Exempt income - employment in the United Kingdom

Is income derived by a taxpayer who is on a work exchange program with an organisation in the United Kingdom, exempt from Australian income tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes, the taxpayer's overseas employment income is exempt foreign income under section 23AG of the ITAA 1936.

The taxpayer was involved in a work exchange program with an organisation in the United Kingdom. The exchange allowed the taxpayer to undertake similar employment duties overseas to those in their current employment in Australia. The exchange was encouraged by the taxpayer's employer, who organised the necessary licences.

The taxpayer was present in the United Kingdom for more than 183 days during the United Kingdom's year of assessment (6 April to 5 April for individuals).

Wages were paid by the taxpayer's Australian employer and tax was withheld.

Subsection 23AG(1) of the ITAA 1936 states that 'where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the person from that foreign service is exempt from tax'. This section is subject to the proviso contained in subsection 23AG(2) of the ITAA 1936, which removes the exemption for income that is treated as exempt income in the foreign country in which it is earned.

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.

Article 12 of Schedule 1 of the International Tax Agreements Act 1953 provides that salary and wages derived in the United Kingdom from employment exercised there shall be deemed to have a source in and be taxed in the United Kingdom. However, this will only apply if the taxpayer is present in the United Kingdom for more than 183 days of the United Kingdom year of assessment and the remuneration is paid by an Australian employer.

If the taxpayer was not present in the United Kingdom for more than 183 days in the United Kingdom year of assessment, the income will be exempt in the United Kingdom and subject to tax in Australia.

The taxpayer is considered to be an Australian resident for tax purposes. The taxpayer travelled to the United Kingdom as part of a work exchange program and was employed in that country for more than 183 days of the United Kingdom's year of assessment. The taxpayer's Australian employer paid the taxpayer wages while on the exchange program. As the period of employment was greater than 91 days, the taxpayer's wages is exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936 but is subject to tax in the United Kingdom.

Note: if a payment is exempt income, an employer is not required to withhold an amount of tax from salary and wages (subsection 12(1) of Schedule 1 of the Taxation Administration Act 1953 ).