Assessability of reward payment received by a French student from an Australian resident entity

Is the 'reward' payment received by a taxpayer, a resident of France, from an Australian resident entity assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The 'reward' payment received by the taxpayer, a resident of France, from an Australian resident entity is assessable under subsection 6-5(3) of the ITAA 1997 as it is income according to its ordinary meaning from an Australian source.

The taxpayer is a resident of France and is not a resident of Australia for income tax purposes.

The taxpayer is a full time student undertaking a course of study in France.

As part of the course of study, the taxpayer agrees to participate in a training project with an Australian resident entity for a period of three months under the terms of an agreement between the Australian resident entity and a French resident entity.

Under the terms of the agreement, the taxpayer is not entitled to any remuneration from the Australian resident entity. However, the taxpayer can be 'rewarded' in recognition of their contribution to the project.

The taxpayer will receive a 'reward' payment on successful completion of the project. The 'reward' payment will be equivalent to the salary paid for trainee students and is calculated based on the level of education and experience of the taxpayer.

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year and other ordinary income that a provision includes as assessable income on some basis other than having an Australian source.

A payment acquires the character of that for which it is substituted and is income according to its ordinary meaning even though it is paid voluntarily and not in respect of any employment ( Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; (1952) 10 ATD 82).

The taxpayer is a resident of France, a country with which Australia has entered into a double taxation agreement. Therefore, the double taxation agreement between Australia and the French Republic and the protocol to that agreement (the French Agreement) contained in Schedules 11 and 11A to the International Tax Agreements Act 1953 (the Agreements Act) must be considered in determining whether the 'reward' payment received by the taxpayer is taxable in Australia.

Sections 9A and 9B of the Agreements Act give the French Agreement the force of law in Australia. Subsection 4(1) of the Agreements Act provides that ITAA 1997 must be read as one with the Agreements Act.

Article 14(1) of the French Agreement provides that remuneration derived by an individual who is a resident of France in respect of an employment shall be taxable only in France unless the employment is exercised in Australia. If the employment is exercised in Australia, any remuneration received may be taxed in Australia.

Article 20 of the French Agreement provides that payments received from sources outside Australia by a French resident student for the purpose of maintenance or education, while temporarily present in Australia solely for the purpose of education, are not taxable in Australia.

Even though the taxpayer is a full time student, Article 20 of the French Agreement will not apply as the payment is from an Australian entity.

Article 14(1) of the French Agreement does not apply as there is no employer-employee relationship between the taxpayer and the Australian resident entity with any entitlement for remuneration.

Even though the 'reward' payment is not salary or remuneration as it was not paid in relation to any employment, it was intended to be a reward for the completion of the training project based on the equivalent salary paid to trainee students. Therefore, the 'reward' payment acquires the character of that for which it was substituted.

Accordingly, the 'reward' payment received by the taxpayer, though not considered to be a salary or remuneration for the purpose of Article 14(1) of the French Agreement, is income according to its ordinary meaning and is assessable under subsection 6-5(3) of the ITAA 1997.