Assessability of employment income received by a dual resident of Australia and Italy

Are the salary and wages received by a taxpayer, who is a dual resident of Australia and Italy, from an Italian employer for work solely performed in Australia assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The salary and wages received by a taxpayer, who is a dual resident of Australia and Italy, from an Italian employer for work performed solely in Australia are assessable income under subsection 6-5(2) of the ITAA 1997.

The taxpayer is an Australian resident for income tax purposes.

The taxpayer is also a resident of Italy for Italian tax purposes for part of their stay in Australia.

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

The taxpayer is working in Australia for a period of approximately four years.

The taxpayer exercises the duties of their employment solely in Australia.

The taxpayer receives salary and wages from their Italian employer.

The taxpayer will reside in a rental property for the duration of their stay in Australia.

The taxpayer has a home available in Italy.

The taxpayer will spend time in Australia and in Italy during their stay in Australia.

The taxpayer's personal and economic relations are predominantly associated with Italy.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer, includes ordinary income derived directly or indirectly from all sources during the income year.

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

In determining liability to Australian tax on Australian sourced income, it is necessary to consider not only the income tax laws but also any applicable tax treaty 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 21 to the Agreements Act contains the tax treaty and the protocol between Australia and the Republic of Italy (the Italian Convention). The Italian Convention and the protocol operate to avoid the double taxation of income received by Australian and Italian residents.

Article 4(3) of the Italian Convention provides tests of residency which are used where the individual is a resident of two countries (tie breaker tests). The tiebreaker tests 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. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes.

Article 4(3) of the Italian Convention provides that a person's residency status for the purpose of applying the Italian Convention shall be determined as follows: (a) the person shall be deemed to be a resident of the country in which he/she has a permanent home available (b) if the person has a permanent home in both countries, or does not have a permanent home in either, the person will be deemed to be a resident of the country in which he/she has a habitual abode (c) if the person has a habitual abode in both countries, or does not have a habitual abode in either, the person will be deemed to be a resident of the country with which his/her personal and economic relations are closer.

Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting tax treaties. Paragraph 104 of TR 2001/13 states that the OECD Model Tax Convention and Commentary (OECD Commentary) will often need to be considered in interpreting tax treaties.

The OECD Commentary provides that in relation to a 'permanent home': (a) for a home to be permanent, an individual must have arranged and retained it for his or her permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short duration. The dwelling has to be available at all times continuously and not occasionally for the purposes of a stay, which owing to the reasons for it is necessarily of short duration (eg travel for pleasure, business travel, attending a course etc) (b) any form of home may be taken into account, including a house or apartment belonging to or rented by the individual and a rented furnished room.

As the taxpayer has residences in both countries which are available at all times continuously for the taxpayer's permanent use, the taxpayer has a permanent home in Australia and in Italy.

In relation to a habitual abode, the OECD Commentary states that all stays in each country, regardless of the purpose for the stays, must be considered in order to assign a preference to a particular country. Further, the comparison must be made over a sufficient length of time for it to be possible to determine whether the presence in each country is habitual and to also determine the intervals at which the stays take place.

The notion of an habitual abode is not simply a test of where a person stays more frequently but also looks to whether living in a particular country is normal or customary having regard to the taxpayer's circumstances. As it is usual or customary for the taxpayer to spend time in both countries, the taxpayer has a habitual abode in both countries.

In relation to a taxpayer's personal and economic relations, the OECD Commentary states that regard should be had to factors such as family and social relations, occupation, political, cultural or other activities and place of business.

The taxpayer's personal and economic ties are closer with Italy than with Australia. Accordingly, the taxpayer will be treated as a resident of Italy for the purposes of applying the provisions of the Italian Convention to income earned by the taxpayer during the period of dual residency.

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

Even though the taxpayer is a resident of Italy for the purpose of the Italian Convention, the salary and wages may be taxed in Australia as the employment is exercised in Australia.

Accordingly, the salary and wages received by the taxpayer, who is a dual resident of Australia and Italy for a part of their stay in Australia, are assessable income under subsection 6-5(2) of the ITAA 1997.