Assessability of salary and wages received from employment in New Zealand

Are the salary and wages earned by an Australian resident taxpayer while working in New Zealand for a period of one year, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The salary and wages earned by an Australian resident taxpayer while working in New Zealand for a period of one year are not assessable under subsection 6-5(2) of the ITAA 1997 as the income will be exempt 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 New Zealand by the New Zealand government for a period of one year.

The taxpayer receives salary and wages from the New Zealand government.

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 it is not included in 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' includes 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 because of any of the reasons listed. One of the listed reasons is where the income earned by the resident in the foreign country is made exempt by the operation of a double tax agreement (paragraph 23AG(2)(b) of the ITAA 1936).

In determining liability to Australian tax on foreign sourced income, 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 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 for some limited situations).

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

Paragraph (1) of Article 15 of the New Zealand Agreement provides that salary, wages and other similar remuneration derived by an Australian resident taxpayer will be taxable only in Australia unless the employment is exercised in New Zealand. If the employment is exercised in New Zealand then New Zealand may tax the income.

However under paragraph (2) of Article 15 of the New Zealand Agreement, where the employment is exercised in New Zealand the income will not be taxable in New Zealand 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; and • the remuneration is paid by, or on behalf of, an employer who is not a resident of New Zealand; and • 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 New Zealand Agreement will be, subject to tax in Australia.

Paragraph (1) of Article 15 of the New Zealand Agreement is also subject to Article 20 of the New Zealand Agreement. Paragraph (2) of Article 20 of the New Zealand Agreement provides that remuneration paid by the New Zealand government to an individual in respect of services rendered to the New Zealand government in the discharge of governmental functions will be exempt from Australian tax if the taxpayer is not a resident of Australia for tax purposes.

As the taxpayer is a resident of Australia for tax purposes, paragraph (2) of Article 20 of the New Zealand Agreement will not apply.

The taxpayer will be present in New Zealand for a period in excess of 183 days and the salary and wages are paid by the New Zealand government. Therefore, paragraph (2) of Article 15 of the New Zealand Agreement does not apply.

Under paragraph (1) of Article 15 of the New Zealand Agreement, the salary and wages income earned by the Australian resident taxpayer in New Zealand may be subject to tax in New Zealand. As the taxpayer's income is not exempt from tax in New Zealand, subsection 23AG(2) of the ITAA 1936 does not apply.

Accordingly, the salary and wages earned by the taxpayer in New Zealand will be exempt from tax under subsection 23AG(1) of the ITAA 1936 and are not included in their assessable income under subsection 6-5(2) of the ITAA 1997.