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Is the income derived by a non-resident Australian citizen working in China 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 a non-resident Australian citizen working in China 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 China for taxation purposes.

The taxpayer works for an Australian Government organisation in China.

The taxpayer's employment does not involve the discharge of governmental functions within the meaning of Article 19 of Schedule 28 to the International Tax Agreements Act 1953 (Agreements Act).

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

The salary and wages are not exempt from tax in China.

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 those Acts are read as one.

Schedule 28 to the Agreements Act contains the double tax agreement between Australia and the People's Republic of China (the Chinese Agreement). The Chinese Agreement operates to avoid the double taxation of income received by Australian and Chinese residents.

Article 15(1) of the Chinese Agreement provides that salaries, wages and other similar remuneration derived by an individual who is a resident of China in respect of an employment shall be taxable only in China unless the employment is exercised in Australia.

The taxpayer is a resident of China for taxation purposes and for the purposes of the Chinese Agreement and exercises the duties of their employment wholly in China.

Accordingly, Article 15(1) of the Chinese Agreement applies and the income is taxable only in China.

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