Private ruling: Pay As You Go Withhold and the short-term visit exception under the Income from Employment Article of Australia's Tax Treaty.
Published: June 2012
Ruling period: Years ended 30 June 2012 to 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the Rulee required to withhold an amount pursuant to section 12-35 of Schedule 1 to the Taxation Administration Act 1953 under the arrangement by which the foreign country resident individuals are seconded to the Rulee in Australia? | A1: No

Relevant facts and circumstances: The Rulee and the foreign country Employer are both members of a global network of member firms that provide professional services. The Rulee is an Australian resident. The foreign country Employer is not an Australian resident entity and does not have a permanent establishment in Australia. There are a number of foreign country resident trainees ("the trainees") seconded from the foreign country Employer to the Rulee to undertake training in the Program. The trainees The trainees enter Australia on a 'work and holiday' visa. The trainee's will not be present in Australia for a period exceeding 3 months in an Australian year of income. The trainees remain residents of foreign country for tax purposes while in Australia. The trainees continue to be subject to tax in foreign country and the foreign country Employer continues to withhold foreign country taxes on their salaries. The overarching objective and intent of the trainees' assignment is to provide them with experience and skills able to be utilised in their employment by the foreign country. The Program and relationship between the parties The Program is created, owned and managed by the foreign country Employer. The foreign country Employer has identified that international experiences will be of benefit to its employees. The primary objective of the secondment of the trainees to the Rulee is to provide foreign work-based training experience for the foreign country Employer employees. It does not meet any short-term resource needs in Australia. The foreign country Employer selects the trainees for the secondments and has overall responsibility for the number of trainees seconded to Australia (as agreed with the Rulee ). The secondments are governed by a 'Secondment Policy' between the Rulee and the foreign country Employer. 'The Guideline' is entered into between the Rulee and the foreign country Employer as an overview of the timing, contracts and costs of the secondment. The trainees enter into employment contracts with the foreign country Employer ("the Home Agreement") before they are seconded to Australia. The trainees also enter into an arrangement described as an employment agreement with the Rulee ("The Rulee Work Agreement"). The Rulee Work Agreement is necessary for meeting the Rulee's management requirements and to comply with certain legal requirements. The Rulee Work Agreement outlines the trainees' working conditions with the Rulee such as duration of secondment, normal working hours, work location and dress standard. In providing the trainees with an Australian employment agreement there is no intention to create a formal financial contractual relationship between the Rulee and the trainee. The Rulee Work Agreement is to be read in conjunction with the trainees' Home Agreement. Certain clauses within The Rulee Work Agreement expressly refer to the terms of the trainees' Home Agreement. Terms relating to remuneration, leave entitlements and termination are based on the trainee's Home Agreement. The trainees' assignment may be terminated only in accordance with the terms of their Home Agreement. As such, the foreign country Employer can repatriate the trainees at any time. The foreign country Employer also retains the authority to give notice and discontinue a trainee's employment. The Rulee directs the duties and activities of the trainees during their secondment to Australia. The Rulee provides the trainees with instructions as to the activities to be undertaken which will be carried out at either the Rulee work premises or client premises under the control and responsibility of the Rulee. While working in Australia, the trainees need to comply with the Rulee's regulations, risk management and quality control protocols. Some trainees may undertake work which can be chargeable to clients of the Rulee. The extent of monetary reward to the Rulee will be determined by the amount of chargeable activity that the trainees are engaged in and will vary depending upon the individual trainee and the particular client which whom they may work. The Rulee does not consider chargeable work a key element of the assignment. It may be incidental to the activity undertaken by the trainee as a requirement of due process. The Rulee bears the responsibility for any work produced by the trainees and would be responsible for claims arising out of any defective work produced by the trainees or for any act of fraud or negligence during their training. The foreign country Employer is responsible for losses arising from the hiring, or the sending on secondment, of the secondee or from the employment relationship of the secondee with foreign country Employer. Costs and allowances The Guideline between the Rulee and the foreign country Employer deals with the allocation of costs and allowances relating to the secondments. The secondment of trainees to Australia is not intended to benefit the Rulee economically or result in material costs to the Rulee . The foreign country Employer does not charge the Rulee for the provision of trainees. The foreign country Employer will receive no compensation as a result of the trainees presence in Australia. The salary and social costs related to the trainees are borne by the foreign country Employer and not recharged to the Rulee by foreign country Employer. The Rulee may incur overhead costs relating to infrastructure set-up (for example provision of laptop computer, desk space, security, technology and other office overheads) and potentially some reimbursement of business travel costs if the trainee was required to spend time away from the normal allocated office within Australia. All other tools and materials are put at the trainees' disposal by foreign country Employer. The Rulee does not provide any other allowance in relation to the employment in Australia.

Relevant legislative provisions: Taxation Administration Act 1953 subsection 12-1(1) of schedule 1. | Taxation Administration Act 1953 subsection 12-1(1A) of schedule 1. | Taxation Administration Act 1953 subsection 12-35 of schedule 1. | Income Tax Assessment Act 1936 subsection 6(1). | Income Tax Assessment Act 1997 subsection 6-5(1). | Income Tax Assessment Act 1997 subsection 6-5(3). | Income Tax Assessment Act 1997 subsection 995-1(1). | International Tax Agreements Act 1953 section 4. Agreement between the Commonwealth of Australia and the Federal Republic of foreign country for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to certain other Taxes, and Protocol [1975] ATS 8, article 14.

Reasons for decision: Summary: Section 12-35 of schedule 1 to the Taxation Administration Act 1953 ('TAA 1953') 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). Taxation Ruling 2005/16 Income Tax: Pay As You Go - withholding from payments to employees (TR 2005/16) provides guidance as to whether an individual is paid as an employee for the purposes of section 12-35 of schedule 1 to the TAA 1953. As stated in paragraph 12 of TR 2005/16, a payment does not necessarily have to be between employer and employee for the payment to be covered by section 12-35 of schedule 1 to the TAA 1953. However, it is a requirement that the payment be made to the employee in their capacity as an employee, either of the payer or another entity. Section 12-1 of schedule 1 to the TAA 1953 provides general exceptions to the Pay As You Go ("PAYG") withholding obligations. The payer entity need not withhold an amount from a payment if the whole of the payment is not assessable income and is not exempt income of the entity receiving the payment: subsection 12-1(1A) of schedule 1 to the TAA 1953. It is necessary to consider whether the payment | Detailed Reasoning - Is the trainee's income assessable?: A person is a resident for Australian tax purposes if the tests in subsection 6(1) of the ITAA 1936 are satisfied. In this case, the trainees are not residents of Australia for tax purposes because they residents of foreign country and they are present in Australia for less than 183 days in the Australian year of income. A person is not a resident of Australia for the purposes of the ITAA 1936 is a 'foreign resident": subsection 995-1(1) of the ITAA 1997. Broadly, the assessable income of a foreign resident includes ordinary and statutory income derived from Australian sources: subsection 6-5(3) of the ITAA 1997. The trainees receive income from the foreign country Employer relating to employment. Income derived from employment is ordinary income, included in assessable income under subsection 6-5(1) of the ITAA 1997. Income derived from employment is generally considered to be 'sourced' in the place where the duties or services are performed. As the trainees perform duties for the Rulee in Australia, their income from the foreign country Employer is employment income sourced in Australia and therefore prima facie assessable in Australia. However, because the trainees are foreign residents it is necessary to consider whether the applicable tax treaty alters the general application of Australian tax laws. The applicable tax treaty in this case is the Agreement between the Commonwealth of Australia and the Federal Republic of foreign country for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to certain other Taxes, and Protocol [1975] ATS 8 ('the German Agreement'). Section 4 of the International Agreements Act 1953 ('the Agreements Act') incorporates the Agreements Act with the ITAA 1936 so that the two Acts are read as one. Subsection 4(2) of the Agreements Act provides that the provisions of the Agreements Act have effect notwithstanding anything inconsistent with those provisions contained in the ITAA 1936 and ITAA 1997. Section 11 of the Agreements Act gives the foreign country Agreement the force of law. The foreign country Agreement operates to avoid the double taxation of income received by Australian and foreign country residents. Application of the Australia - foreign country Tax Agreement Article 14 of the foreign country Agreement deals with the treatment of income from employment. Article 14(1) of the foreign country Agreement provides that remuneration derived by a resident of foreign country shall be taxable in foreign country unless the employment is exercised in Australia. If the employment is exercised in Australia then the income may be taxed in Australia. In this case, the employment is 'exercised' in Australia because the trainee's render their services in Australia in exchange for their income. Therefore, their employment income would be taxable in Australia under the rule in Article 14(1) of the foreign country Agreement. However, Article 14(2) of the foreign country Agreement contains a general exception to the rule in Article 14(1) of the foreign country Agreement. This exemption is known as the 'short-term visit exception'. For income to qualify for the short-term visit exception the following three conditions prescribed in Article 14(2) of the foreign country Agreement must be satisfied: · The recipient is present in Australia for a period or periods not exceeding in the aggregate 183 days in the Australian year of income; · The remuneration is paid by or on behalf of an employer who is not a resident of Australia; and · The remuneration is not deductible in determining the profits of a permanent establishment or a fixed base which the employer has in Australia. In this case, the trainees will be taxed only in foreign country (their country of residence) if each of these three conditions is satisfied. | Detailed Reasoning - (a) Recipient present in Australia for less than 183 days: On the facts provided, the first condition is satisfied because the trainee is not present in Australian for a period exceeding 183 days in an Australian year of income. | Detailed Reasoning - (b) Remuneration paid by a non-resident employer: The second condition in Article 14(2) of the foreign country Agreement is that remuneration is paid by or on behalf of an employer who is not a resident of Australia. The term 'employer' is not defined in the foreign country Agreement. Draft Taxation Ruling TR 2012/D4 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 (TR 2012/D4) considers the meaning of the term 'employer' under tax treaty articles such as Article 14 of the foreign country Agreement. In the context of Article 14(2) of the foreign country Agreement, the 'employer' is the enterprise to which the non-resident, foreign country trainees render their services in what would be considered an employment relationship: paragraphs 5 and 6 of TR 2012/D4. In determining who the employer of the foreign country trainees is, the Commissioner must consider key indicators of an employment relationship arising from Australian domestic law as well as the context, object and purpose of the exception provided for by Article 14(2) of the German Agreement: paragraph 7 of TR 2012/D4. The relationship between an employer and an employee is a contractual one. Whether a contractual relationship exists is a question of law considering the totality of the relationship between the parties: paragraphs 9 and 10 of TR 2012/D4. It is necessary to consider the substance, and not merely form, of any contractual relations: paragraph 11 of TR 2012/D4. Key indicators of an employment relationship under Australian common law are listed in paragraph 13 of TR 2012/D4, as follows: · Who exercises ultimate control over the employee - the right to control in terms of the ability to withdraw a worker from an assignment and/or terminate the relationship with the worker; · Who exercises day-to-day control over the worker - that is, the degree of actual control exercised in terms of, for example, how, when and what is to be done; Integration - the nature of the services rendered by the worker and whether they are an integral part of the business activities carried on by the enterprise to which the services are provided; The terms of engagement - for example, entitlements to leave and who has obligations to deduct PAYG tax, pay superannuation contributions and workers' compensation insurance; · Who is responsible for payment of remuneration for the worker's services; · Who bears the responsibility or risk for the results produced by the worker; · Whether or not the contract is for the achievement of a specified result; · Who provides or maintains the necessary equipment and resources to perform the work; and · Whether or not the work can be delegated by the worker. No one factor is determined and not all factors will be relevant in a particular case. A balanced and reasonable weighing of the relevant factors in this case concludes that the foreign country Employer is, in substance and form, the employer of the trainees for the purpose of the short-visit exception. | Detailed Reasoning - (c) Remuneration is not in Australia: Having concluded that the trainee's remuneration is paid for by the foreign country Employer, the third condition requires that the remuneration is not borne by a permanent establishment or a fixed base which the foreign country Employer has in Australia. On the facts provided, the foreign country Employer is not an Australian resident entity and does not have a permanent establishment in Australia. | Detailed Reasoning - Conclusion: Income derived by the trainees in respect of an employment exercised at the Rulee firm is not assessable in Australia as a result of the application of Article 14(2) of the foreign country Agreement. Accordingly, pursuant to subsection 12-1(1A) of schedule 1 to the TAA 1953, the Rulee is not required to withhold an amount under section 12-35 of schedule 1 to the TAA 1953.

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