US-AU DTA: Article 15 – Dependent Personal Services
In this week’s blog we will be discussing the tax implication of rendering dependent personal services as stipulated in Article 15 of the US/Australia DTA.
The main purpose of Article 15 is to ensure that income derived by an individual who is a resident of the US or Australia as an employee or director in the other country is taxed appropriately.
In terms of Article 15 the source state will have taxing rights on such income if the individual is present in that state for a certain period of time.
INTERPRETING ARTICLE 15 OF THE DTA – DEPENDENT PERSONAL SERVICES
Article 15(1) sets out the basis upon which the remuneration derived by employees and directors should be taxed. Pensions, annuities, and remuneration of government employees are covered by Article 18 and 19 of the DTA and therefore not covered in terms of Article 15.
Generally, other salaries, wages, directors’ fees, etc derived by a resident of one country from an employment exercise or services performed as a director of a company in the other country will be taxed in that other country.
Article 15(2) includes an exemption from tax in the country being visited where the visits are only for a limited period. The conditions for exemption are:
- That the visit or visits not exceed, in the aggregate, 183 days in the year of income of the country visited;
- That the remuneration is paid by, or on behalf of, an employer or company who is not a resident of the country being visited, and
- That the remuneration is not deductible in determining taxable profits of a permanent establishment, fixed base or a trade or business which the employer or company has in the country being visited.
Where these conditions are met, the remuneration derived in the source state will be taxed only in the country of residence.
Article 15(3) stipulates that income derived from employment aboard a ship or aircraft operated in international traffic is to be taxed in the country of residence of the operator. The US Treasury however explained that under US law, the US taxes such income of a non-resident alien only to the extent it is derived from US sources (i.e. in US territorial waters). This paragraph does not confer an exclusive taxing right.
Article 15(3) does not confer an exclusive taxing right and both countries retain the right to tax their residents and citizens under Art 1(3) of the DTA (Personal scope).
Remuneration derived by US residents from employment in Australia may in terms of Article 15 of the DTA, be taxable in the US rather than Australia if the remuneration is paid in respect of a visit not exceeding 183 days in the year by an employer who is not resident in Australia and has no permanent establishment in Australia.
Both the US and Australia implemented certain relief measures for individuals who inadvertently spent more than 183 days in the source due to the Covid pandemic.
US Covid Relief Measures
Days that you were unable to leave the US either because of a medical condition that arose while were in the US or where you were unable to leave the US due to COVID-19 travel disruptions, you may be eligible to exclude up to 60 consecutive days in the US during a certain period.
Australia Covid Relief Measures
The ATO recognized that the Covid pandemic has created a special set of circumstances that need to be taken into account when evaluating the source of the employment income earned by a foreign resident who usually works overseas but instead performed that same foreign employment in Australia. If the remote working arrangement is short term (3 months or less), the income from that employment will not have an Australian source. However, for working arrangements longer than 3 months, an individual’s personal circumstances need to be examined to ascertain if the employment is connected to Australia. Employment income (ie salary or wages) is likely to be determined as having an Australian source if:
- The terms and conditions of the employment contract change;
- The nature of the job changes;
- Work is performed for an Australian entity affiliated with the overseas employer;
- The economic impact or result of the work shifts to Australia;
- The employing entity is in Australia;
- Work is performed with Australian clients;
- The performance of the work depends on the individual being physically present in Australia to complete it;
- Australia becomes the individual’s permanent place of work;
- The individual’s intention towards Australia changes.
Income earned from paid leave (such as annual or holiday leave) while in Australia temporarily does not need to be declared in Australia.
Individuals should therefore make sure that they do not unnecessarily file tax returns in the source state if their stay was extended due to Covid related measures.