Issue
Are salary and wages received by an Australian resident taxpayer from working for an Australian state government in China assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The salary and wages received by an Australian resident taxpayer from working for an Australian state government in China are assessable under subsection 6-5(2) of the ITAA 1997.
Facts
The taxpayer is an Australian citizen and a resident of Australia for income tax purposes.
The taxpayer is employed by an Australian state government.
The taxpayer carries out the duties of their employment in China.
The taxpayer's duties involve the discharge of functions of a governmental nature.
The taxpayer receives salary and wages from the Australian state government.
Reasons for Decision
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, whether in or out of Australia, 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 11-15 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 and '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.
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 19(1)(a) of the Chinese Agreement provides that remuneration, other than a pension, paid by Australia or a political subdivision or local authority of Australia in respect of services rendered in the discharge of functions of a governmental nature shall be taxable only in Australia.
However, Article 19(1)(b) of the Chinese Agreement provides that such remuneration shall be taxable only in China if the services are rendered in China and the individual is a resident of China who: (i) is a citizen or national of China; or (ii) did not become a resident of China solely for the purposes of rendering the services.
The taxpayer is present in China solely for the purposes of their employment, which involves the discharge of functions of a governmental nature for an Australian state government. As such, the income from the taxpayer's employment is taxed only in Australia under Article 19(1)(a) of the Chinese Agreement.
As the income is exempt in China 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.
Accordingly, as the taxpayer is an Australian resident, the salary and wages received from working in China for an Australian state government will be assessable under subsection 6-5(2) of the ITAA 1997.