With recent scrutiny on some employer arrangements, it seems timely to highlight the ‘183 day rule myth’ and the true application of Dependent Personal Services (DPS) Article in Australia’s Double Tax Agreements (DTAs).
Regardless of their residency position, an individual working in Australia would generally be subject to income tax on employment income under Australian domestic law.
However, the DPS Article can override the domestic law to allocate taxing rights in respect of income from employment.
Where there is an Australian subsidiary, the DPS Article allocates sole taxing rights to the state in which the individual is a resident where:
On face value, this indicates an exemption from tax where the employee was present in the source state for less than 183 days. The catch is the interpretation of the term ‘employer’.
Organisation for Economic Co-operation and Development (OECD) commentary and Australian Taxation Office (ATO) guidance requires a substance over form approach to identifying the employer (refer Taxation Ruling TR 2013/1). Which entity bears the risk and reward for the services?
In practice, very few scenarios arise where it would be reasonable to argue that the 183-day exemption has application where an individual is working within an entity in Australia, for that entity’s benefit, even if for a very short period. Further, it would seem especially unlikely that the Australian entity was not deriving a benefit where costs are recharged to the Australian entity.
This ‘183-day rule myth’ is pervasive within expatriate and commercial circles and is a difficult preconception for tax professionals to correct and address.