Income tax and fringe benefits tax: can a non-resident employer be: (a) required to withhold amounts from salary and wages paid to an Australian resident employee for work performed overseas under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 ? (b) subject to obligations under the Fringe Benefits Tax Assessment Act 1986 in relation to benefits provided to an Australian resident employee in relation to work performed overseas?

Yes.

A non-resident employer who pays an Australian resident for work performed overseas is subject to withholding obligations if the non-resident employer has a sufficient connection with Australia.

The nature of a sufficient connection is a matter of statutory interpretation having regard to the Pay As You Go (PAYG) Withholding provisions in the Taxation Administration Act 1953 (TAA). Where a non-resident employs an Australian resident for work performed overseas that employer will have a sufficient connection to Australia if they have a physical business presence in Australia. A non-resident entity will have a physical business presence in Australia if the non-resident carries on an enterprise or income producing activities (or part of such enterprise or activities) in Australia and has a physical presence in Australia.

If there is a withholding obligation, obligations under the Fringe Benefits Tax Assessment Act 1986 (FBTAA) will arise in relation to benefits provided to that employee. If there is no withholding obligation, amounts paid to the employee by the non-resident employer will not be 'salary and wages' as defined in subsection 136(1) of the FBTAA and no obligations under the FBTAA can arise for the non-resident employer in relation to benefits provided to that employee.

Sheree is an Australian resident for tax purposes. She is employed as a project manager working in the Australian operations of a non-resident consultancy company. The company transfers her overseas for 5 months to work on a new consultancy project. The company continues to carry on business and maintains a physical presence in Australia. Sheree's wages are assessable income in Australia. The company has an obligation to withhold an amount for Australian tax purposes from the salary paid to her.

Sheree is provided with a car while overseas and is reimbursed for some additional living expenses. As amounts must be withheld from her salary, the employer would have obligations under the FBTAA in respect of the benefits provided to her.

Raj is an Australian resident for tax purposes. While on a 6 month backpacking holiday overseas, she works as a fruit-picker for a local family-owned business. She is paid by the hour and given free board and lodgings. Her employer has no staff or operations in Australia, and therefore no connection with Australia. Raj's wages are assessable income in Australia. However, her employer has no obligation to withhold Australian tax from the wages paid to her. As there is no obligation to withhold, no obligations under the FBTAA can arise to her employer in respect of the board and lodgings provided.

Laurren is an Australian resident for tax purposes. She works for an Australian subsidiary of an international hotel chain as an events manager. Under an incentive program for high performing staff, she is offered a 6 month overseas secondment with the group's global parent company. The parent company is a non-resident for tax purposes and does not carry on business in Australia. While on secondment she will be employed and paid by the parent company. Her employer, being the non-resident parent company not carrying on business in Australia and with no physical presence in Australia, has no obligation to withhold Australian tax from the salary paid to her. As there is no obligation to withhold, no obligations under the FBTAA can arise to her employer in respect of any benefits provided to her.

When the final Determination is issued, it is proposed to apply both before and after its date of issue. However, the Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination (see paragraphs 75 to 77 of Taxation Ruling TR 2006/10).

Under section 12-35 of Schedule 1 to the TAA [1] an entity must withhold an amount from salary and wages, commissions, bonuses or allowances it pays to an individual as an employee (whether of that or another entity). However, pursuant to subsection 12-1(1), an entity need not withhold an amount under section 12-35 if the whole of the payment is exempt income of the employee. [2]

Australian law can be validly enacted with extra-territorial effect. [3] While there is a general presumption of statutory interpretation that a law is not intended to have extra-territorial operation, [4] this presumption can be displaced where there is a clear legislative intention for the law to apply outside Australia. [5] Such an intention can be found in specific statutory provisions or by necessary implication having regard to the policy, object or purpose of the law. [6]

The TAA does not expressly provide that its application is limited to events and circumstances within Australia; nor does the Act expressly provide that its operation is extra-territorial. [7] Section 12-35 uses terms that do not have a particular territorial aspect to their meaning and is also silent regarding matters of extra-territorial effect.

However, the stated object of the part of the Act which contains section 12-35 [8] is to ensure the efficient collection of certain specified taxes, including income tax. [9] Residents are, broadly speaking, assessable on their worldwide employment income. Non-residents are, broadly speaking, assessable on their income earned in Australia. [10] As a means of collection of tax payable on employment income, which includes such foreign-sourced income and income earned by non-residents, the presumption against any extra-territorial operation is inconsistent with the purpose of PAYG employment withholding.

The manner of a law's operation outside Australia is also a matter of statutory interpretation. In considering whether a law operates extra-territorially and the manner of such operation, regard is had to the presumption that the law is not intended to extend to matters properly within the jurisdiction of a foreign law. [11] Unless there is a contrary intention, a sufficient connection with Australia is required. [12]

In Clark (Inspector of Taxes) v. Oceanic Contractors [1983] 1 All ER 133; [1983] 2 WLR 94; 13 ATR 901, the House of Lords examined the territorial effect of the UK equivalent of section 12-35. [13] It was held that a non-resident company is subject to withholding obligations where it has a trading presence in the United Kingdom. Lord Scarman said (at All ER 141; 13 ATR 909): ...the present case is concerned with the territorial limitation to be implied into a section which establishes a method of tax collection. The method is to require the person paying the income to deduct it from his payments and account for it to the Revenue. The only critical factor, so far as collection is concerned, is whether in the circumstances it can be made effective. A trading presence in the United Kingdom will suffice. [14]

Similarly, in the context of Australia's PAYG withholding provisions, the employment withholding obligation is to be construed as not limited to persons and events in Australia. However the application of that obligation to persons and events outside of Australia requires a sufficient connection with Australia. [15] The obligation to withhold does not apply where there is no such connection.

Whether there is a sufficient connection with Australia for PAYG withholding purposes depends on a consideration of individual facts and circumstances relevant to the purpose, nature and effect of the particular law. Having regard to the wording of section 12-35, matters relating to the entity making the payment, the individual receiving the payment, the employment relationship, and the payment itself are relevant.

In the case of a non-resident making a payment to an Australian resident for work performed overseas, there is a sufficient connection with Australia if the non-resident carries on an enterprise [16] or income producing activities (or part of such enterprise or activities) in Australia and has a physical presence in Australia (collectively referred to as a physical business presence). As the obligation to withhold is on the employer, the sufficient connection must be with the employer. The residency of the employee is not a matter that establishes a sufficient connection of the employer with Australia. The fact that the payment is made overseas does not establish that there is no sufficient connection with Australia.

A physical business presence in Australia may include having an office, business operations, trading presence and/ or employees in Australia. Owning real estate or other investments in Australia will not of itself be sufficient to create a relevant physical business presence of that payer in Australia. Likewise, merely having Australian clients without any office or employees located in Australia would not be sufficient to create a relevant physical business presence in Australia. A parent company, subsidiary or presence of an associate in Australia will not of itself mean the non-resident employer has a physical business presence in Australia except in the situation where the entity present in Australia: • carries on the Australian business of the non-resident employer; or • is the common law agent of the non-resident employer.

In addition, a non-resident employer who is registered for PAYG withholding under section 16-140 will have established a sufficient connection with Australia, being subject to Australia's PAYG withholding regime and required to pay amounts to the Commissioner under it.

Where the employer does have a sufficient connection to Australia for PAYG withholding purposes, the employer is required to withhold tax from salary and wages paid to an Australian resident employee for work performed overseas under section 12-35.

An administrative penalty may be imposed under section 16-30 equal to the amount that was not withheld as required. Failing to withhold an amount under section 12-35 when required to do so is a strict liability offence under section 16-25 attracting a penalty of 10 penalty units when this offence applies. [17]

Where a non-resident employer has a sufficient connection with Australia to have an obligation to withhold from payments made to an Australian resident employee for work performed overseas, it will also have obligations under the FBTAA in relation to any benefit provided to that employee. In these circumstances, the payment will be 'salary or wages' for the purposes of the terms 'current employer' and 'current employee' as defined in subsection 136(1) of the FBTAA. As a result, the non-resident employer and the Australian resident employee will be an 'employer' and an 'employee' respectively as these expressions are defined in subsection 136(1) of the FBTAA.

As a practical matter, it is considered that the circumstances giving rise to an obligation to withhold will be infrequently encountered. In many common situations where Australian resident taxpayers work overseas, the non-resident employer is unlikely to have a physical business presence in Australia. The circumstances are most likely to arise in the case of a multinational business which carries on business in Australia.

If amounts are paid by an entity other than the non-resident employer to a person as employee of the foreign employer working overseas any withholding obligation by that payer entity must be separately considered from the perspective of that payer.

There is no withholding obligation where a payment is wholly exempt from tax pursuant to a double tax agreement. [18]

You are invited to comment on this draft Determination. Please forward your comments to the contact officer by the due date.

A compendium of comments is also prepared for the consideration of the relevant Rulings Panel or relevant tax officers. An edited version (names and identifying information removed) of the compendium of comments will also be prepared to: • provide responses to persons providing comments; and • publish on the Tax Office website at www.ato.gov.au. Please advise if you do not want your comments included in the edited version of the compendium. Due date: 28 May 2010 Contact officer details have been removed following publication of the final ruling.