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

Are the salary and wages derived by a taxpayer, who is a resident of Australia and Finland, assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The salary and wages derived by a taxpayer who is a resident of Australia and Finland are assessable income under subsection 6-5(2) of the ITAA 1997.

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer has a visa allowing them to work and remain in Australia for three years. However, the taxpayer plans to reside in Australia for only one year and then return to Finland.

The taxpayer receives a monthly salary from their Finnish employer and continues to work via internet in Australia for the Finnish employer by developing internet products.

The taxpayer has a casual employment contract for 12 weeks with an Australian employer and receives income from that employer.

The taxpayer has been renting a house in Australia with their immediate family.

The taxpayer has an everyday banking account in Australia but no other assets. They maintain a house and investments in Finland.

The taxpayer and their family have social contacts in Australia but their extended family and most of their friends are in Finland.

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, whether in or out of Australia, during the income year.

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

In determining liability to Australian tax on income received by a taxpayer from a tax treaty country, 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 25 to the Agreements Act contains the tax treaty between Australia and Finland (the Finnish Agreement). The Finnish Agreement operates to avoid the double taxation of income received by Australian and Finnish residents.

Article 4(1)(a) of the Finnish Agreement provides that a person is a resident of Australia, subject to Article 4(2) of the Finnish Agreement, if the person is a resident of Australia for the purposes of Australian tax.

The taxpayer is a resident of Australia for Australian tax purposes for the relevant period as the taxpayer resided in Australia (Taxation Ruling TR 98/17). Therefore, the taxpayer satisfied the requirements of Article 4(1)(a) of the Finnish Agreement.

However, Article 4(1)(b) of the Finnish Agreement provides that if a person is liable under the laws of Finland to tax therein by reason of your domicile, residence or any other criterion of a similar nature, then the person is a resident of Finland for the purposes of this Agreement, subject to Article 4(2) of the Finnish Agreement.

As the taxpayer is liable under the laws of Finland to tax therein by reason of their domicile, Article 4(1)(b) as well as Article 4(1)(a) of the Finnish Agreement is satisfied.

Article 4(4) of the Finnish Agreement sets out the tiebreaker rules for residency for individuals where they are considered to be a resident of both Australia and Finland. 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 Finnish Agreement. However, the tiebreaker rules do not change a taxpayer's residency status for Australian tax law purposes.

As the taxpayer satisfies both Article 4(1)(a) and (b) of the Finnish Agreement, the tiebreaker rules set out in Article 4(4) of the Finnish Agreement will apply in order to determine which country will treat the taxpayer as a resident for the purposes of applying the Finnish Agreement.

Article 4(4) of the Finnish Agreement provides that where an individual is a resident of both Australia and Finland they shall be deemed to be a resident of the country: (a) in which they have a permanent home available to them; (b) if they have a permanent home in both Australia and Finland, or if they do not have a permanent home available to them in either of them, they shall be deemed a resident solely of the country with which their personal and economic relations are closer.

Paragraphs 12 and 13 of the Commentary on Article 4 concerning residence contained in the OECD Model Tax Convention states that a permanent residence is a place where the individual owns or possesses a home, which must be retained for its permanent use, as opposed to staying at a particular place for a short period of time. A home can be a house or apartment belonging to or rented by the individual, and it must be available to them at all times continuously, and not occasionally for the purpose of a short term stay.

The taxpayer maintained a permanent home both in Australia and Finland as they retained an apartment in Finland to be available to them on their return and have rental accommodation available, for more than a short stay, in Australia. It is, therefore, necessary to consider the taxpayer's closer personal and economic relations under Article 4(4)(b) of the Finnish Agreement.

Paragraph 15 of the Commentary on Article 4 in the OECD Model Tax Convention highlights such relations to include: ....family and social relations, his occupations, his political, cultural or other activities, his place of business, the place from which he administers his property, etc.

In determining where the taxpayer's personal and economic relations lie closer, paragraph 15 of the Commentary goes on to say: The circumstances must be examined as a whole, but it is nevertheless obvious that considerations based on the personal acts of the individual must receive special attention. If a person who has a home in one State sets up a second in the other State while retaining the first, the fact that he retains the first in the environment where he has always lived, where he has worked, and where he has his family and possessions, can, together with other elements, go to demonstrate that he has retained his centre of vital interests in the first State.

The taxpayer has interests present in Australia such as their immediate family, occupational ties, rental accommodation, a bank account and social ties with friends and sporting activities. The taxpayer's immediate family being present in Australia would suggest a close personal tie to Australia. However the Commentary stipulates that 'the circumstances must be examined as a whole'.

As the taxpayer has retained their apartment in an environment where they still have occupational ties with the Finnish employer as well as family and economic ties this would suggest their personal and economic relations lie closer in Finland in accordance with paragraph 15 of the Commentary on Article 4 in the OECD Model Tax Convention.

Therefore, under Article 4(4)(b) of the Finnish Agreement the taxpayer would be deemed to be a resident of Finland. However, this does not mean that their Australian resident status is lost for the general operation of the Australian tax law. The taxpayer will continue to be treated as an Australian resident under the Australian tax law and their Australian sourced income will be subject to tax in Australia under the terms of the Finnish Agreement.

Article 15(1) of the Finnish Agreement provides that salaries, wages and other similar remuneration derived by an individual who is a resident of Finland in respect of an employment shall be taxable only in the Finland 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 Finnish Agreement 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, (c) the income is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has in Australia; and (d) the income is, or upon the application of this Article will be taxed in Finland.

As the taxpayer was 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, Article 15(2) of the Finnish Agreement will not apply. Australia may therefore tax the employment income in the first instance.

As an Australian resident, the taxpayer would normally be taxed on their world wide income. However, since the taxpayer is considered a resident of Finland for the purposes of the tax treaty, Australia can only tax the taxpayer on their Australian sourced items of income covered by the tax treaty.

As the salary and wages from the Finnish employer and the Australian employer are derived from employment exercised in Australia, Article 15(1) of the Finnish Agreement states that the income may be taxed in Australia and Article 22 of the Finnish Agreement deems this income to be from sources in Australia.

Accordingly, the salary and wages derived by the taxpayer are assessable income under subsection 6-5(2) of the ITAA 1997.