Assessability of salary and wages earned by Locally Engaged Staff of an Australian embassy in France - taxpayer is an Australian resident

Are the salary and wages earned as locally engaged staff, in an Australian embassy by a taxpayer who is an Australian resident for tax purposes, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The salary and wages earned as locally engaged staff, in an Australian embassy by a taxpayer who is an Australian resident for tax purposes, are assessable under subsection 6-5(2) of the ITAA 1997.

The taxpayer is an Australian resident for tax purposes as they are an eligible employee for the purposes of the Superannuation Act 1976.

The taxpayer is employed as locally engaged staff by the Australian embassy in France.

The taxpayer receives salary and wages as income from this employment.

The taxpayer has been working in France for in excess of 91 days.

The taxpayer is not a French national nor are they permanently resident in France.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.

Section 11-5 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with overseas employment income.

Subsection 23AG(1) of the ITAA 1936 provides that where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity as an employee (subsection 23AG(7) of the ITAA 1936). 'Foreign earnings' includes income consisting of salary or wages (subsection 23AG(7) of the ITAA 1936).

However subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country only because of any of the reasons listed therein.

Under paragraph 23AG(2)(b) of the ITAA 1936, where income is exempt in the foreign country as a result of the operation of a double tax agreement, that income is not exempt under subsection 23AG(1) of the ITAA 1936.

In determining liability to Australian tax on foreign sourced income, it is necessary to consider not only the income tax laws, but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 11 of the Agreements Act contains the double tax agreement between Australia and France (the French Agreement). The French Agreement operates to avoid the double taxation of income received by Australian and French residents.

Article 18 of the French Agreement deals with governmental remuneration. Paragraph (1) of Article 18 of the French Agreement provides that remuneration paid by Australia to an individual for services rendered in the discharge of governmental functions, shall be exempt from tax in France unless the services are rendered in France by a French national or a permanent resident of France.

The employees at the Australian embassy perform services in discharge of governmental functions. Although the services were rendered in France the taxpayer is not a French national nor are they a permanent resident of France. The salary and wages income paid to the taxpayer is therefore exempt from tax in France as a result of paragraph (1) of Article 18 of the French Agreement.

As the income is exempt in France as a result of the operation of a double tax agreement, the income will not be exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936.

As the income is not exempt from tax in Australia it will form part of the taxpayer's assessable income under subsection 6-5(2) of the ITAA 1997.