Assessability of salary and wages income derived by Australian teacher working in Germany where the initial employment contract for less than two years later extended

Are the salary and wages received by an Australian resident taxpayer from teaching in a school in Germany assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) where the taxpayer initially contracts to teach at a school for less than two years and later extends the period of contract to more than two years?

The salary and wages received before the change in intention by the taxpayer to remain in Germany for a period exceeding two years are assessable under subsection 6-5(2) of the ITAA 1997 as Article 19(1) of Schedule 9 to the International Tax Agreements Act 1953 (the Agreements Act) applies.

However, the salary and wages received after the change in intention by the taxpayer to extend the period of contract to teach 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).

The taxpayer is an Australian resident for income tax purposes.

The taxpayer, a qualified teacher in Australia, is employed as a teacher in a school in Germany under an employment contract for less than 2 years.

Prior to the expiry of the employment contract, the taxpayer agrees to extend the contract for a further term.

The taxpayer's total period of employment in Germany exceeds two years.

The taxpayer receives salary and wages from the German resident employer.

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 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. Taxation Determination TD 2001/22 provides guidance as to the application of Article 19(1) of the German Agreement on salary paid to a German resident employed as an assistant teacher in an Australian school. Notwithstanding the factual differences, the guidelines in TD 2001/22 are considered to be relevant to this issue.

Paragraph 5 of TD 2001/22 states that if, during the period of teaching in Australia or after it has finished, the taxpayer formed an intention to remain in Australia for a period exceeding two years, the teaching income derived before the change in intention will remain exempt from tax in Australia through the operation of Article 19(1) of the German Agreement. However, the exemption will not apply to any teaching income earned after the change in intention.

The salary and wages received before the change in intention by the taxpayer to remain in Germany for a period exceeding two years are therefore exempt from tax in Germany under Article 19(1) of the German Agreement. As the salary and wages are exempt from tax in Germany under Article 19(1) of the German Agreement, paragraph 23AG(2)(b) of the ITAA 1936 will operate to deny the exemption under subsection 23AG(1) of the ITAA 1936 from applying.

The salary and wages received by the taxpayer after the change in intention to remain in Germany for a period exceeding two years may be taxed in Germany as Article 14(1) of the German Agreement will apply. As the taxpayer is employed in Germany for a continuous period of not less than 91 days and the salary and wages received after the change in intention to remain in Germany for a period exceeding two years are not exempt from tax in Germany, they will be exempt from tax under subsection 23AG(1) of the ITAA 1936.

Accordingly, the salary and wages received before the change in intention by the taxpayer to remain in Germany for a period exceeding two years are assessable under subsection 6-5(2) of the ITAA 1997 and the salary and wages received after the change in intention to remain in Germany for a period exceeding two years are not assessable under subsection 6-5(2) of the ITAA 1997.