Assessability of employment income received by dual resident of Australia and Taiwan from working in Taiwan

Is employment income received by a taxpayer, who is a resident of Australia and of Taiwan, from working as an employee in Taiwan assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The employment income received by a taxpayer, who is a resident of Australia and of Taiwan, from working as an employee in Taiwan is not assessable under subsection 6-5(2) of the ITAA 1997.

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

The taxpayer is also a resident of Taiwan for Taiwan tax purposes.

The taxpayer is employed by an Australian resident employer.

The taxpayer carries out the duties of their employment solely in Taiwan.

The taxpayer receives salary and wages in respect of their employment.

The taxpayer has a permanent home available at all times continuously in Australia and in Taiwan.

The taxpayer has spent the majority of their time in Taiwan since taking up their employment and has returned to Australia infrequently.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes all the 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.

However, 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. '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.

In determining liability to Australian tax of foreign sourced income received by a 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 Agreement Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one.

Schedule 41 to the Agreement Act contains the double tax agreement between the Australian Commerce and Industry Office and the Taipei Economic and Cultural Office (the Taipei Agreement). The Taipei Agreement operates to avoid double taxation of income received by Australian and Taiwan residents.

Article 4 of the Taipei Agreement sets out the tiebreaker rules for residency for individuals. The tiebreaker rules ensure that the individual is only treated as a resident of one country for the purposes of working out liability to tax under the Taipei Agreement. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes.

Article 4(3) provides that if an individual is a resident of both Australia and of Taiwan, the status of the person shall be determined in accordance with the following rules: (a) the person shall be deemed to be a resident solely of the territory which a permanent home is available to the person (b) if a permanent home is available to the person in both territories, or in neither of them, the person shall be deemed to be a resident solely of the territory in which the person has an habitual abode (c) if the person has an habitual abode in both territories or in neither of them, the person shall be deemed to be a resident solely of the territory with which the person's economic and personal relations are closer.

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

Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting double tax agreements. Paragraph 104 provides that the OECD Model Tax Convention and commentary will often need to be considered in interpreting double tax agreements.

The OECD Commentary provides 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.

As the taxpayer has residences in both countries which are available at all times continuously for the taxpayer's permanent use, the taxpayer has a permanent home in Australia and Taiwan.

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

As the taxpayer spends most of their time in Taiwan and only travels to Australia infrequently, the taxpayer has a habitual abode in Taiwan but not in Australia.

Accordingly, the taxpayer will be treated solely as a resident of Taiwan for the purposes of applying the provisions of the Taipei Agreement.

Article 15(1) of the Taipei Agreement provides that salary, wages and other similar remuneration derived by a Taiwan resident in respect of an employment will be taxable only in Taiwan unless the employment is exercised in Australia. If the employment is exercised in Australia, the salary and wages may be taxed in Australia.

As the taxpayer exercises their employment solely in Taiwan, the salary and wages received by the taxpayer are taxable only in Taiwan.

Accordingly, the salary and wages received by the taxpayer from working in Taiwan are 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 by the taxpayer 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) as Australia is not permitted to tax the income under the Taipei 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.