Private ruling: foreign source income
Date of advice: 21 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 June 2017

Ruling: Q1: Is the income that you earn from foreign employment as a pilot flying on international routes flying for Company X assessable in Australia? | A1: No | Q2: Is the income that you earn from foreign employment as a pilot flying on Country A domestic routes for Company X assessable in Australia? | A2: Yes

Relevant facts and circumstances: You entered into a three year contract with Company X in late 201X. The contract contains the possibility of a further five year extension. Your employment will be based in Country A. You will fly domestic routes within Country A and international routes. You have a fly-in fly-out arrangement with your employer. Your family was originally based with you in Country A. In mid 201Y you and your family travelled to Australia to investigate the possibility of relocating to Australia. In mid 201Y you signed a long term lease in Australia and your family has resided in Australia on a permanent basis from this date. You will spend approximately half the year in Australia with your family and half the year working in Country A. You are an Australian resident for tax purposes from 30 June 201Y. You will pay tax in Country A on the employment income from Country X and they will provide you with a tax paid certificate.

Relevant legislative provisions: Income Tax Assessment Act 1936 ; | Income Tax Assessment Act 1997 subsection 6-5(2); and | International Tax Agreements Act 1953 sections 4 and 5.

Reasons for decision: Detailed Reasoning - International routes: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country A agreement is listed in section 5 of the Agreements Act. The Country A operates to avoid the double taxation of income received by residents of Australia and Country A. Taxation Ruling TR 2001/13 provides interpretation of Australia's tax treaties in particular, paragraphs 22 to 26 provide an interpretation on the words used to allocate taxing rights. Paragraph 4 of TR 2001/13 provides that the phrase 'shall be taxable only' limits the exercise of a taxing power to the country that has an exclusive taxing right. Any attempt by the country of residence to exercise domestic law would be ineffective to the extent that the treaty as implemented takes precedence over the country domestic law in the event of a conflict. Paragraph 1 of Article 15 of the Country A agreement provides that salaries, wages and other similar remuneration derived by an individual who is a resident of Australia in respect of employment may be taxed in both Australia and Country A. Paragraph 2 of Article 15 specifies that in certain circumstances employment income is only taxable in Australia. Because your employer is a resident of Country A this article does not change the taxing rights. Paragraph 3 of Article 15 gives Country A sole taxation rights on remuneration derived in respect of an employment exercise aboard an aircraft operated by an enterprise of Country A in international traffic. Subsequently your remuneration derived in respect of international flights is exempt from tax in Australia. | Detailed Reasoning - Domestic routes: The income you derive from your employment in Country A flying domestic routes is not "derived in respect of an employment exercised aboard a ship or aircraft operated by an enterprise of a contracting state in international traffic". Consequently, income derived from flying domestic routes is not exempt from tax in Australia under Article 15(3) of the Country A Agreement. Therefore it is assessable in Australia as ordinary income under Subsection 6-5(2) of the ITAA 1997.