Edited version of private advice

Authorisation Number: 1052335151674

Date of advice: 22 November 2024

Ruling

Subject: Residency - foreign income tax offset

Question 1

Is the income you earned from your Country A employer assessable in Australia pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Can you use the foreign income tax offset (FITO) provisions to offset tax paid in Country A against your Australian assessable income pursuant to section 770-10 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You were born in Country A and are a Country A citizen.

From XX XX 20XX, you have been employed with a Country A company (your Employer).

On XX XX 20XX, you and your spouse permanently relocated from Country A to Australia.

On XX XX 20XX, you became an Australian citizen.

You have entered into a 12-month rental agreement for a unit in Australia. You use this address when completing income and outgoing passenger cards.

You hold Australian bank accounts.

You hold Country A bank accounts.

You hold a driver's licence in both Australia and Country A.

You continue to work remotely for your Employer and get paid into a Country A bank account.

You transfer your income from the Country A bank account to your Australian bank account.

You do not earn any income from Australian-based institutions.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 770-10

International Tax Agreements Act 1953

Reasons for decision

Question 1

Is the income you earned from your Country A employer assessable in Australia pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

Subsection 6-5(2) of the ITAA 1997 applies such that all domestic and foreign-sourced income you earn as an Australian resident is assessable in Australia. As you have been an Australian resident since 11 August 2024, the income you receive from your Employer is ordinary income which is assessed under section 6-5 of the ITAA 1997.

Detailed reasoning

Subsection 6-5 (2) of the ITAA 1997 provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia.

In determining your liability to pay tax in Australia on income originating from foreign sources it is necessary to consider not only the domestic income tax laws but also any application of double tax agreements.

Double taxation agreement

Where income of an Australian resident originates from a foreign employer it is necessary to consider any applicable double tax agreements. Sections 4 and 5 of the International Tax Agreements Act 1953 (the Agreements Act), incorporate this Act with the ITAA 1936 and the ITAA 1997 and provide that the provisions of a double tax agreement have the force of the law.

The DTA (the DTA) allocates taxing rights over cross-national income and gains between Australia and Country A.

Article 14.1 of the DTA states that salaries, wages and other similar remuneration derived by a resident of the Contracting State (Australia) in respect of an employment shall be taxable only in Australia unless the employment is exercised in the other State (Country A). If the employment is so exercised in the other State, such remuneration as is derived therefrom may be taxed in Country A.

Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements discusses the Commissioner's views about interpreting double tax agreements. Paragraph 104 provides that the OECD Model Tax Convention and Commentary (the Model Convention) will often need to be considered in interpreting double tax agreements.

The Commissioner's view on where employment is exercised accords with the guidance found on page 305 of the commentary on the Model Convention, which provides the following:

Employment is exercised in the place where the employee is physically present when performing the activities for which the employment income is paid. One consequence of this would be that a resident of a Contracting State who derived remuneration, in respect of an employment, from sources in the other State could not be taxed in that other State in respect of that remuneration merely because the results of this work were exploited in that other State.

This is supported by decisions in the Australian courts, which have generally held that the source of employment income is where the employee performs their duties. Thus, employment income earned while physically located in Australia is considered to be sourced in Australia.

Application to your circumstances

On XX XX 20XX, you became a resident of Australia for taxation purposes, resulting in Australia having the sole taxing right on your employment income when carrying out your employment duties from Australia, as enforced by Article 14.1 of the DTA with Country A.

As the income you received from your Country A employer is for work performed in Australia in accordance with the principles outlined in the Model Convention, the income is assessable in Australia under section 6-5 of the ITAA 1997.

Question 2

Can you use the foreign income tax offset (FITO) provisions to offset tax paid in Country A against your Australian assessable income pursuant to section 770-10 of the ITAA 1997?

Summary

Section 770-15 of the ITAA 1997 provides that the FITO can only apply when the tax has been correctly imposed in accordance with the DTA. Article 23 of the DTA confirms that tax paid in Country A will be allowed as a credit against your Australian tax subject to the provisions of the laws of Australia, which include the FITO provisions of Division 770 of the ITAA 1997.

As Article 14 of the DTA gives Australia sole taxing rights over any employment income you earn in Australia, the tax in Country A has been incorrectly applied and you do not meet the requirements to be entitled to the FITO under section 770-10 of the ITAA 1997.

Detailed Reasoning

Foreign income tax offset

Where tax has been applied in both Australia and another DTA jurisdiction, the elimination of double taxation will proceed under the provisions of the relevant article in the DTA.

For income which has been subject to taxation in both Australia and Country A, Article 23 of the DTA provides instructions to determine which jurisdiction will provide a credit on tax paid.

Article 23 the DTA provides:

ELIMINATION OF DOUBLE TAXATION

1. Subject to the provisions of the laws of Australia which relate to the allowance of a credit against Australian tax of tax paid in a country outside Australia (which shall not affect the general principle of this Article), Country A tax paid under the laws of Country A and in accordance with this Convention, in respect of income derived by a resident of Australia shall be allowed as a credit against Australian tax payable in respect of that income.

2. Subject to the provisions of the laws of Country A which relate to the allowance of a credit against Country A income tax of tax paid in a country outside Country A (which shall not affect the general principle of this Article), Australian tax paid under the laws of Australia and in accordance with this Convention, in respect of income derived by a resident of Country A (excluding, in the case of a dividend, tax paid in respect of the profits out of which the dividend is paid) shall be allowed as a credit against Country A tax payable in respect of that income.

Section 770-10 of the ITAA 1997 provides that a taxpayer whose assessable income in Australia is also subject to foreign income tax paid may be entitled to a FITO. However, the foreign income tax must meet the definition of foreign income tax in section 770-115 of the ITAA 1997 for section 770-110 to apply.

Subsection 770-15(1) of the ITAA 1997 provides the following definition of foreign income tax:

Foreign income tax means tax that:

(a) is imposed by a law other than an *Australian law; and

(b) is:

(i) tax on income; or

(ii) tax on profits or gains, whether of an income or capital nature; or

(iii) any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953.

Note:

Foreign income tax includes only that which has been correctly imposed in accordance with the relevant foreign law or, where the foreign jurisdiction has a tax treaty with Australia (having the force of law under the International Tax Agreements Act 1953), has been correctly imposed in accordance with that tax treaty.

The DTA with Country A is has the force of law under the Agreements Act, therefore the FITO will only apply where tax has been correctly imposed in accordance with the DTA.

Article 14 of the DTA provides that work done in Australia shall be taxable only in Australia. As such, Country A tax which has not been applied in accordance with the DTA will not meet the definition of foreign income tax in section 770-15 of the ITAA 1997 which excludes the tax from meeting the FITO entitlement conditions of section 770-10 of the ITAA 1997.

Application to your circumstances

Article 23.1 of the DTA provides that Australia will allow a credit against tax paid in Country A where the tax has been correctly applied in accordance with Country A law and the DTA. As the tax you have paid in Country A since becoming an Australian resident has not been applied in accordance with the DTA, it does not meet the definition of foreign income tax in section 770-15 of the ITAA 1997 and is therefore prevented from being entitled to apply the FITO under section 770-10 of the ITAA 1997 to offset the tax paid in Country A against your assessable income in Australia.

Further issues to consider

As your Country A tax has been incorrectly withheld since you have become an Australian resident you will have to contact the Country A taxation office to seek a refund on the incorrectly withheld amount.