Assessability of employment income received by Australian resident working in the United Kingdom

Are the salary and wages received by an Australian resident taxpayer from employment in the United Kingdom (UK) 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 employment in the UK are assessable under subsection 6-5(2) of the ITAA 1997 and they are not exempt income under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) as the taxpayer has not been engaged in continuous foreign service for more than 90 days.

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

The taxpayer is employed by a UK resident entity.

The taxpayer receives salary and wages from the UK entity.

The taxpayer is present in the UK for less than 91 days.

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

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 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).

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

Schedule 1 to the Agreements Act contains the double tax agreement between Australia and the United Kingdom of Great Britain and Northern Ireland (the UK Agreement). Schedule 1A to the Agreements Act contains the protocol amending the UK Agreement (UK Protocol). The UK Agreement and the UK Protocol operate to avoid the double taxation of income received by Australian and UK residents.

Article 12(1) of the UK 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 the UK. If the employment is exercised in the UK, the remuneration may be taxed in the UK.

Article 12(2) of the UK Agreement provides that the income derived from employment exercised in the UK will be exempt from tax in the UK if: • the taxpayer is present in the UK for a period or periods not exceeding in the aggregate 183 days in the year of income; • the remuneration is paid by or on behalf of an employer who is not a UK resident; and • the remuneration is not deductible in determining the profits of a permanent establishment or a fixed base which the employer has in the UK.

Article 19(2) of the UK Agreement provides that, subject to the provisions of the law of Australia, a credit for any tax paid in the UK will be allowed against Australian tax payable on income from the UK sources.

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

Article 12(2) of the UK Agreement will not apply as the salary and wages are paid by a UK resident employer.

As the taxpayer is a resident of Australia for income tax purposes, Article 12(1) of the UK Agreement applies.

Accordingly, the salary and wages received by the taxpayer from the UK will form part of their assessable income under subsection 6-5(2) of the ITAA 1997. The taxpayer will be entitled to a foreign tax credit for UK tax paid on that income. Note: Where the UK tax paid is greater than the Australian tax payable, the taxpayer is only entitled to a foreign tax credit equal to the value of the Australian tax payable and cannot recover any excess UK 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.