Assessability of employment income received by Australian resident for service aboard a ship operated in international waters

Are the salary and wages income received by an Australian resident taxpayer from service aboard a Norwegian ship operated in international waters assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The salary and wages income received by an Australian resident taxpayer from service aboard a Norwegian ship operated in international waters are assessable under subsection 6-5(2) of the ITAA 1997.

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

The taxpayer is employed by a company that is a resident of Norway as an officer on a ship operated in international waters.

The taxpayer has not been engaged in continuous foreign service for more than 90 days.

The taxpayer receives salary and wages income on which Norwegian tax is deducted.

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.

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.

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.

Paragraph 19 of Taxation Ruling TR 96/15 states that for the purposes of subsection 23AG(1) of the ITAA 1936, service on a foreign ship in international waters does not constitute foreign service as it is not performed in a foreign country.

In determining liability to Australian tax on foreign sourced income received by an Australian 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 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 23 to the Agreements Act contains the agreement between Australia and the Kingdom of Norway (the Norwegian Convention).

Article 15 of the Norwegian Convention provides that salary, wages and other similar remuneration derived by a resident of Australia is taxable only in Australia unless the employment is exercised in Norway. If the employment is exercised in Norway then the remuneration may also be taxed in Norway.

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

Paragraph (2) of Article 23 of the Norwegian Convention provides that income derived by a resident of Australia and which may be taxed in Norway under Article 15 shall be deemed to have a source in Norway for the purpose of paragraph (1) of Article 25 of the Norwegian Convention.

Paragraph (1) of Article 25 of the Norwegian Convention provides that, subject to the provisions of the law of Australia, a credit for Norwegian tax paid under the law of Norway and in accordance with the Norwegian Convention will be allowed against Australian tax payable on income from sources in Norway.

Subsection 160AF(1) of the ITAA 1936 provides that where the assessable income of a resident contains foreign sourced income and foreign tax has been paid on that income a foreign tax credit will be allowed. The foreign tax credit allowed against Australian income tax is the lesser of: • the amount of that foreign tax paid, reduced in accordance with any relief available to the taxpayer under the law relating to that tax, or • the amount of Australian tax payable in respect of the foreign income.

The taxpayer's income is derived in respect of employment exercised aboard a ship operated in international traffic by their employer who is a resident of Norway. The income received by the taxpayer is deemed to have a Norwegian source and may be taxed in Norway.

As the taxpayer has not been engaged in foreign service for a continuous period of not less than 91 days, the salary and wages are not exempt from tax under subsection 23AG(1) of the ITAA 1936.

Accordingly, the taxpayer's assessable income will include the salary and wages received from service aboard a Norwegian ship under subsection 6-5(2) of the ITAA 1997. As the taxpayer has paid Norwegian tax on the assessable foreign sourced income, a foreign tax credit will be allowed.

Note: Where the Norwegian tax paid is greater than the Australian tax payable, the taxpayer is only entitled to a credit equal to the value of the Australian tax payable and cannot recover any excess Norwegian tax paid. However, under section 160AFE of the ITAA 1936, any excess foreign tax credit can be carried forward for a maximum of five years for application against any future tax payable on the taxpayer's foreign income of the same class.