheduled international social security agreement applies. To qualify for the exemption, the employer must apply to the ATO for a "Certificate of Coverage".

Australia currently has 31 bilateral agreements regarding social security. There is no bilateral agreement between Australia and Country X.

Accordingly, the employees of Entity A cannot obtain a Certificate 15C. Consequently, the exclusion under paragraph 27(1)(e) of SGAA does not apply.

In summary, the exclusions in paragraphs 27(1) (c), (ca), (d) and (e) do not apply to your circumstances.

Question 3

Detailed Reasoning

The SGAA requires that an employer must provide the required minimum level of superannuation support each quarter for its eligible employees. The term 'employee' is defined in section 12 of the SGAA. Under subsection 12(2), employee includes:

A person who is entitled to payment for the performance of duties as a member of the executive body (whether described as the board of directors or otherwise) of a body corporate is, in relation to those duties, an employee of the body corporate.

The Commissioner of Taxation has published Draft Taxation Ruling TR 2023/4DC1 Income Tax and superannuation: who is an employee? (TR 2023/4DC1)which states at paragraphs 22-24

22. The totality of the relationship between a worker and an engaging entity comprises the legal rights and obligations they have in respect of each other - that is, the contractual relationship between the parties. To determine the nature of the contractual relationship between a worker and an engaging entity, it is the terms of the contract alone, whether express or implied, which are to be taken into account.

23. As such, the first step in determining whether an employment relationship exists is to identify the contract between the parties. Employment contracts may be:

•                     Wholly in writing

•                     Wholly oral, or

•                     Comprised of any combination of written terms, oral terms and terms implied from conduct.

24. The second step is to identify the terms of the contract, that is the legal rights and obligations agreed between the parties, whether written, verbal or a combination of the two.

At paragraph 145, TR 2023/4DC1 expands on partnerships. It states:

A partner in a partnership cannot be an employee of the partnership. It is not possible for a person to meet the common law definition of employee and still have the powers and responsibilities of a partner. In particular, the degree of control over an individual required for the individual to be an employee at common law is incompatible with the degree of independence that a partner has in relation to the conduct of the partnership enterprise.

No contract was provided to state the terms and conditions of the partners employment.

The facts presented in the application documentation stipulate that the partners are self-employed and are not a member of the executive body, they are separate entities that are not employed by the Entity A.

Accordingly, as they are not considered employees, Superannuation Guarantee would not apply to the partners of Entity A.