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Is the remuneration paid by a fully government owned and controlled body of the Japanese Government to a Japanese resident employed in Australia assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. Even though the remuneration paid by the Japanese Government to a Japanese resident employed in Australia is assessable under subsection 6-5(3) of the ITAA 1997, Article 14(3) of Schedule 6 to the International Tax Agreements Act 1953 (the Agreements Act) does not apply and the remuneration is not taxable in Australia.

The taxpayer is a resident of Japan and a non-resident of Australia for taxation purposes.

The taxpayer is working in Australia for a Japanese Government body.

The Japanese Government body does not compete with other similar commercial bodies.

The taxpayer is discharging government functions for the Government of Japan while in Australia.

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non-resident includes ordinary income derived directly or indirectly from all Australian sources during the income year.

In determining liability to tax on Australian sourced income received by a non resident, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the Agreements Act.

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Schedule 6 to the Agreements Act contains the double tax agreement and the protocol between Australia and Japan (the Japanese Agreement). The Japanese Agreement operates to avoid the double taxation of income received by Australian and Japanese residents.

Article 14(2) of the Japanese Agreement exempts from Australian tax remuneration paid by the Government of Japan to an individual for services rendered in the discharge of governmental functions for the Japanese Government unless the individual is an Australian citizen or ordinarily resident in Australia.

However, article 14(3) of the Japanese Agreement provides that Article 14 does not apply to payments in respect of services rendered in connection with any trade or business carried on by the Japanese Government.

As the Japanese Government body is fully government owned and controlled by the Government of Japan and does not compete with other similar commercial bodies, it is not considered to be carrying on a trade or business.

Accordingly, article 14(3) of the Japanese Agreement will not apply.

The taxpayer is discharging governmental functions for the Japanese Government and is not an Australian citizen or ordinarily resident in Australia. Accordingly, article 14(2) of the Japanese Agreement exempts from Australian tax the remuneration paid by the Japanese Government.

Consequently, the remuneration paid by the Japanese Government to a Japanese resident employed in Australia is not assessable under subsection 6-5(3) of the ITAA 1997.