Private ruling: Assessability of foreign income
Published: December 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Questions and answers | 1. Is the salary you derived overseas assessable income in Australia? | Yes. | 2. Are the dividends you received from the limited liability company assessable in Australia? | Yes.

Relevant facts and circumstances: You are a resident of Australia for taxation purposes. You had a two year working holiday visa for the overseas country. You obtained a contract to provide services to an entity overseas. You incorporated a limited liability company to provide the services. The limited liability company is incorporated overseas and is a resident of the overseas country for tax purposes. You own all the shares in the limited liability company. You are the sole director of the limited liability company. You are the sole employee of the limited liability company. You were based at the contracting entities premises to carry out the provision of services. The remuneration was paid by the contracting entity to the limited liability company. You were paid a salary from the limited liability company. The limited liability company paid tax in the overseas country. The after tax profits were drawn by you as a dividend. You departed the overseas country when your visa expired.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 44 | Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Section 6-10 | International Tax Agreements Act 1953 Section 4 | International Tax Agreements Act 1953 Schedule 1 Article 10 | International Tax Agreements Act 1953 Schedule 1 Article 14

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997 ) and section 6-10 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income and statutory 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 overseas agreement) is listed in section 5 of the Agreements Act. The agreement between Australia and the overseas country operates to avoid the double taxation of income received by residents of Australia and the overseas country. Article XX of the overseas agreement considers the tax treatment of income from employment. 1 Subject to the provisions of Articles 17 and 18 of this Convention, salaries, wages and other similar remuneration derived by a resident of Australia in respect of an employment shall be taxable only in Australia unless the employment is exercised in the overseas country. If the employment is so exercised, such remuneration as is derived from that exercise may be taxed in the overseas country. 2 Notwithstanding the provisions of paragraph 1 of this Article, remuneration derived by a resident of Australia in respect of an employment exercised in the overseas country shall be taxable only in Australia if: (a) the recipient is present in the overseas country for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year or year of income of the overseas country; 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 deductible in determining taxable profits of a permanent establishment which the employer has in the other State. The employment income you derived in the overseas country is assessable in Australia under article XX of the DTA as Australia has the taxing rights on the income and the overseas country can also tax the income. As you were paid by a resident of the overseas country paragraph 2 does not exclude the overseas country from taxing the income. Section 44 of the Income Tax Assessment Act 1936 (ITAA 1936) provides that the assessable income of a resident share holder of a company includes dividends that are paid to the shareholder out of profits derived from any sources. You are a resident of Australia for taxation purposes therefore, dividend income is assessable in Australia. Article XX of the DTA between Australia and the overseas country considers the assessability of dividend income. 'Dividends paid by a company which is a resident of a Contracting State for the purposes of its tax, being dividends beneficially owned by a resident of the other Contracting State, may be taxed in that other State.' The dividend income you received from the overseas company is assessable in Australia. You have argued that paragraph 5 of Article XX applies to make the dividends you received only assessable in the overseas country. However, you are not carrying on a business in the overseas country so paragraph 5 does not apply. Any business being undertaken is carried on by the company not you, you were an employee of the company. Therefore Article X does not apply.