Private ruling: Subject - Partnership employee - non-resident - PAYG withholding
Published: July 2013
Ruling period: 1 July 2012 to 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the partnership which is registered for GST and PAYG withholding, liable for PAYG withholding on salary paid to an employee, who is a non- resident of Australia for income tax purposes? | A1: No

Relevant facts and circumstances: You are seeking a private ruling on PAYG withholding and superannuation guarantee obligations in regards to their engagement of a casual employee, who is a non resident of Australia for tax purpose. · The employee was previously a full time employee, living in Australia. · The employee relocated to and changed residential address to USA. · The employee retains an Australian bank account into which salary will be paid into electronically. · The employee will be a casual employee. · The employee’s position description is lawyer. · The employee will be performing work for Australian based clients of the employer. · The employee will be applying Australian law. · The employee will be working electronically by logging into the employers terminal sever. · The employees work will be supervised by a partner of the employer, based in Australia. · The employer is based in Australia · The employee is a resident of USA for tax purposes.

Relevant legislative provisions: Taxation Administration Act 1953 Sch1 sec12-35. | Taxation Administration Act 1953 Sch1 sec12-1. | Taxation Administration Act 1953 Sch1sec 12-55. | Income Tax Assessment Act 1997 Section 6-20. | Income Tax Assessment Act 1997 Subsection 6-5(3). Question 1 | Is the partnership which is registered for GST and PAYG withholding, liable for PAYG withholding on salary paid to an employee, who is not a resident of Australia for income tax purposes? | Detailed reasoning | In this arrangement the employee has been found by the employer to be a non-resident of Australia for taxation purposes. | In determining whether the employee is liable for PAYG withholding on salary paid to a non resident we need to determine whether the salary is regarded as Australian or foreign sourced income. | Section 12-35 in Schedule 1 of the Taxation Administration Act (TAA) states that: | An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity). | If that individual is an employee and a resident of Australia for taxation purposes, then their employer would be required to withhold an amount under section 12-35 of Schedule 1 of the TAA. | However, section 12-1 of Schedule 1 of the (TAA) provides general exceptions where PAYG withholding does not apply. At paragraph 12-1(1) it states: | An entity need not withhold an amount under section 12-35, 12-40, 12-45, 12-47, 12-50, 12-55, 12-60, 12-80, 12-90, 12-120 or 12-190 from a payment if the whole of the payment is exempt income for the entity receiving the payment.' | Section 6-20 of the Income Tax Assessment Act of 1997 (ITAA 1997) provides the following definition of exempt income: | An amount of ordinary income or statutory income is exempt income if it is made exempt from income tax by a provision of this Act or another Commonwealth law. This section goes on to provide the following: | Ordinary income is also exempt income to the extent that this Act excludes it (expressly or by implication) from being assessable income. Section 6-5(3) of the ITAA 1997 states that: | If you are a foreign resident, your assessable income includes: | (a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and | (b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source. | In determining whether the salary being paid to this employee is regarded as exempt income under Australian tax law we need to determine whether the salary income is regarded as Australian or foreign sourced. If the income is regarded as foreign sourced exempt income to a non-resident then there would be no requirement to withhold any amount from it. | The term 'Australian sourced' is defined in section 995-1 of the ITAA 1997 as being income that is 'derived from a source in Australia for the purposes of the Income Tax Assessment Act of 1936 (ITAA 1936).' The term 'sourced' is considered in detail in the case of Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 7 AITR 76; (1957) 11 ATD 288 where the source of remuneration under a contract of employment or services was found to generally be the place where the work or services are performed. | As a consequence the exception in section 12-1 in Schedule 1 to the TAA would apply and there would be no obligation for the partnership to withhold any amount from payments of salary, wages or allowances to foreign-based employee in this arrangement. | However under the International Tax Agreements Act 1953 taxation agreements prevail where there is a conflict with ITAA Article 15 of the Australian Treaty Series 1983 No 16 states; | (1) Subject to the provisions of Articles 18 (Pensions, annuities, alimony and child support) and 19 (Governmental remuneration), 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 or in respect of services performed as a director of a company shall be taxable only in that State unless the employment is exercised or the services performed in the other Contracting State. If the employment is so exercised or the services so performed, such remuneration as is derived from that exercise or performance may be taxed in that other State. | (2) Notwithstanding the provisions of paragraph (1), remuneration derived by an individual who is a resident of one of the Contracting States in respect of an employment exercised in the other Contracting State or in respect of services performed in the other Contracting State as a director of a company 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 the taxable year or year of income of that other State; | (b) the remuneration is paid by, or on behalf of, an employer or company who is not a resident of that other State; and | (c) the remuneration is not deductible in determining taxable profits of a permanent establishment, a fixed base or a trade or business which the employer or company has in that other State. | If the employee is a resident of Australia for tax purposes and has been in USA for 183 days or less the employee’s salary and wages would be taxed in Australia. | If the employees is a resident of Australia for tax purposes and has been in the USA for more than 183 days the employees salary and wage would be taxed in the USA | Article 4 of the convention must be used to determine residency for the purpose of article 15. | You have stated in your application that the employee is a USA resident for tax purposes. Based on the assumption that you have correctly identified that the employee is a USA resident for tax purposes under 15 (1) the salary and wages would be taxable in the USA.