Assessability of Australian sourced salary and wages received by a resident of Switzerland

Is the salary and wages income from employment performed in Australia by a resident of Switzerland over three income years assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The salary and wages income from employment performed in Australia by a resident of Switzerland over three income years is assessable under subsection 6-5(3) of the ITAA 1997.

The taxpayer is a resident of Switzerland and is not an Australian resident for income tax purposes.

The taxpayer is employed by an Australian company. The taxpayer's salary and wages will be paid by the Australian company and will be sourced in Australia.

The taxpayer will be working in Australia over a period spanning three income years. The taxpayer will perform services in Australia for more than 183 days in one income year.

The taxpayer will perform services in Australia for less than 183 days in each of the other two income years.

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 income in the present case is sourced from Australia and subsection 6-5(3) will apply.

In determining liability to 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).

The taxpayer is a resident of Switzerland, a country with which Australia has entered into a tax treaty. Therefore, the tax treaty between Australia and Switzerland (the Swiss Agreement) and the protocol to that agreement contained in Schedule 15 of the Agreements Act must be considered in determining whether the salary and wages paid to the taxpayer is taxable in Australia.

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 in some limited situations).

Article 15 of the Swiss Agreement deals with dependent personal services. The Article provides that salary, wages and other similar remuneration derived by a Swiss resident shall be taxable only in Switzerland unless the employment is exercised in Australia. If the employment is exercised in Australia then the income may also be taxed in Australia.

Article 15(2) of the Swiss Agreement provides that the income will be exempt from tax in Australia if: • the taxpayer is present in Australia for a period or periods not exceeding in the aggregate 183 days in the Australian year of income, and • the remuneration is paid by or on behalf of an employer who is a resident of Switzerland, and • the remuneration is not deductible in determining the profits of a permanent establishment or a fixed base which the employer has in Australia.

In the present case, the remuneration is paid to the taxpayer by an employer who is a resident of Australia and so the exemption under paragraph (b) will not apply. In addition, the taxpayer is present in Australia for more than 183 days for one of the income years and so the exemption under paragraph (a) will not apply as well in that year.

As a result, Article 15(2) of the Swiss Agreement does not apply and Article 15(1) of the Swiss Agreement gives Australia the right to tax the salary and wages earned by the taxpayer in all three income years. Accordingly, the salary and wages will be assessed under subsection 6-5(3) of the ITAA 1997.