Private ruling: Foreign employment remuneration
Date of advice: 16 May 2024
Published: 24 June 2024
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the payments you receive from the foreign organisation characterised as remuneration and therefore ordinary income? | A1: Yes. | Q2: Are the payments you receive from the foreign organisation subject to tax in Australia under the double tax agreement between Australia and Country X? | A2: No.

Relevant facts and circumstances: You are an Australian resident for tax purposes who resided in Country X some years ago. You were employed by an entity in Country X. Your employment was always exercised in Country X and at no time were you an Australian resident for tax purposes while you were employed in Country X. Your employer had a profit-sharing system for the benefit of its employees. Your employer transferred certain amounts from its yearly profits to an organisation for management. In every year your employer made a profit allocation to the organisation the employees were allocated an equal share of units. The units have a value based on the number of units and overall value of the organisation. The value of an individual's holdings is the total value of their units. The units did not give an employee any form of ownership interest in the employer. The first possible disbursement from the organisation is in the year the unitholder reached a certain age. The unitholder can choose to set their disbursement plan for all the current available units or may defer disbursement until a later year. The amount disbursed to the individual unitholder from the organisation is calculated based on the net value of the assets of the organisation. The net value is divided by the organisation's total amount of units to receive the value for one unit. The value for one unit is then multiplied by the units that the unitholder has chosen for disbursement.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-20 | International Tax Agreements Act 1953

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes income according to ordinary concepts (ordinary income) derived from all sources, whether in or out of Australia, during the income year. Ordinary income includes remuneration derived from rendering personal services. Taxation Determination TD 2017/26 provides that benefits (in the form of money or money's worth) that are received for, or in respect of, services provided as an employee, or, similarly, payments which have a sufficient connection with employment, will be characterised as remuneration and therefore ordinary income. Further, the character of the benefit must be determined in the hands of the recipient. It is irrelevant whether: • it is paid in advance of the services to be performed or after, • the remuneration is paid by the employer or another entity, • it is paid from the income or the capital of a trust, or • it is paid from an amount previously assessed to a trustee under the trust assessing provisions in an earlier year. In your case, you participated in a profit-sharing system as part of your employment with a foreign employer. Your employer set aside part of its annual profits for the benefit of its employees by way of allocating a number of 'units' to each employee that were held by an organisation for the benefit of the employee. Upon reaching a specified age, the employee (or former employee) could call on the organisation to disburse all or part of their entitlement to them. It is noted that the units did not give an employee any form of ownership interest in the employer. Further, it does not appear that an employee could dispose of their units to a third party or otherwise deal with them. Consequently, it is considered that the units are not property and are therefore not capital gains tax (CGT) assets for the purposes of the ITAA 1997. Instead, the units represent an entitlement to an amount equating to the monetary value of the units. From the above, although the payments to you may be from the income or capital of the organisation, it is considered that the character of the payments from the organisation in your hands is remuneration, as they will have a sufficient connection with your former employment. That is, they represent deferred remuneration from your former employer's profit-sharing scheme. Therefore, the payments will be ordinary income for the purposes of section 6-5 of the ITAA 1997. In determining your liability to pay tax in Australia, it is necessary to consider any applicable double tax agreement. Sections 4 and 5 of the International Tax Agreements Act 1953 incorporate that Act with the ITAA 1936 and the ITAA 1997 and provide that the provisions of a double tax agreement have the force of law. Where income is not subject to tax in Australia by virtue of the provisions of a double tax agreement Australia has with another country, it is exempt income under subsection 6-20(2) of the ITAA 1936. Article 15 of the double tax agreement with Country X (Country X Agreement) deals with dependent personal services. It states that salaries, wages and other similar remuneration derived by an individual who is a resident of one 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. Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting double tax agreements. Paragraph 104 provides that the OECD Model Tax Convention and Commentary (2017) will often need to be considered in interpreting double tax agreements. In respect to the exercising of employment and related considerations, the OECD Commentary on Article 15 provides the following general guidance: • Employment is exercised in the place where the employee is physically present when performing the activities for which the employment income is paid. • Member countries have generally understood the term 'salaries, wages and other similar remuneration' to include benefits in kind received in respect of an employment (e.g. stock-options, the use of a residence or automobile, health or life insurance coverage and club memberships). • The condition provided by the Article for taxation by the State of source is that the salaries, wages or other similar remuneration be derived from the exercise of employment in that State. This applies regardless of when that income may be paid to, credited to or otherwise definitively acquired by the employee. • Payments may be made after the termination of employment pursuant to various deferred remuneration arrangements. Such a payment should be treated as remuneration covered by Article 15 and, to the extent that it can be associated to a specific period of past employment in a given State, it should be considered to be derived from the employment activities exercised in that State. In your case, you carried out employment services in Country X for a period of time when you were a tax resident of Country X and were not a tax resident of Australia. Therefore, Article 15 of the Country X Agreement provides that the salary, wages or other similar remuneration you derived from your employment is only taxable in Country X. This was the case with the employment income you derived when you worked in Country X and is also the case with the payments you receive from the organisation. Therefore, the payments you will receive from the organisation will only be taxable in Country X, and Australia will have no right to tax the payments.