Assessability of employment income received from an Australian resident employer by a New Zealand resident individual

Is a New Zealand resident's employment income (that is, an expense deductible to a New Zealand permanent establishment of an Australian resident employer) assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) where the taxpayer performed his duties in Australia for less than 183 days in an income year?

Yes. The employment income is assessable where a non-resident works in Australia for an Australian resident employer.

The taxpayer is a resident of New Zealand for tax treaty purposes.

The taxpayer is employed by a company that is a resident of Australia. However, the services performed by the taxpayer are in connection with the activities carried out in New Zealand of a permanent establishment of the resident employer.

The remuneration derived by the taxpayer from such activities is deductible in determining the taxable profits of the New Zealand permanent establishment.

The taxpayer exercises employment in Australia for a period of less than 183 days.

The taxpayer's employment in Australia is connected with the activities of the New Zealand permanent establishment.

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 under subsection 6-5(3) of the ITAA 1997.

The source of remuneration for services rendered will depend on the facts of each case. However, the source is generally the place where those services are performed: see Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 11 ATD 288; (1957) 7 AITR 76 where Williams J stated at CLR 414; ATD 296; AITR 85 that: ... the locality of the source of income derived from personal exertion in the capacity of employee or in relation to any services rendered surely must be where such personal exertion took place, and the locality of the source of the proceeds of any business where the activities of the business are carried on.

In determining the liability to tax on employment income received by a non-resident, 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 (the Agreements Act).

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

Schedule 4 of the Agreements Act contains the tax treaty between Australia and New Zealand (the New Zealand Agreement). The New Zealand Agreement operates to avoid the double taxation of income received by Australian and New Zealand residents.

Article 15(1) of the New Zealand Agreement provides that salary and wages derived by a New Zealand resident for employment exercised in Australia may be taxed in Australia. However Article 15(2) of the New Zealand Agreement provides that the income will only be taxed in New Zealand if: a. the recipient is present in that other State for a period or periods not exceeding in the aggregate 183 days in any 12 month period commencing or ending in the year of income concerned; and b. the remuneration is paid by, or on behalf of, an employer who is not a resident of that other State; and c. the remuneration is not deductible in determining taxable profits of a permanent establishment or fixed base which the employer has in that other State; and d. the remuneration is, or upon the application of this Article will be, subject to tax in the first mentioned State.

For Article 15(2) to allocate sole taxing rights to New Zealand, the requirements in all paragraphs must be met.

As the taxpayer exercises employment within Australia for a period of less than 183 days, Article 15(2)(a) is met.

However, under Article 15(2)(b), the remuneration derived by the taxpayer is paid by, or on behalf of, an employer who is a resident of Australia.

The key term in Article 15(2)(b) is the requirement for the employer to not be a resident of the Contracting State in which the employment is exercised. In this case, the employer of the taxpayer is an Australian resident. That remains so, notwithstanding that the taxpayer's activities are connected with the New Zealand permanent establishment and the remuneration derived from such activities is deductible in determining the taxable profits of the permanent establishment in New Zealand. At law, the permanent establishment is not a separate legal entity but is part of the resident company. As Article 15(2)(b) only refers to the residency status of the employer, it is concluded that the remuneration derived by the taxpayer from services performed in connection with the activity of the New Zealand permanent establishment is, nonetheless, remuneration paid by, or on behalf of, the Australian resident employer.

Accordingly, condition (b) is not met. As one of the conditions in Article 15(2) is not met, the remuneration derived by the taxpayer from the exercise of employment in Australia may be taxed by Australia pursuant to Article 15(1) of the New Zealand Agreement.

As the remuneration derived by the taxpayer from the exercise of employment in Australia is deemed to be from sources in Australia by virtue of Article 23 of the New Zealand Agreement, such income is included in the taxpayer's assessable income under subsection 6-5(3) of the ITAA 1997.