Issue
Are the salary and wages income received by an Australian resident taxpayer from employment in South Africa assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The salary and wages income received by an Australian resident taxpayer from employment in South Africa are not assessable under subsection 6-5(2) of the ITAA 1997 as they are exempt from tax under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).
Facts
The taxpayer is a resident of Australia for income tax purposes.
The taxpayer is employed in South Africa on a project arranged by an entity for a period of 3 years.
The taxpayer pays South African tax on the salary and wages received from the entity.
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.
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' include income consisting of salary and 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 exclusions listed therein.
Under paragraph 23AG(2)(b) of the ITAA 1936, where income is exempt from income tax 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.
Therefore, 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. 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 an employment will be taxable only in Australia unless the employment is exercised in South Africa. If the employment is exercised in South Africa, the remuneration may be taxed in Australia.
Paragraph 23AG(2)(b) of the ITAA 1936 will not apply as the salary and wages income received by the taxpayer are not exempt from tax in South Africa.
As the taxpayer is engaged in foreign service for a continuous period not less than 91 days and the salary and wages are not exempt from tax in South Africa under the South African Agreement, the income received from South Africa will be exempt from tax under subsection 23AG(1) of the ITAA 1936.
Accordingly, the salary and wages received by the resident taxpayer from employment in South Africa will not be assessable under subsection 6-5(2) of the ITAA 1997.