Assessability of salary and wages received by an Australian resident from South Africa which is exempt from tax in South Africa

Are the salary and wages received by an Australian resident taxpayer from short term projects in South Africa, which is exempt from tax in South Africa, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The salary and wages received by an Australian resident taxpayer from short term projects in South Africa, which is exempt from tax in South Africa, 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 in South Africa by an entity for a period not less than 91 days on various short term projects.

The salary and wages earned in the capacity as an employee are generally exempt from tax in South Africa because of the short term nature of the projects.

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 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 and wages (subsection 23AG(7) of the ITAA 1936).

However, paragraph 23AG(2)(c) of the ITAA 1936 provides that foreign earnings will not be exempt from tax under subsection 23AG(1) of the ITAA 1936 if those foreign earnings derived in the capacity as an employee are generally exempt from income tax in the foreign country because of a provision of law of the foreign country.

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. In the event of inconsistent provisions, the Agreements Act overrides the ITAA 1936 and ITAA 1997 (except in some limited situations).

Schedule 42 to the Agreements Act contains the double tax agreement between Australia and the Republic of South Africa (the South African Agreement). The South African Agreement operates to avoid double taxation of income received by Australian and South African residents.

Paragraph (1) of Article 15 of the South African Agreement provides that salary and wages derived by an individual who is a resident of Australia in respect of employment exercised in South Africa may be taxable in Australia.

Paragraph 23AG(2)(c) of the ITAA 1936 will apply as the salary and wages received by the taxpayer from the short term projects in South Africa in the capacity as an employee are generally exempt from income tax in South Africa because of a provision of law of South Africa. Therefore, the salary and wages will not be exempt from tax under subsection 23AG(1) of the ITAA 1936.

As the taxpayer is a resident of Australia for income tax purposes, paragraph (1) of Article 15 of the South African Agreement applies and the salary and wages received from South Africa will form part of the assessable income of the taxpayer under subsection 6-5(2) of the ITAA 1997.