Issue
Is the income received by an Australian resident taxpayer as an official of a body established by an international organisation for the provision of independent professional services carried out in the United States (US) assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The income received by the Australian resident taxpayer as an official of a body established by the international organisation for the provision of personal services in an independent capacity carried out in the US is not assessable under subsection 6-5(2) of the ITAA 1997. The income is exempt from tax under the International Organisations (Privileges & Immunities) Act 1963 (IO(P&I)A) and the regulations made under that Act that relate to the international organisation.
Facts
The taxpayer is a citizen of and a resident of Australia for tax purposes.
The taxpayer has been appointed to an office of a body established by an international organisation. That office is not a high office.
The international organisation is listed in the Regulations of the IO(P&I)A.
The taxpayer provides professional services to the body in return for remuneration.
The taxpayer is not an employee.
The taxpayer carries out their activities in the US.
The taxpayer is not a resident for tax purposes of the US.
Reasons for Decision
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident will include ordinary income derived from all sources, whether in or out of Australia, during the income year.
Income from professional services is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.
However, subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.
Section 6-20 of the ITAA 1997 provides that an amount of ordinary income is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law.
The IO(P&I)A is a Commonwealth law under which an international organisation, and persons engaged by it, may be accorded certain privileges and immunities including an exemption from tax.
Subsection 5(1) of the IO(P&I)A provides that the regulations may declare an organisation to be an organisation to which this Act applies.
Paragraph 3(1)(b) of the IO(P&I)A defines the term an 'international organisation to which this Act applies' to mean an organisation that is declared by the regulations to be an international organisation to which this Act applies, and includes a body established by such an organisation.
Subparagraph 6(1)(d)(i) of the IO(P&I)A provides that the regulations may confer all or any of the privileges and immunities set out in Part I of the Fourth Schedule upon a person who holds an office in an international organisation to which this Act applies, not being an office prescribed by the relevant regulations as a high office.
The taxpayer is an official of a body established by an international organisation. Regulations relating to the international organisation have been made under the IO(P&I)A. Therefore, the body established by the international organisation is an international organisation to which the IO(P&I)A applies.
The regulations provide that a person who holds an office in the international organisation, other than a high office, has the privileges and immunities specified in Part I of the Fourth Schedule to the IO(P&I)A.
The taxpayer holds an office in the international organisation. That office is not a high office.
Paragraph 2 of Part I of the Fourth Schedule to the IO(P&I)A provides an exemption from taxation on salary and emoluments received from the international organisation.
In determining liability to Australian tax on foreign sourced income received by an Australian resident, 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 Income Tax Assessment Act 1936 and the ITAA 1997 so that those Acts are read as one.
Schedule 2 to the Agreements Act contains the double tax convention between Australia and the US (the US Convention). Schedule 2A to the Agreements Act contains the protocol amending the US Convention (the US Protocol). The US Convention and the US Protocol operate to avoid double taxation of income received by Australian and US residents.
Article 14 of the US Convention provides that income derived by a resident of Australia in respect of personal services in an independent capacity shall be taxable only in Australia unless the services are provided in the US and: (a) the individual is present in the US for a period or periods aggregating more than 183 days in the taxable year of income of the US, or (b) the individual has a fixed base regularly available in the US to perform those activities, in which case so much of the income as is attributable to that fixed base may be taxed in the US.
The income derived by the taxpayer is in respect of personal services in an independent capacity.
As the taxpayer is a resident of Australia for income tax purposes, Australia may tax the income received by the taxpayer. Where the taxpayer meets the requirements of paragraphs (a) or (b) of Article 14 of the US Convention, the US may also tax the income.
Paragraph 29 of Taxation Ruling TR 2001/13 states that double tax agreements are generally seen as intended to operate in a 'permissive' manner in relation to the domestic laws of the contracting countries, not in an 'empowering' fashion so as to impose, through the words of the double tax agreements, a further liability to tax.
Paragraph 40 of TR 2001/13 confirms that as well as not dictating that the allocated taxing rights must be exercised by a country, double tax agreements also do not generally dictate how they are to be exercised. Whether and how those rights are exercised is generally left to the respective ordinary domestic laws. It is therefore possible, and unexceptional, to have a situation where there is a right under a treaty to impose a form of taxation, but where the legislature has not decided to impose (or has positively decided not to impose) such a tax liability under domestic law.
As the taxpayer is the holder of an office of an international organisation to which the IO(P&I)A applies, the income received by the taxpayer from working for the body in the US is exempt from Australian tax in accordance with subparagraph 6(1)(d)(i) the IO(P&I)A and the relevant regulations made under that Act that relate to the organisation.
Accordingly, as the income is exempt income under section 6-20 of the ITAA 1997, it is not assessable under subsection 6-5(2) of the ITAA 1997.