Assessability of remuneration from employment aboard a ship or aircraft operated in international traffic - non resident employee

Is the non resident taxpayer's income from employment aboard a ship or aircraft, operated in international traffic by an Australian resident, assessable in Australia under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The non resident taxpayer's income from employment aboard a ship or aircraft, operated in international traffic by an Australian resident, is assessable in Australia under subsection 6-5(3) of the ITAA 1997.

The taxpayer is a non-resident of Australia and is a resident of New Zealand for tax purposes.

The taxpayer derives employment income from duties aboard a ship or aircraft operated in international traffic by their employer.

The taxpayer's employer is an Australian resident.

Subsection 6-5(3) of the ITAA 1997 provides that ordinary income derived by a non resident directly or indirectly from Australian sources, as well as other ordinary income included by a provision on a basis other than having an Australian source, is assessable.

The salary and wages received by the taxpayer are ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

In determining liability to tax on Australian sourced income received by a non resident, 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 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 4 to the Agreements Act contains the double tax agreement between Australia and New Zealand (the NZ Agreement). The NZ Agreement operates to avoid the double taxation of income received by Australian and New Zealand residents.

Article 15 of the NZ Agreement deals with dependant personal services. Paragraph (1) of Article 15 of the NZ Agreement provides that salary and wages derived by a resident of New Zealand shall be taxable only in New Zealand unless the employment is exercised in Australia. If the employment is exercised in Australia then the income may also be taxed in Australia.

However, if an Australian resident taxpayer operates a ship or aircraft in international traffic, paragraph (3) of Article 15 of the NZ Agreement provides that remuneration derived in respect of employment exercised aboard that ship or aircraft may be taxed in Australia.

Article 23 of the NZ Agreement provides that income derived by a resident of New Zealand and which may be taxed in Australia (under Article 15), shall be deemed to have a source in Australia for Australian and New Zealand tax purposes.

The taxpayer's income is derived in respect of employment exercised aboard a ship or aircraft operated in international traffic by their employer who is a resident of Australia. The income received by the taxpayer is deemed to have an Australian source and may be taxed in Australia. Accordingly, the income is included in the taxpayer's assessable income under subsection 6-5(3) of the ITAA 1997. Note: A foreign tax credit may be allowed in New Zealand for Australian tax paid (Article 24 of the NZ Agreement).