Assessability of employment income received by a teacher working in Germany who is a resident of Australia and of Germany

Is employment income received by a teacher who is a resident of Australia and of Germany assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) where the taxpayer exercises the duties of their employment solely in Germany?

No. The employment income received by a teacher who is a resident of Australia and of Germany is not assessable under subsection 6-5(2) of ITAA 1997 where the taxpayer exercises the duties of their employment solely in Germany.

The taxpayer is an Australian citizen.

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer is also subject to unlimited tax liability in Germany and is therefore a resident of Germany for tax purposes.

The taxpayer is a teacher.

The taxpayer left Australia to take up a teaching position in a school in Germany.

The taxpayer has a permanent home in Germany which is available at all times continuously.

The taxpayer also has a permanent home in Australia which is available at all times continuously.

The taxpayer has spent almost all of their time in Germany since departing Australia and has returned to Australia for only a short period of time.

The taxpayer receives salary and wages from their German employer.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident 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 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 Income Tax Assessment Act 1936 (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 salary, wages, commission, bonuses or allowances.

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.

Schedule 9 to the Agreements Act contains the double tax agreement between Australia and Germany (the German Agreement). The German Agreement operates to avoid the double taxation of income received by Australian and German residents.

Article 4(2) of the German Agreement provides rules (the 'tie-breaker' rules) to ensure that a dual resident individual is treated as a resident of only one of the countries for the purposes of the German Agreement. A dual resident individual is an individual who is a resident of both Australia and Germany for income tax purposes.

Article 4(2) of the German Agreement provides that the residency of an individual for the purposes of the German Agreement shall be determined in accordance with the following rules: (a) the individual shall be deemed to be a resident of the country in which he or she has a permanent home available (b) if the individual has a permanent home available in both countries, or in neither country, the individual shall be deemed to be a resident of the country in which he or she has an habitual abode. If the individual has an habitual abode in both countries, or in neither country, the individual is deemed to be a resident of the country with which their personal and economic relations are closest.

The terms 'permanent home', 'habitual abode' and 'personal and economic relations' are not defined in the German Agreement. Article 3(2) of the German Agreement provides that any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the domestic laws of each country.

Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting double tax agreements. At paragraph 104, it says that the OECD Model Tax Convention and Commentary may be considered in interpreting double tax agreements.

The OECD Commentary states that in relation to a 'permanent home': (a) for a home to be permanent, an individual must have arranged and retained it for his or her permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short duration. The dwelling has to be available at all times continuously and not occasionally for the purposes of a stay, which owing to the reasons for it is necessarily of short duration (eg travel for pleasure, business travel, attending a course etc) (b) any form of home may be taken into account, including a house or apartment belonging to or rented by the individual and a rented furnished room.

The taxpayer has a permanent home available in Australia and in Germany.

In relation to a habitual abode, the OECD Commentary provides that all stays in each country, regardless of the purpose for the stays, must be considered in order to assign a preference to a particular country.

As the taxpayer has resided almost exclusively in Germany for the period of dual residency, it is considered that the taxpayer's habitual abode is in Germany and not in Australia.

Accordingly, for the purposes of applying the provisions of the German Agreement, the taxpayer shall be deemed to be a resident of Germany.

Article 19(1) of the German Agreement provides that remuneration which a professor or teacher who is a resident of one of the countries and who visits the other country 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 receives for those activities shall not be taxed in the other country.

However, as the taxpayer is a resident of Germany for the purposes of the German Agreement, and carries out their duties wholly in Germany, Article 19(1) of the German Agreement does not apply to the taxpayer.

Article 14 of the German Agreement deals with the taxation of employment income generally.

Article 14(1) provides that remuneration derived by an individual who is a resident of Germany in respect of an employment shall be taxable only in Germany unless the employment is exercised in Australia. If the employment is so exercised, such remuneration as is derived from that exercise may also be taxed in Australia.

As the taxpayer is a resident of Germany for the purposes of the German Agreement and exercises the duties of their employment solely in Germany, the employment income received from teaching in Germany is taxable only in Germany under Article 14(1) of the German Agreement.

Therefore, the employment income the taxpayer receives from teaching in Germany is not assessable under subsection 6-5(2) of the ITAA 1997. Note: in accordance with Taxation Determination TD 94/58, while the foreign employment income received may also be exempt under section 23AG of the ITAA 1936, it is not an exempt amount for the purposes of the 'exemption with progression' calculation in subsection 23AG(3) of the ITAA 1936 as Australia is not permitted to tax the income under the German Agreement. Subsection 23AG(3) refers to 'an amount that is exempt from tax under this section' and thus only applies in respect of income that qualifies for exemption from tax in Australia because of section 23AG, and not for any other reason.