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Is the salary and wages income earned by a resident taxpayer from employment as a teacher in the United Kingdom (UK) assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The salary and wages income earned by a resident taxpayer from employment as a teacher in the UK is not assessable under subsection 6-5(2) of the ITAA 1997 as it is exempt from tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer was living in the UK for a two year period.

The taxpayer dominant purpose in moving to the UK was to accompany their spouse who had been temporarily posted to that country. The taxpayer made no arrangements to gain work as a teacher prior to arriving in the UK.

After arriving in the UK the taxpayer sought and obtained employment as a teacher in a school. They were employed as a teacher for a period in excess of 183 days during the UK year of income (6 April to 5 April).

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 then 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 and 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.

One of the reasons listed is where the income is exempt in the foreign country as a result of the operation of a double tax agreement (paragraph 23AG(2)(b) of the ITAA 1936).

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 1 to the Agreements Act contains the double tax agreement between Australia and the UK (the UK Agreement). The UK Agreement operates to avoid the double taxation of income received by Australian and UK residents.

Article 16 of the UK Agreement deals with visiting professors and teachers. That Article provides that a professor or teacher who: • visits the UK for a period not exceeding 2 years for the purpose of teaching at a university, college or school or other educational institution; and • who is, or was immediately before that visit, a resident of Australia,

shall be exempt from tax in the UK on any remuneration for such teaching if that income is subject to tax in Australia.

To meet the requirements of this Article the taxpayer must have travelled to the UK for the purpose of teaching. If the taxpayer's dominant purpose for the visit was for something other than teaching then this Article will not apply (see Example 3 in each of Taxation Determinations TD 2001/21, TD 2001/22, TD 2001/23 and TD 2001/24).

The taxpayer's dominant purpose in travelling to the UK was to accompany their spouse. They made no arrangements to obtain teaching employment prior to arrival in the UK. The taxpayer did not meet the requirement that their visit was for the purpose of teaching and Article 16 of the UK Agreement therefore does not apply.

Article 12 of the UK Agreement deals with dependant personal services. Paragraph (1) of Article 12 of the UK Agreement provides that salary and wages income of an Australian resident will be taxable only in Australia unless the employment is exercised in the UK. If the employment is exercised in the UK then the income is deemed to have a source in and may be taxed in the UK.

However, temporary visits are dealt with in paragraph (2) of Article 12 of the UK Agreement which provides that the income derived from employment exercised in the UK will be exempt in the UK if: • the taxpayer was present in the UK for a period or periods not exceeding in the aggregate 183 days in the UK year of income; • the remuneration is paid by or on behalf of an employer who is not a UK resident; and • the remuneration is not deductible in determining the profits of a permanent establishment or a fixed base which the employer has in the UK.

The taxpayer will be present in the UK for a period in excess of 183 days in the UK year of income and therefore paragraph (2) of Article 12 of the UK Agreement will not apply. Therefore although the taxpayer's income is subject to tax in Australia it may also be subject to tax in the UK under paragraph (1) of Article 12 of the UK Agreement.

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