Private ruling: Foreign source income assessability
Date of advice: 29 August 2016
Published: October 2016
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the income you will derive from your employment as a pilot in Country A assessable in Australia? | A1: No

Relevant facts and circumstances: You are an Australian resident for tax purposes. You are contemplating accepting an employment contract as a pilot with Company X. The contract will be for four years. Your employment will be based in Country A. You will fly domestic routes within Country A and international routes including to Australia. Your family will remain in Australia. You intend that your main residence will remain in Australia. You will pay tax in Country A on the employment income from Company 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: Summary: 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 Agreement operates to avoid the double taxation of income received by residents of Australia and China. The Country A Agreement states at Article 15, paragraph 3: Notwithstanding the provisions of paragraphs (1) and (2), remuneration derived in respect of an employment exercise aboard a ship or aircraft operated by an enterprise of a Contracting State in international traffic, shall be taxable only in the Contracting State of which the enterprise is a resident. 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. In your case, as your employment will be exercised for an enterprise (Company X) based in Country A which will involve international flights between Country A and Australia, the income will be taxable only in Country A and will not be assessable in Australia under section Subsection 6(2) of the ITAA 1997.