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Are the salary and wages received by an Australian resident taxpayer from service aboard a cruise ship operated by an Australian resident company in New Zealand (NZ) territorial waters included in assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The salary and wages income received by an Australian resident taxpayer from service aboard a cruise ship operated by an Australian resident company in NZ territorial waters are included in assessable income under subsection 6-5(2) of the ITAA 1997.

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

The taxpayer is employed aboard a ship which operates out of its home port of Sydney.

The ship is operated by a company that is an Australian resident for income tax purposes.

The company conducts cruises that travel through Australian territorial waters, New Zealand (NZ) territorial waters and international waters.

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

The taxpayer has not paid foreign tax in relation to their salary and wage income.

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.

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 Income Tax Assessment Act 1936 (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.

Subsection 23AG(7) of the ITAA 1936 defines 'foreign service' as service in a foreign country as the holder of an office or in the capacity of an employee, and 'foreign earnings' include salary, wages, commission, bonuses or allowances.

Paragraph 19 of Taxation Ruling TR 96/15 states that for the purposes of subsection 23AG(1) of the ITAA 1936, service on a foreign ship in international waters does not constitute foreign service as it is not performed in a foreign country.

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

In determining liability to Australian tax on foreign source income received by an Australian 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 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 4 to the Agreements Act contains the double tax agreement between Australia and NZ (the NZ Agreement). The NZ Agreement operates to avoid the double taxation of income received by Australian and NZ residents.

Article 15(1) of the NZ Agreement provides that salary and wages derived by an individual who is a resident of Australia is taxable only in Australia unless the employment is exercised in NZ. If the employment is exercised in NZ, then it may also be taxed in NZ.

However, Article 15(2) of the NZ Agreement states that where the employment is exercised in NZ the income will not be taxable in NZ if: • the taxpayer is present in NZ for a period or periods not exceeding in the aggregate 183 days in any 12 month period commencing or ending in the year of income; • the remuneration is paid by, or on behalf of, an employer who is not a resident of NZ; • the remuneration is not deductible in determining the taxable profits of a permanent establishment or fixed base which the employer has in NZ; and • the remuneration is, or upon application of Article 15 of the NZ Agreement will be, subject to tax in Australia.

As the taxpayer meets the requirements of Article 15(2) of the NZ Agreement, the salary and wages gained from service in NZ will be taxable only in Australia.

As the taxpayer is a resident of Australia, the salary and wages income received by the taxpayer will be included in assessable income under subsection 6-5(2) of the ITAA 1997.