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

No. The income derived by an Australian citizen, who is a non resident of Australia for income tax purposes, working in the UK as a LES for an Australian Government department 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 department 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 15 of former 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.

Former Schedule 1 to the Agreements Act contained the double tax agreement between Australia and the United Kingdom of Great Britain and Northern Ireland (the 1967 UK Agreement). Former Schedule 1A to the Agreements Act contained the Protocol to the 1967 UK Agreement (the 1980 Protocol).

The 1967 UK Agreement and 1980 Protocol were replaced by the 2003 UK Convention which 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. However, the 1967 UK Agreement and the 1980 Protocol continue to operate to avoid the double taxation of income received by Australian and UK residents for income derived before 1 July 2004.

Article 15(1) of the 1967 UK Agreement provides that remuneration (other than pensions) paid by Australia to any individual for services rendered to Australia in the discharge of governmental functions, shall be exempt from UK tax if the individual is not ordinarily resident in the UK, or is ordinarily resident in the UK solely for the purpose of rendering the services.

The taxpayer did not become a resident of the UK solely for the purpose of rendering the services. Therefore, Article 15(1) of the 1967 UK Agreement provides that the remuneration derived by the taxpayer is not exempt from UK tax.

Therefore, the salary and wages derived by the taxpayer may be taxed by the UK.

The taxpayer is a citizen of Australia who exercises the duties of their employment wholly in the UK.

The source of income derived from employment is generally the place where the duties or services are performed ( Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 11 ATD 288; (1957) 7 AITR 76). Therefore, the salary and wages received by the taxpayer from employment in the UK has a foreign source.

Therefore, as the taxpayer is a non resident of Australia for income tax purposes, the salary and wages earned while working 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.