Assessability of salary and wages received by an Australian resident from employment in Vietnam

Are the salary and wages received by the taxpayer from employment in Vietnam assessable under subsection 6-5(2) of the Income Tax Assessment Act (ITAA 1997) when they are exempt from tax in Vietnam because of a specific exemption?

No. The salary and wages received by the Australian resident taxpayer from employment in Vietnam 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).

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

The taxpayer is employed in Vietnam as a foreign aid worker by a Vietnamese entity for a continuous period exceeding 183 days in the Vietnamese year of income.

The salary and wages received by the taxpayer are exempt from income tax in Vietnam because of a specific exemption in the Vietnamese income tax law that applies to foreign aid workers.

Employment income is generally subject to income tax in Vietnam.

The Vietnamese entity is not an international organisation that is granted privileges or immunities in relation to salary and wages under either an international agreement to which Australia is a party or a Vietnamese law.

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.

In determining the liability to Australian tax on foreign sourced income received by a resident taxpayer 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 38 to the Agreements Act contains the double tax agreement between Australia and the Socialist Republic of Vietnam (the Vietnamese Agreement). Schedule 38A to the Agreements Act contains the exchange of notes amending the Vietnamese Agreement (Exchange of Notes). The Vietnamese Agreement and the Exchange of Notes operate to avoid the double taxation of income received by Australian and Vietnamese residents.

Article 15(1) of the Vietnamese 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 Vietnam. If the employment is exercised in Vietnam, the salary and wages may be taxed in Vietnam.

Temporary visits are dealt with in Article 15(2) of the Vietnamese Agreement which provides that remuneration derived by a resident of Australia in respect of employment exercised in Vietnam shall be taxable only in Australia if: • the taxpayer is present in Vietnam for a period or periods not exceeding in the aggregate 183 days in the Vietnamese year of income; • the remuneration is paid by, or on behalf of, an employer who is not a resident of Vietnam; • the remuneration is not deductible in determining the taxable profits of a permanent establishment or fixed base that the employer has in Vietnam; and • the remuneration is, or upon the application of the Article, will be subject to tax in Australia.

As the taxpayer will be present in Vietnam for a period in excess of 183 days in the Vietnamese year of income and is employed by a Vietnamese entity, Article 15(2) of the Vietnamese Agreement will not apply. Therefore, the salary and wages received by the taxpayer may also be taxed in Vietnam under Article 15(1) of the Vietnamese Agreement.

However, the taxpayer's income is exempt from tax in Vietnam because of a specific provision in the Vietnamese income tax law that applies to the taxpayer's circumstances. The exemption provided in the Vietnamese income tax law does not fit within any of the other categories that exclude exemption under subsection 23AG(2) of the ITAA 1936.

As the taxpayer has been working in Vietnam for a continuous period of not less than 91 days, the salary and wages will be exempt from tax under subsection 23AG(1) of the ITAA 1936 and is not included in assessable income under subsection 6-5(2) of the ITAA 1997. The income will also be exempt from tax in Vietnam.