Assessability of employment income received by a dual resident of Australia and the United States

Is the employment income of a dual resident of Australia and the United States (US) assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997), where the taxpayer has been contracted by a non-resident employer to work in Australia?

Yes. The employment income of a dual resident of Australia and the US is assessable under subsection 6-5(2) of the ITAA 1997 even where the taxpayer has been contracted by a non-resident employer to work in Australia.

The taxpayer is a citizen of the US.

The taxpayer's employer is a non-resident of Australia.

The taxpayer's employment contract requires the taxpayer to work in Australia for a period of 18 months.

The taxpayer receives employment income paid on behalf of their employer in the US.

US tax is withheld from the taxpayer's employment income.

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer is a resident of the US for taxation purposes.

The taxpayer's habitual abode and personal and economic ties are in the US.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages are ordinary income for the purposes of subsections 6-5(2) of the ITAA 1997.

In determining liability to Australian tax on foreign sourced income it is necessary to consider not only the income tax laws, but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 2 to the Agreements Act contains the double tax agreement between Australia and the US (the US Convention). Schedule 2A to the Agreements Act contains the US Protocol amending the US Convention (US Protocol). The US Convention and the US Protocol operate to avoid the double taxation of income received by Australian and US residents.

For the periods of dual residency, it is necessary to consider the tie breaker rules in the US Convention.

Article 4(2) of the US Convention sets out the tiebreaker rules for residency for individuals. The tiebreaker rules ensure that the individual is only treated as a resident of one country for the purposes of working out liability to tax on their income under the US Convention. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes.

Article 4(2) of the US Convention provides that if an individual is a resident of both Australia and US, he shall be deemed to be a resident of the State: (a) in which he maintains a permanent home (b) if the provisions of (a) do not apply, in which he has an habitual abode, or (c) if the provisions of (a) and (b) do not apply, with which his personal and economic relations are closer.

As the taxpayer's habitual abode and personal and economic ties are in the US, the taxpayer will be considered a resident of the US under the US Convention.

Article 15(1) of the US Convention provides that salaries, wages and other similar remuneration derived by an individual who is a resident of the US in respect of an employment shall be taxable only in the US unless the employment is exercised in Australia. If the latter applies, the income may also be taxed in Australia.

However, Article 15(2) of the US Convention provides that income from employment exercised in Australia will not be taxed in Australia if: (a) the individual is present in Australia for a period or periods not exceeding in the aggregate 183 days in the relevant Australian tax year (b) the income is paid by, or on behalf of, an employer who is not a resident of Australia, and (c) the income is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has in Australia.

Article 27(1)(a) of the US Convention provides that income derived by a resident of the United States which, under this Convention, may be taxed in Australia shall for the purposes of the income tax law of Australia and of this Convention be deemed to be income from sources in Australia.

As the taxpayer will be present in Australia for a period exceeding 183 days in the Australian tax year and the source of the taxpayer's employment income is deemed to be income from sources in Australia, the conditions for this exception to operate will not be met. The income may be taxed by both Australia and US.

Accordingly, the employment income of the dual resident of Australia and the US is assessable under subsection 6-5(2) of the ITAA 1997.

Article 22(1)(a) of the US Convention provides that the US shall allow a resident or citizen of the US as a credit against US tax the appropriate amount of income tax paid to Australia.