Private ruling: Taxation of income derived from a foreign employer
Published: June 2012
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Question 1 and answer: | Will you have to pay income tax in Australia on employment income derived from a foreign based employer if you work in Australian waters for a period exceeding 183 days in any income year? | Yes. | Question 2 and answer: | Will you have to pay income tax in Australia on your employment income derived from a foreign based employer if you work in Australian waters for a period not exceeding 183 days in any income year? | No.

Relevant facts and circumstances: You have been residing in a Country X for approximately three years. You are married to a citizen of Country X; you have two children together and own a house together. You are not a resident of Australia for income tax purposes. You work on an oil rig that is currently located in Australian waters. You expect the oil rig to remain in Australian waters for several more months until it relocates outside Australian waters. Although you are unsure of the destination of the oil rig beyond the next assignment, you state that in the future you will work in Australian waters for no more than 183 days in any income year. You are considering changing employers to a Country Y based company. If you work for the company in Country Y you will still work on the same oil rig. You state that if you work for the company in Country Y you will be paid from that country and will be under its direction and control. You believe that the company in Country Y has an office or branch in Australia however this may have recently been sold to another company. In any event you state that you will have no dealings with this outlet if you change employers.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5

Reasons for decision: Detailed Reasoning - Assessable Income: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your taxable income includes income gained from all sources, whether in or out of Australia. However, where you are a foreign resident (non-resident) your Australian taxable income includes only income derived from an Australian source. A foreign resident whose income comprises only that sourced outside Australia does not have any income that is taxable in Australia. | Detailed Reasoning - Lodgment of Australian Tax Returns: Following the end of an income year an Australian resident taxpayer will need to lodge an Australian tax return declaring income from all sources in or out of Australia. A foreign resident will need to lodge an Australian tax return declaring Australian sourced income, with the exception of interest, unfranked dividend and royalty income from which Australian tax has already been withheld. A foreign resident who has only received income from a source outside Australia will not need to lodge an Australian tax return. | Detailed Reasoning - Source of Income: In determining the source of salary and wages income the following factors are considered to be relevant: · negotiating and obtaining the contract of employment, · performing the work, and · payment for the services. Common law has established that in the case of an ordinary contract for employment the source of the income generally depends upon the place where the work is performed. The making of the contract and the place of payment are considered to be less significant factors in determining the derivation of income. Consequently, in most cases the source of income will be the place where the work is performed. Therefore, a foreign resident who works in Australia (which includes Australian waters), whether for an Australian or foreign employer, will generally be liable to pay income tax in Australia. They may also be required to pay income tax in their home country. In this regard, advice should be sought from the taxation authority in that country. Specific guidance regarding the taxation liabilities of foreign residents who work in Australia is provided for by any international tax treaty in force between Australia and the home country of the foreign resident. Tax treaties are also referred to as tax conventions or double tax agreements (DTA). They prevent double taxation and fiscal evasion, and foster cooperation between Australia and other international tax authorities by enforcing their respective tax laws. Individuals will only be affected by a tax treaty if they are a resident of Australia or the other treaty country. The DTA between Australia and Country X provides that where a resident of Country X carries out work in Australia, the person will be liable to pay tax in Australia on any employment income earned from that work. However, the person may be exempt from tax in Australia if they are present here for a period not exceeding 183 days in the year of income. For this exemption to apply the employment income earned must be paid by an employer who is not resident in Australia and must not be deductible in determining the taxable profits of a fixed place of business the employer has in Australia. A foreign resident who does not work in Australia and is paid by a foreign employer will not be liable to pay income tax in Australia. Individuals in this situation should seek advice about their liability to pay income tax from the taxation authority in their country of residence. | Detailed Reasoning - Conclusion: Based on the above, if you change employers to a Country Y company and you work in Australian waters for a period exceeding 183 days in any income year you will be liable to pay income tax in Australia. However, in your situation you state that you will work in Australian waters for no more than 183 days in any income year. This is less than the 183 day period specified in the DTA that can be used to determine the taxation liabilities of Australian and Country X residents. Should you change employers to the company in Country Y you will be paid by a company not resident in Australia, and there is not enough evidence to conclude that the employment income you would earn would be used to determine the taxable profits of a fixed place of business in Australia. Therefore if you work in Australian waters for no more than 183 days in any income year you will not be liable to pay income tax on your employment income.

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