Issue
Are the salary and wages received by an Australian resident taxpayer from teaching at a school in Germany for more than two years assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The salary and wages received by an Australian resident taxpayer from teaching at a school in Germany for more than two years 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 an Australian resident for income tax purposes.
The taxpayer, a qualified teacher in Australia, is employed as a teacher at a school in Germany for more than 2 years.
The taxpayer receives salary and wages income from the German resident employer.
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.
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.
Subsection 23AG(7) of the ITAA 1936 defines 'foreign service' as service in a foreign country as the holder of an office or in the capacity of an employee and 'foreign earnings' include income consisting of salary and wages.
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 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 including the protocol(s) to that 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. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).
Schedule 9 to the Agreements Act contains the double tax agreement between Australia and the Republic of Germany (the German Agreement). The German Agreement operates to avoid the double taxation of income received by Australian and German residents.
Article 14(1) of the German Agreement provides that remuneration derived by an individual who is a resident of Australia in respect of employment shall be taxable only in Australia unless the employment is exercised in Germany. If the employment is exercised in Germany, the income derived from that exercise may be taxed in Germany.
Article 14(1) of the German Agreement is also subject to Article 19(1) of the German Agreement.
Article 19(1) of the German Agreement provides that remuneration received by a teacher, who is a resident of Australia, will not be taxable in Germany where the taxpayer visits Germany for a period not exceeding two years for the purpose of carrying out advanced study or research or of teaching at a university, college, school or other educational institution.
As the taxpayer will be present in Germany for the purpose of teaching for a period exceeding two years, Article 19(1) of the German Agreement will not apply.
Paragraph 23AG(2)(b) of the ITAA 1936 will not apply as the salary and wages received by the taxpayer are not exempt from tax in Germany under Article 14(1) of the German Agreement.
As the taxpayer is employed in Germany for a continuous period of not less than 91 days and the salary and wages are not exempt from tax under the German Agreement, the income received from Germany will be exempt from tax under subsection 23AG(1) of the ITAA 1936.
Accordingly, the salary and wages received by the resident taxpayer while employed in Germany as a teacher for more than two years will not be assessable under subsection 6-5(2) of the ITAA 1997.