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Is the salary and wages earned by a resident taxpayer while working in the Philippines assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The salary and wages earned by a resident taxpayer while working in the Philippines is not assessable under subsection 6-5(2) of the ITAA 1997 as the income will be exempt under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is an Australian resident for taxation purposes.

The taxpayer works for an Australian employer and was seconded to work in their office in the Philippines.

The taxpayer worked in the Philippines for a period in excess of 183 days in the Philippines year of income (1 January to 31 December).

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the ITAA 1936 which deals with overseas employment income.

Subsection 23AG(1) of the ITAA 1936 provides that where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity as an employee (subsection 23AG(7) of the ITAA 1936). 'Foreign earnings' includes income consisting of salary or wages (subsection 23AG(7) of the ITAA 1936).

However subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country only because of any of the reasons listed.

Under paragraph 23AG(2)(b) of the ITAA 1936 where income is exempt in the foreign country as a result of the operation of a double tax agreement that income is not exempt.

In determining liability to Australian tax on foreign sourced income it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the 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 for some limited provisions).

Schedule 14 to the Agreements Act contains the double tax agreement between Australia and the Republic of the Philippines (the Philippine Agreement). The Philippine Agreement operates to avoid the double taxation of income received by Australian and Philippine residents.

Paragraph (1) of Article 15 of the Philippine Agreement provides that salary and wages income of an Australian resident will be taxable only in Australia unless the employment is exercised in the Philippines. If the employment is exercised in the Philippines then the Philippines may also tax the income.

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

The taxpayer will be present in the Philippines for a period in excess of 183 days during their income year and therefore paragraph (2) of Article 15 of the Philippine Agreement does not apply.

Under paragraph (1) of Article 15 of the Philippine Agreement, although the taxpayer's income is subject to tax in Australia, it may also be subject to tax in the Philippines. Therefore the taxpayer's income is not exempt from tax in the Philippines and accordingly subsection 23AG(2) of the ITAA 1936 will not apply.

As subsection 23AG(2) of the ITAA 1936 does not apply the taxpayer's income earned in the Philippines will be exempt from tax under subsection 23AG(1) of the ITAA 1936 and is not included in their assessable income under subsection 6-5(2) of the ITAA 1997.