Assessability of employment income received by resident working in Indian territorial waters

Are the salary and wages earned by a resident taxpayer, while working on a marine seismic field vessel in Indian territorial waters, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The salary and wages earned by a resident taxpayer, while working on a marine seismic field vessel in Indian territorial waters, are not assessable under subsection 6-5(2) of the ITAA 1997 as they are exempt from Australian income tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is an Australian resident for income tax purposes.

The taxpayer's employer is not a resident of Australia or India.

The taxpayer performs the duties of their employment on a marine seismic field vessel.

The vessel is operated by the taxpayer's employer in various locations including Indian territorial waters.

The taxpayer's employer has a permanent establishment (PE) in India as a result of its operation of the vessel in Indian territorial waters.

The remuneration paid to the taxpayer is deductible in determining taxable profits of the employer's PE in India.

The taxpayer is employed under an arrangement which requires the taxpayer to work continuous cycles of six weeks on the vessel and six weeks off. The taxpayer spends their time off in Australia.

The taxpayer worked in Indian territorial waters for more than 90 days but less than 183 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 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 is engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that service will be exempt. 'Foreign service' includes service in a foreign country in the capacity as an employee (subsection 23AG(7) of the ITAA 1936). 'Foreign earnings' includes salary and wages income (subsection 23AG(7) of the ITAA 1936).

Paragraph 23AG(6)(a) of the ITAA 1936 provides that a period during which a person is engaged in foreign service includes any period during which the person, in accordance with the terms and conditions of that service, is absent on recreation leave, other than: (i) leave wholly or partly attributable to a period of service or employment other than that foreign service (ii) long service leave, furlough, extended leave, or leave of a similar kind, or (iii) leave without pay or on reduced pay.

Taxation Ruling IT 2441 states that where a resident is employed in a project in a foreign country, leave taken in circumstances similar to those mentioned in Taxation Ruling IT 2015 is treated as recreation leave that forms part of a period of foreign service under subsection 23AG(6) of the ITAA 1936.

Taxation Ruling IT 2015 refers to employees who are engaged in uninterrupted cycles of five weeks on site on an onshore oil drilling project and five weeks leave in Australia, without any entitlement for additional annual leave, and who are not required to attend the company offices in Australia.

As the taxpayer's circumstances are similar to that described in IT 2015, the periods of time off spent by the taxpayer in Australia form part of their foreign service period.

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 tax in the foreign country only because of any of the reasons listed therein.

One of the reasons listed is where the income is exempt in the foreign country because of a double tax agreement (paragraph 23AG(2)(b) of the ITAA 1936).

Therefore, 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.

Schedule 35 to the Agreements Act contains the double tax agreement between Australia and India (the Indian Agreement).

Article 15(1) of the Indian Agreement provides that remuneration derived by an Australian resident from employment exercised in India may be taxed by Australia and India.

However, Article 15(2) of the Indian Agreement provides that remuneration derived from employment exercised in India will be exempt from tax in India if: (a) the taxpayer is present in India for a period or periods not exceeding in the aggregate 183 days in the Indian year of income (b) the remuneration is paid by or on behalf of an employer who is not an Indian resident, and (c) the remuneration is not deductible in determining the profits of a PE which the employer has in India.

Article 15(2)(c) of the Indian Agreement is not satisfied as the remuneration is deductible in determining taxable profits of the employer's PE in India. Therefore the employment income received by the taxpayer may be taxed in India under Article 15(1) of the Indian Agreement.

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 India. None of the other reasons in subsection 23AG(2) of the ITAA 1936 apply to the taxpayer's situation.

As the taxpayer has been engaged in foreign service for a continuous period of not less than 91 days and none of the circumstances in subsection 23AG(2) of the ITAA 1936 apply, the employment income received by the taxpayer is exempt under subsection 23AG(1) of the ITAA 1936.

Therefore, the salary and wages received by the taxpayer from employment in India are not assessable under subsection 6-5(2) of the ITAA 1997.