Issue
Are the salary and wages earned by a non-resident taxpayer, who is an Australian citizen employed as a locally engaged staff by an Australian government organisation in Switzerland, assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The salary and wages earned by a non-resident taxpayer, who is an Australian citizen employed as a locally engaged staff by an Australian government organisation in Switzerland, are not assessable under subsection 6-5(3) of the ITAA 1997.
Facts
The taxpayer is an Australian citizen but is a non-resident of Australia for income tax purposes.
The taxpayer is a resident of Switzerland for the purposes of Swiss tax law.
The taxpayer is employed as a locally engaged staff by an Australian government organisation in Switzerland.
The taxpayer receives salary and wages from the Australian government organisation in Switzerland.
The salary and wages received by the taxpayer have been taxed in Switzerland.
Reasons for Decision
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.
Salary and wages are ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.
Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.
Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23(r) of the Income Tax Assessment Act 1936 (ITAA 1936) which provides that income derived by a non-resident from sources wholly out of Australia will be exempt from tax.
The source of income derived from employment is generally the place where the duties or services are performed ( Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 11 ATD 288; (1957) 7 AITR 76). Therefore, the salary and wages received by the taxpayer for services performed in Switzerland have a Swiss source under ordinary domestic principles.
However, 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 ITAA 1997 so that those Acts are read as one.
Schedule 15 to the Agreements Act contains the double tax agreement between Australia and Switzerland (the Swiss Agreement). The Swiss Agreement operates to avoid the double taxation of income received by Australian and Swiss residents.
Article 19(1) of the Swiss Agreement provides that remuneration paid by the Australian government to any individual in respect of services rendered to the Australian government in the discharge of governmental functions shall be taxable only in Australia. However, the remuneration is taxable only in Switzerland if the services are rendered in Switzerland by an individual who is a resident of Switzerland who: (a) is a citizen or national of Switzerland; or (b) did not become a resident of Switzerland solely for the purposes of performing the services.
The taxpayer is a resident of Switzerland for Swiss tax purposes. If the taxpayer became a resident of Switzerland solely for the purposes of performing their services for the Australian government, under the Swiss Agreement Australia would have the exclusive taxing rights over the salary and wages paid by the Australian government organisation to the taxpayer. However, if the taxpayer became a resident at least partly for other reasons, then the salary and wages paid by the Australian government organisation to the taxpayer would be taxable only in Switzerland.
In this case, the salary and wages have been taxed in Switzerland.
The application of the Swiss Agreement is at first instance up to the source country, that is, Switzerland. Australia could, however, have a different view on how the Swiss Agreement applies. Such conflicts in treaty interpretation can arise from differences in each country's domestic law, contrary interpretations of the facts or diverging interpretations of treaty provisions themselves.
In cases where differences in treaty interpretation arise from differences in each country's domestic law, paragraph 32.3 of the OECD Commentary on Article 23 of the OECD Model law indicates that the source country's interpretation of the treaty will prevail. It provides: Where, due to differences in the domestic law between the State of source and the State of residence, the former applies, with respect to a particular item of income or capital, provisions of the Convention that are different from those that the State of residence would have applied to the same item of income or capital, the income is still being taxed in accordance with the provisions of the Convention, as interpreted and applied by the State of source. In such a case, therefore, the two Articles require that relief from double taxation be granted by the State of residence notwithstanding the conflict of qualification resulting from these differences in domestic law.
In the current case, if a difference arose as a result of Switzerland applying its domestic meaning of terms, then Australia would not be able to tax this income.
Paragraph 32.5 of the Commentary on the other hand deals with cases where differences in interpretation arise from questions of fact or the interpretation of treaty provisions. It states: Article 23 A and Article 23 B, however, do not require that the State of residence eliminate double taxation in all cases where the State of source has imposed its tax by applying to an item of income a provision of the Convention that is different from that which the State of residence considers to be applicable...Such conflicts resulting from different interpretation of facts or different interpretation of the provisions of the Convention must be distinguished from the conflicts of qualification described in the above paragraph where the divergence is based not on different interpretations of the provisions of the Convention but on different provisions of domestic law...States should use the provisions of Article 25 (Mutual Agreement Procedure), and in particular paragraph 3 thereof, in order to resolve this type of conflict in cases that would otherwise result in unrelieved double taxation.
In these latter cases, Australia may consult the Swiss authorities under the Mutual Agreement Procedure Article to arrive at a mutually agreed position. Alternatively, Australia can choose to accept Switzerland's interpretation of the treaty.
In this case, the basis for Switzerland imposing its tax has not been determined. However, notwithstanding that Australia may have a different interpretation where it arises from questions of fact of the interpretation of treaty provisions, Australia in this case will accept that Switzerland has taxed in accordance with the Agreement.
On this basis, as Article 19 of the Swiss Agreement allocates an exclusive taxing right to one of the countries, this means that Australia, having accepted Switzerland's right to tax the income, is not permitted to tax the employment income.
Accordingly, the salary and wages earned by the non resident taxpayer while working for an Australian government authority in Switzerland remains exempt from income tax under paragraph 23(r) of the ITAA 1936 and will not be assessable under subsection 6-5(3) of the ITAA 1997.