Assessability of employment income received by a South African resident taxpayer

Is a South African resident's employment income from a South African employer assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) where the taxpayer performs employment duties in Australia?

Yes. The employment income received by a resident of South Africa is assessable in Australia under subsection 6-5(3) of the ITAA 1997 where the taxpayer performs employment duties in Australia.

The taxpayer is a resident of South Africa and a non-resident of Australia for taxation purposes.

The taxpayer is present in Australia for more than 183 days, spanning across two Australian income years, from 1 February 2006 to 31 March 2007.

The taxpayer is performing employment duties in Australia but their salary and wages are paid by their employer in South Africa, who does not have a permanent establishment or fixed base in Australia.

The taxpayer is taxed in South Africa on their salary and wages.

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non-resident for the income year includes ordinary income derived directly or indirectly from all Australian sources and other ordinary income that a provision includes in 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...

As the taxpayer performs employment duties in Australia and receives ordinary income as remuneration for these, that remuneration would be assessable under subsection 6-5(3) of the ITAA 1997. However, 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 (Agreements Act). If there is an inconsistency, the provisions of the Agreements Act will prevail over those of the ITAA 1997 (subsection 4(2) of the Agreements Act).

Schedule 42 of the Agreements Act contains the tax treaty between Australia and the Republic of South Africa (the South African Agreement). The South African Agreement operates to avoid the double taxation of income received by Australian and South African residents.

Article 15(1) of the South African Agreement provides that employment income derived by a resident of South Africa shall be taxable only in South Africa unless the employment is exercised in Australia. If the employment is exercised in Australia it may be taxed in Australia. However, Article 15(2) of the South African Agreement provides that such income will be taxable only in South Africa if: (a) the recipient is present in Australia 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 or year of assessment of Australia, and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of Australia, and (c) the remuneration is not deductible in determining taxable profits of a permanent establishment or fixed base which the employer has in Australia.

As the employer is a South African resident and does not have a permanent establishment or fixed base in Australia, the conditions in Article 15(2)(b) and 15(2)(c) of the South African Agreement are satisfied.

In interpreting the meaning of Article 15(2)(a) of the South African Agreement, regard may be had to the OECD Model Tax Convention on Income and on Capital (the OECD Model) and the Commentaries on the Articles of the OECD Model (the OECD Commentary) as the South African Agreement is based on the OECD Model. This approach was accepted by the High Court in Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4717; (1990) 21 ATR 531 (see paragraph 102 of Taxation Ruling TR 2001/13).

Article 15 of the South African Agreement is the same in substance as Article 15 of the OECD Model. Paragraph 4 of the OECD Commentary on Article 15 of the OECD model states that in interpreting the wording of subparagraph (a) of paragraph (2) all possible periods of twelve consecutive months must be considered, even periods which overlap others to a certain extent.

On the current facts, there are two periods of twelve consecutive months to consider. The first begins in the 2005-06 income year, on 1 February 2006 (when the taxpayer arrived in Australia). The second ends in the 2006-07 income year on 31 March 2007 (the last day on which the taxpayer will be in Australia).

During the 12 month period beginning in the 2005-06 income year (that is, 1 February 2006), the taxpayer is present in Australia for more than 183 days in the aggregate. Accordingly, Article 15(2) of the South African Agreement does not apply and Australia may tax the employment income derived during that time (under Article 15(1) of the South African Agreement).

During the 12 month period ending in the 2006-07 income year (that is, 31 March 2007), the taxpayer is present in Australia for more than 183 days in the aggregate. Accordingly, Article 15(1) of the South African Agreement does not apply and Australia may tax the employment income derived during that time (under Article 15(1) of the South African Agreement).

In accordance with subsection 6-5(3) of the ITAA 1997, the taxpayer's assessable income in the 2005-06 income year will include the employment income derived between 1 February 2006 and 30 June 2006, and the taxpayer's assessable income in the 2006-07 income year will include the employment income derived between 1 July 2006 and 31 March 2007.