Assessability of income received by an Australian resident studying in the US

Are the payments received by an Australian resident taxpayer from their employment, while attending a full time postgraduate course in the United States (US), assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The payments received by an Australian resident taxpayer from their employment, while attending a postgraduate course in the US, are assessable under subsection 6-5(2) of the ITAA 1997 as they are not exempt income under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is a resident of Australia for income tax purposes.

The taxpayer went to the US to study because the postgraduate course they are undertaking is not available in Australia.

The taxpayer will continue to receive salary and wages income from their Australian employer whilst studying in the US.

The taxpayer has advised that their employer will continue to deduct tax from their salary.

The taxpayer intends to return to Australia at the end of the postgraduate course.

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 51-10 of the ITAA 1997, which deals with educational allowances and section 23AG of the ITAA 1936 which deals with overseas employment.

Section 51-35 of the ITAA 1997 states that payments made to a full-time student at a school, college or university are not exempt where the amount is received in the capacity as an employee.

Salary or wages earned overseas by an Australian resident during a period of service of at least 91 days is generally exempt under subsection 23 AG(1) of the ITAA 1936. However, subsection 23AG(2) of the ITAA 1936 states that income will not be exempted under section 23AG of the ITAA 1936 where it is exempt in the foreign country only because a double tax agreement, or a law of the foreign country giving effect to a double tax agreement.

In determining liability to Australian tax on foreign sourced income received by a 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 1936 and the ITAA 1997 so that those Acts are read as one.

Schedule 2 to the Agreements Act contains the double tax convention between Australia and the US (the US Convention). Schedule 2A to the Agreements Act contains the US Protocol, amending the US Convention (US Protocol). The US Convention and the US Protocol operate to avoid the double taxation of income received by Australian and US residents.

Article 20 of the US Convention provides where a student, who is a resident of Australia and who is temporarily present in the US for the purpose of their full-time education, receives payments from sources outside the US for the purpose of their maintenance or education, those payments shall be exempt from tax in the US.

Consequently, the payments are taxable only in Australia and are not exempt under subsection 23AG(1) of the ITAA 1936 because the income is exempt from tax in the US only because of the US Convention.

Accordingly, as the payments received by the Australian resident taxpayer, while attending a postgraduate course in the US are not exempt under either section 51-35 of the ITAA 1997 or subsection 23AG(1) of the ITAA 1936, the payments are included in assessable income under subsection 6-5(2) of the ITAA 1997.