ATO ID 2005/166: Car Fringe Benefit: non resident employee from United Kingdom or New Zealand
Date of decision: 14 June 2005
Year of income: Year ending 31 March 2006
Business line: Superannuation and Employer Obligations

Issue
Will the Australian company have provided a person with a car fringe benefit in terms of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), where the person is seconded from a United Kingdom (UK) employer to work for an Australian company, which then pays the person a salary under the secondment agreement and also provides them with a car benefit?

Decision
Yes. The Australian company in its capacity as an employer has provided a car fringe benefit in accordance with subsection 136(1) of the FBTAA.

Facts
The person is a resident of the UK. The person is seconded to Australia to work for an Australian company, which is a resident of Australia. Prior to the person's secondment to Australia, the person was an employee of an employer based in the UK. The person is based in Australia for more than 183 days during the Australian income tax year after which the individual returns to the UK to work for the previous employer. As the person is in Australia for more than 183 days, they are also classified as a resident of Australia for the purposes of subsection 6(1) of the Income Tax Assessment Act 1936. The person is deemed to be only a resident of the UK under Article 4(3) of UK/ Australia Double Taxation Convention Signed 21 August 2003 (2003 UK Convention). Whilst in Australia the person's salary is paid by the Australian employer which is not deductible in determining the taxable profits of the UK employer. During the person's stay in Australia, they are provided with a car benefit by the Australian company.

Reasons for decision
Summary: By paying for the person's salary the individual would be classified as a 'current employee in terms of subsection 136(1) of the FBTAA with the Australian company being classified as a 'current employer' under the same subsection. There would consequently be a fringe benefits tax liability in terms of subsection 66(1) of the FBTAA to the Australian company where it (as an employer) provides a fringe benefit to an employee in respect of their employment. The car benefit provided to the employee has been provided to them in respect of their employment' as defined by subsection 136(1) of the FBTAA and would therefore also constitute a car fringe benefit in terms of subsection 136(1) of the FBTAA, meaning the Australian employer would notionally have a fringe benefits tax liability in Australia. In determining liability to fringe benefits tax on fringe benefits provided to an employee, it is necessary to consider not only the fringe benefits tax law but also any applicable double tax agreement contained in the Agreements Act. Section 4AA of the International Tax Agreements Act 1953 (the Agreements Act) incorporates that Act with the FBTAA so that both Acts are read as one. The provisions of the Agreements Act however will have effect notwithstanding any inconsistencies that may exist in the FBTAA. Section 3AAA of the Agreements Act lists the 2003 UK Convention as one of the Current Agreements. Section 5 gives this current agreement the force of law. The 2003 UK Convention operates to avoid the double taxation of income received by Australian and UK residents. In accordance with Article 15(1) of the 2003 UK Convention, where a fringe benefit is taxable in both contracting states, the benefit will be taxable only in that contracting state which would have the primary taxing right over that benefit, if the value of that benefit were paid to the employee as ordinary employment income. Article 15(2)(b) of the 2003 UK Convention provides that a Contracting State has a 'primary taxing right' to the extent that it has a taxing right under the 2003 UK Convention in respect of the remuneration for the relevant employment. Article 1(e) of the 2003 UK Convention defines the term 'contracting state' to mean UK or Australia as the context requires. The Explanatory Memorandum (EM) introducing the 2003 UK Convention states that under Article 15, the country which would have the primary taxing right if the benefit were ordinary employment income will have the sole taxing right in relation to the fringe benefit and this would generally be determined in accordance with Article 14 (Income from employment) or Article 18 (Government service). The EM also states that regardless of whether the benefit is taxed under the ordinary income tax law or under a separate legislation as is in Australia, or whether the tax is liable to be paid by the employer or the employee, Article 15 of the 2003 UK Convention will ensure that liability to tax on the fringe benefit will be taxed in only one of the countries. Article 14(1) of the 2003 UK Convention which deals with income from employment provides that salaries, wages and other similar remuneration derived by a resident of the UK shall be taxable only in the UK unless the employment is exercised in Australia. If the employment is so exercised, such remuneration may be taxed in Australia. Notwithstanding the provisions of Article 14(1) of the 2003 UK Convention, under Article 14(2), remuneration derived by a resident of the UK in respect of employment exercised in Australia shall be taxable only in the UK where: As the employee has been present in Australia for more than 183 days and the remuneration is paid by an Australian resident employer, Article 14(2) of the 2003 UK Convention does not apply. Under Article 14(1) of the 2003 UK Convention, Australia has the primary taxing right over the remuneration received by the employee as it is an Australian sourced income. The value of the fringe benefit if paid as ordinary employment income would be assessable in Australia. Therefore, in accordance with Article 15(1) of the 2003 UK Convention, the fringe benefit provided by the Australian employer would be taxable only in Australia.

Legislative references: Fringe Benefits Tax Assessment Act 1986 subsection 136(1) subsection 66(1)
Other references: The Convention between Australia and the United Kingdom of Great Britain and Northern Ireland - Article 4(3) - Article 14(1) - Article 14(2) - Article 15(1)
Subject references: Benefit Car fringe benefits FBT employees FBT employers Fringe benefits tax International tax Overseas employees United Kingdom