Assessability of employment income received by Australian resident working in New Zealand

Are the salary and wages received by an Australian resident taxpayer from employment in New Zealand 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 New Zealand 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 company that is a not a resident of Australia or New Zealand.

The employer does not have a permanent establishment or fixed base in New Zealand.

The taxpayer is present in New Zealand for less than 91 days in the New Zealand tax year.

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 4 to the Agreements Act contains the double tax agreement between Australia and New Zealand (the NZ Agreement). The NZ Agreement operates to avoid the double taxation of income received by Australian and New Zealand residents.

Article 15(1) of the NZ Agreement provides that salary and wages and other similar remuneration 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 New Zealand. If the employment is exercised in New Zealand, the remuneration may be taxed in New Zealand.

However, Article 15(2) of the NZ Agreement provides that remuneration derived by an Australian resident individual taxpayer in respect of an employment exercised in New Zealand will be taxable only in Australia if: • the taxpayer is present in New Zealand for a period or periods not exceeding in the aggregate 183 days in any 12 month period commencing or ending in the year of income; • the remuneration is paid by, or on behalf of, an employer who is not a resident of New Zealand; • the remuneration is not deductible in determining the taxable profits of a permanent establishment or fixed base which the employer has in New Zealand; and • the remuneration is, or upon application of Article 15 of the NZ Agreement will be, subject to tax in Australia.

Article 15(2) of the NZ Agreement will apply as the taxpayer is present in New Zealand for a period less than 183 days and the remuneration is paid by an employer who is not a New Zealand resident with any permanent establishment or fixed base in New Zealand and the remuneration is subject to tax in Australia.

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

Accordingly, the salary and wages earned by the taxpayer while present in New Zealand will form part of their assessable income under subsection 6-5(2) of the ITAA 1997.