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Are the salary and wages received by an Australian resident taxpayer from employment in Spain assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The salary and wages received by an Australian resident taxpayer from employment in Spain are assessable under subsection 6-5(2) of the ITAA 1997 and they are not exempt income under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) as the taxpayer has not been engaged in continuous foreign service for more than 90 days.

The taxpayer is a resident of Australia for income tax purposes.

The taxpayer is employed by a company that is a not a resident of Australia or Spain.

The employer does not have a permanent establishment or fixed base in Spain.

The taxpayer is present in Spain for less than 91 days.

The taxpayer has not been engaged in continuous foreign service for more than 90 days.

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 and 'foreign earnings' include income consisting of salary and wages (subsection 23AG(7) of the ITAA 1936).

In determining liability to Australian tax on foreign sourced income received by a resident, 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 the ITAA 1997 so that those Acts are read as one. In the event of inconsistent provisions, the Agreements Act overrides the ITAA 1936 and ITAA 1997 (except in some limited situations).

Schedule 39 to the Agreements Act contains the double tax agreement between Australia and the Kingdom of Spain (the Spanish Agreement). The Spanish Agreement operates to avoid the double taxation of income received by Australian and Spanish residents.

Article 15(1) of the Spanish Agreement provides that salary and wages derived by an individual who is a resident of Australia in respect of an employment will be taxable only in Australia unless the employment is exercised in Spain. If the employment is exercised in Spain, the remuneration may be taxed in Spain.

However, Article 15(2) of the Spanish Agreement provides that remuneration derived by an Australian resident individual taxpayer in respect of an employment exercised in Spain will be taxable only in Australia if: • the taxpayer is present in Spain for a period or periods not exceeding in the aggregate 183 days in the year of income; • the remuneration is paid by, or on behalf of, an employer who is not a Spanish resident; and • the remuneration is not deductible in determining the taxable profits of a permanent establishment or fixed base which the employer has in Spain.

Article 15(2) of the Spanish Agreement will apply as the taxpayer is present in Spain for a period less than 183 days in the year of income and the remuneration is paid by an employer who is not a Spanish resident with any permanent establishment or fixed base in Spain.

The salary and wages received by the taxpayer are not exempt from tax under subsection 23AG(1) of the ITAA 1936 as the taxpayer has not been engaged in foreign service for a continuous period of not less than 91 days.

Accordingly, the salary and wages received by the taxpayer while present in Spain will form part of their assessable income under subsection 6-5(2) of the ITAA 1997.