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Is the income derived by an Australian citizen working in the United Kingdom (UK) as a LES for an Australian Government organisation, assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The income derived by an Australian citizen working in the UK as a LES for an Australian Government organisation, is not assessable under subsection 6-5(3) of the ITAA 1997 as it is exempt income under paragraph 23(r) of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is an Australian citizen.

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

The taxpayer is a resident of the UK for taxation purposes.

The taxpayer works for an Australian Government organisation in the UK.

The taxpayer has been living in the UK for a number of years and applied for the position in the UK.

The taxpayer was employed as a LES.

The taxpayer receives salary and wages in respect of their employment.

The taxpayer's employment as a LES involves the discharge of governmental functions for the purposes of Article 18 of Schedule 1 to the International Tax Agreements Act 1953 (the Agreements Act).

The salary and wages are not exempt from tax in the UK.

The taxpayer did not become a resident of the UK solely for the purpose of rendering the employment services.

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non resident taxpayer includes: (a) ordinary income derived directly or indirectly from all Australian sources during the income year, and (b) other ordinary income that a provision includes as assessable income on some basis other than having an Australian source.

Salary and wages are ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

Section 6-15 of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income. An amount is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law (subsection 6-20(1) of the ITAA 1997).

Section 11-15 of the ITAA 1997 lists provisions about exempt income. Included in this list is paragraph 23(r) of the ITAA 1936.

Paragraph 23(r) of the ITAA 1936 provides that income derived by a non-resident from sources wholly out of Australia (except income that a provision of this Act includes in a taxpayer's assessable income on some other basis than having an Australian source) is exempt from Australian tax.

In determining liability to Australian tax on income received by a non resident taxpayer, 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 and the ITAA 1936 so that those Acts are read as one.

Schedule 1 to the Agreements Act contains the double tax convention between Australia and the United Kingdom of Great Britain and Northern Ireland and the Notes to the agreement (the 2003 UK Convention). The 2003 UK Convention operates to avoid the double taxation of income received by Australian and UK residents.

The 2003 UK Convention entered into force on 17 December 2003, and in the case of Australia, applies to income or gains for the income year beginning on 1 July 2004 and thereafter.

Article 18(1) of the 2003 UK Convention provides that salaries, wages and other similar remuneration paid by Australia to an individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia. However, such salaries, wages and other similar remuneration shall be taxable only in the UK if the services are rendered in the UK and the recipient is a resident of the UK who: (a) is a national of the UK; or (b) did not become a resident of the UK solely for the purpose of rendering the services.

The taxpayer has lived in the UK for a number of years and applied for the position in the UK. As the taxpayer did not become a resident of the UK solely for the purpose of rendering the services, Article 18(1)(b) of the 2003 UK Convention provides that the salary and wages are taxable only in the UK.

Therefore, the income derived by an Australian citizen while working as a LES in the UK for an Australian Government organisation remains exempt from tax under paragraph 23(r) of the ITAA 1936 and is not assessable under subsection 6-5(3) of the ITAA 1997.