Assessability of salary and wages received by an Australian resident working in Japan

Are the salary and wages received by an Australian resident taxpayer from employment in Japan assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The salary and wages received by an Australian resident taxpayer from employment in Japan are assessable under subsection 6-5(2) of the ITAA 1997 as they are not exempt under subsection 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

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

The taxpayer worked in Japan for a continuous period of more than 90 days but less than 183 days.

The taxpayer's Australian employer paid their salary while they were working in Japan.

The taxpayer's Australian employer is not a resident of Japan, nor does it have a fixed base or permanent establishment in Japan.

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. '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.

Therefore, 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 6 to the Agreements Act contains the double tax agreement between Australia and Japan and the Protocol to that agreement (the Japanese Agreement). The Japanese Agreement operates to avoid double taxation of income received by Australian and Japanese residents.

Article 11(1) of the Japanese 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 Japan. If the employment is exercised in Japan, the remuneration may be taxed in Japan.

However, Article 11(2) of the Japanese Agreement provides that salary and wages derived by an individual who is a resident of Australia in respect of employment exercised in Japan shall be exempt from tax in Japan if: (a) the recipient is present in Japan for a period or periods not exceeding in the aggregate 183 days in the year of income or the taxable year as the case may be in Japan (b) the remuneration is paid by or on behalf of an employer who is not a resident of Japan, and (c) the remuneration is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has in Japan.

As all of the conditions of Article 11(2) are satisfied, the salary and wages are exempt from tax in Japan.

Paragraph 23AG(2)(b) of the ITAA 1936 will apply as the salary and wages income received by the taxpayer are exempt from tax in Japan because of the Japanese Agreement. Therefore, the salary and wages are not exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936.

Accordingly, the salary and wages received by the resident taxpayer from employment in Japan will be assessable under subsection 6-5(2) of the ITAA 1997.