Private ruling: Income - exempt
Published: May 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Pursuant to the agreement between Australian and country X and in accordance with guidance provided by the OECD Model Convention, will your presence in Australia be as a foreign resident for the year ended 30 June 2014 and be less than 183 days? | A1: Yes. | Q2: Are the amounts of income derived as remuneration for personal services provided to your employer in relation to days spent physically present in Australia during the period in question exempt from income tax in Australia? | A2: Yes.

Relevant facts and circumstances: You and your spouse are both citizens of country W and your dependent child is a dual citizen of the country W and country Y. You relocated from country W to country X during the year ended 30 June 2013. Effective from then you were a non-resident of country W and a tax resident of country X. You remained residing in country X until your departure during the year ended 30 June 2014. You were employed by a foreign company. Whilst a resident of country X, you were appointed to a different a position with the same foreign company. During the year ended 30 June 2014 you spent a total of days not exceeding 183 attending to meetings in various cities in Australia. These business meetings were part of your new role in the foreign company. During the same period you stayed at temporary accommodation in different cities in Australia. Your family remained in country X at their place of residence. During the same period your remuneration or other income was not deductible in determining the profits for tax purposes of a permanent establishment in Australia. Effective after that period your role's location was moved to Australia and you received an employment agreement with an Australian resident company. You were granted a temporary code 457 Work Visa under the Migration Act 1958 on and you relocated to Australia. Your family followed shortly after. Effective from the date of your permanent relocation to Australia, you became a tax resident of Australia. Given the workdays you had in Australia and your permanent relocation to Australia, you are expected to be physically present in Australia for a period exceeding in the aggregate 183 days in the Australian year of income (that is, in the tax year commencing on 1 July 2013. Your arguments and references You provide the following statements: n Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that ordinary income derived by a foreign resident directly or indirectly from Australian sources, as well as other ordinary income included by a provision on a basis other than having an Australian source, is assessable in Australia. n A non-resident is a person who is not a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936). n You were a non-resident of Australia for tax purposes until the date of your relocation to Australia, on the basis, as a question of fact you did not reside in Australia. n In determining liability to pay Australian tax on Australian sourced income received by a non-resident, it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements contained in the International Tax Agreements Act 1953 (Agreements Act). n Section 4 of the Agreements Act incorporates that Act with the 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). n The Agreement between Australian and country X operates to avoid the double taxation of income received by residents of either Australia or country X, or of both countries. n The Agreement provides that remuneration or other income derived by an individual who is a resident of one of the Contracting States in respect of personal (including professional) services shall be subject to tax only in that Contracting State unless the services are performed or exercised in the other Contracting State. If the services are so performed or exercised such remuneration or other income as is derived therefrom shall be deemed to have a source in, and may be taxed in, that other Contracting State. n However it also states that remuneration and other income derived by an individual who is a resident of one of the Contracting States in respect of personal (including professional) services performed or exercised in the other Contracting State shall be exempt from tax in the other Contracting State if: a) the taxpayer is present in Australia for a period or periods not exceeding in the aggregate 183 days in the year of income or in the basis period for the year of assessment as the case may be of that other Contracting State; b) the services are performed or exercised for or on behalf of a person who is a resident of country X ; and c) the remuneration or other income is not deductible in determining the profits for tax purposes in Australia of a permanent establishment in Australia of that person. n Assuming, points b) and c) above have been satisfied, the question at hand is whether point a) is satisfied. n During the period you were a tax resident of X and spent a total of 48 days (all being "work days" in Australia). However, you will be in Australia for more than 183 days in the tax year ending 30 June 2014 when taking into account both the 48 days (as a non-resident) between 1 July 2013 and 25 November 2013 and in the aggregate, the number of days (as a tax resident of Australia) from 26 November 2013 to 30 June 2014. n It is contended that in determining the number of days you are physically present in Australia for the purposes of the 183 days test, only the 48 days (as a non-resident) are relevant. n In interpreting the Treaty, guidance may be provided by the OECD Model Convention (OECD Convention) and commentaries (OECD commentaries) thereon. Article 15 of the OECD Convention outlines the tax treatment for salaries, wages and other similar remuneration earned in one country by a resident of another country, whereby a potential double taxation situation occurs. n The Commentary provides that the "days of physical presence" method is the most consistent with the wording of the Article and is the one that should be used when calculating the days of presence in a country in such scenarios. The following days are included in calculating the physical presence period: • part of a day • day of arrival • day of departure n The Commentary also specifies that all other days spent inside the "State of activity" should be included in the calculation, such as: • Saturdays and Sundays • national holidays • holidays before, during and after the activity • Short breaks (training, strikes, lock-out, delays in supplies) • sick days (unless they prevent the individual from leaving and he would have qualified for the exemption otherwise) • death or sickness in the family n However, days during which you are a resident of the "source State" (i.e. Australia) should not be taken into account in the calculation. The Commentary provides that subparagraph a) should be read in the context of paragraph 2, which refers to remuneration derived by a resident of a Country A in respect of an employment exercised in the other Country B. This means that the paragraph would not apply to a n person who resides and works in the same country (i.e. a person needs to be a resident in one country but be deriving income in another country, where he is not a resident). n Below are two examples that are included in the OECD commentaries to illustrate the conclusion above: n "Example 1: From January 01 to December 01, X lives in, and is a resident of, State S. On 1 January 02, X is hired by an employer who is a resident of State R and moves to State R where he becomes a resident. X is subsequently sent to State S by his employer from 15 to 31 March 02. In that case, X is present in State S for 292 days between 1 April 01 and 31 March 02 but since he is a resident of State S between 1 April 01 and 31 December 01, this first period is not taken into account for purposes of the calculation of the periods referred to in subparagraph a)". n "Example 2: From 15 to 31 October 01, Y, a resident of State R, is present in State S to prepare the expansion in that country of the business of ACO, also a resident of State R. On 1 May 02, Y moves to State S where she becomes a resident and works as the manager of a newly created subsidiary of ACO resident of State S. In that case, Y is present in State S for 184 days between 15 October 01 and 14 October 02 but since she is a resident of State S between 1 May and 14 October 02, this last period is not taken into account for purposes of the calculation of the periods referred to in subparagraph a)". n Accordingly, applying this to your situation, the periods when you were a tax resident of Australia will be excluded from the calculation of days for the purposes of the exemption under Model Convention and the Agreement between Australian and country X. n Therefore, as you spent a total of only 48 days in Australia during the period beginning 1 July 2013 whilst a non-resident of Australia and a tax resident of country X, and as these are less than 183 days, the criteria for exemption are met and the relevant income is not subject to income tax in Australia. n To put this another way, the number of days of physical presence in Australia during the year ending 30 June 2014 in which the taxpayer was a tax resident and coinciding with the days of physical presence in Australia is no more than 48 days. Upon the favourable application of Article 12 (1) of the Agreement, the amounts of income from remuneration derived from the 48 days of physical presence (work days) shall be exempt from income tax in Australia. Sub-section 6-20 (2) of the ITAA 1997 operates to treat that income as being exempt from Australian income tax.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 Reasons for decision | 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 Income Tax Assessment Act 1997 (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 X Agreement is listed in section 5 of the Agreements Act. | The X Agreement is located on the Austlii website ( www.austlii.edu.au ) in the Australian Treaties Series database. The agreement operates to avoid the double taxation of income received by residents of Australia and X. | Taxation Ruling TR 2013/1 Income tax: the identification of 'employer' for the purposes of the short-term visit exception under the Income from Employment Article, or its equivalent, of Australia's tax treaties explains the general rule that income from employment derived by an individual who is a resident of one of the Contracting States may be taxed in the other Contracting State (the State of source) if the employment is exercised, that is the services are rendered, in that State. | TR 2013/1 uses the Finnish agreement as an example. Paragraph 2 of Article 14 of the Finnish agreement states: | Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of one of the Contracting States in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: | (a) the recipient is present in that other State for a period or periods not exceeding in the aggregate 183 days in any 12 month period commencing or ending in the year of income of that other State, and | (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and | (c) the remuneration is not borne by a permanent establishment which the employer has in the other State. | This establishes the short-term visit exception from taxation in the State of source. All the conditions prescribed in paragraph 2 must be satisfied for the remuneration to qualify for the short-term visit exception. However, given that the Income from Employment Article in a tax treaty is subject to certain other specified articles, this exclusion applies only to the extent that the remuneration of the non-resident is not dealt with by another one of the Articles specified, such as those applying to government services or entertainers and sportspersons. | The first condition is that the short-term visit exception is limited to periods less than or equal to 183 days in any 12 month period. You were present in Australia for a total of 48 days as a foreign resident. | The second condition is that the employer paying the remuneration, or on whose behalf it is paid, must not be a resident of the State in which the employment is exercised. You were employed by a foreign resident company for this period. | Under the third condition, if the employer has a permanent establishment in the State in which the employment is exercised, the remuneration must not be borne by the permanent establishment which it has in that State. The remuneration paid to you was not deductible in determining the profits for tax purposes of a permanent establishment in Australia for this period. | The agreement between Australian and country X states: | Article xx | 1. Subject to this Article and to Articles xx, xx and xx remuneration or other income derived by an individual who is a resident of one of the Contracting States in respect of personal (including professional) services shall be subject to tax only in that Contracting State unless the services are performed or exercised in the other Contracting State. If the services are so performed or exercised such remuneration or other income as is derived therefrom shall be deemed to have a source in, and may be taxed in, that other Contracting State. | 2. In relation to remuneration of a director of a company derived from the company, the provisions of this Article and of Article xx shall apply as if the remuneration were remuneration in respect of personal services. Director's fees and similar payments derived by a resident of one of the Contracting States in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State shall be deemed to be derived in respect of personal services performed in, and may be taxed in, that other Contracting State. | 3. An individual who is a resident of one of the Contracting States shall be exempt from tax in the other Contracting State on remuneration from an employment exercised on ships or aircraft in international traffic. | The country X agreement has similar short-term visit requirements: | Article xx | 1. Remuneration or other income derived by an individual who is a resident of one of the Contracting States in respect of personal (including professional) services performed or exercised in the other Contracting State shall be exempt from tax in the other Contracting State if- | (a) the recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 183 days in the year of income or in the basis period for the year of assessment as the case may be of that other Contracting State; | (b) the services are performed or exercised for or on behalf of a person who is a resident of the first-mentioned Contracting State; and | (c) the remuneration or other income is not deductible in determining the profits for tax purposes in the other Contracting State of a permanent establishment in that other Contracting State of that person. | 2. Paragraph 1 of this Article shall not apply to remuneration or other income derived by public entertainers (such as stage, motion picture, radio or television artistes, musicians and athletes) from their personal activities as such. | 3. Notwithstanding anything contained in this Agreement, where an enterprise of one of the Contracting States derives profits arising from, or in relation to, contracts or obligations to provide in the other Contracting State services of public entertainers referred to in paragraph 2 of this Article, the profits may be taxed in the other Contracting State and shall be deemed to have a source in that other Contracting State, except where the enterprise is, in connection with the provision of those services, substantially supported from the public funds of a Government of the first-mentioned Contracting State, in which case the profits shall be exempt from tax in the other Contracting State. | 4. For the purposes of paragraph 3 of this Article. "a Government of the first-mentioned Contracting State" means, in the case of country X, the Government of country X and, in the case of Australia, the Government of the Commonwealth or of any State of the Commonwealth. | During the period in question you spent a total of 48 days attending to meetings in various cities in Australia as a foreign resident employed by a foreign company. | Conclusion | In accordance with the OECD Model Convention Commentary on Article 15 concerning the taxation of income from employment the days which you are a resident of Australia should not be taken into account in the calculation of the 183 day period. | Therefore, as you were in Australia for a total of 48 days during the period beginning 1 July 2013 as a foreign resident, and as these are less than 183 days, the criteria for exemption in Article 12 of the X Agreement are met and the relevant income is not subject to income tax in Australia.