Issue
Are the salary and wages received by a resident taxpayer from working in Russia assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) where the taxpayer works under a cyclical roster and spends their time off in Australia?
Decision
No. The salary and wages received by a resident taxpayer from working in Russia are not assessable under subsection 6-5(2) of the ITAA 1997 as they are exempt under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).
Facts
The taxpayer is a resident of Australia for income tax purposes.
The taxpayer is employed to work in Russia as an employee for a period of at least 18 months.
The taxpayer works under a cyclical roster of 5 weeks on and 1 week off. The taxpayer is required to work long hours when on site. The taxpayer spends their time off in Australia.
The taxpayer receives salary and wages from their employment.
The Russian tax law provides for the imposition of income tax on employment income and does not generally exempt such income from tax.
Reason for Decision
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 of an employee and 'foreign earnings' includes salary and wages income (subsection 23AG(7) of the ITAA 1936).
Subsection 23AG(6) of the ITAA 1936 provides that a period during which a person is engaged in foreign service includes any period during which the person is absent on recreation leave in accordance with the terms and conditions of the foreign service.
Paragraph 7 of Taxation Ruling IT 2441 states that where an Australian resident taxpayer is employed in a project in a foreign country, leave taken in circumstances similar to those mentioned in Taxation Ruling IT 2015 would be treated as recreation leave forming part of a period of foreign service under subsection 23AG(6) of the ITAA 1936.
Taxation Ruling IT 2015 refers to the application of paragraph 23AF(3)(d) of the ITAA 1936 where employees are engaged in uninterrupted cycles of 5 weeks on site on an onshore oil drilling project and 5 weeks leave in Australia. IT 2015 states that the employees will be taken to have been engaged on an approved project for a period of qualifying service equal to the total number of days they are engaged under the 5 weekly cyclical arrangements.
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 income 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 (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936).
Therefore, in determining liability for 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 Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one.
Schedule 46 to the Agreements Act contains the double tax agreement between Australia and the Russian Federation (the Russian Agreement) and the Protocol to the Russian Agreement. The Russian Agreement and the Protocol to the Russian Agreement operate to avoid the double taxation of income received by Australian and Russian residents.
Article 15(1) of the Russian Agreement provides that salary and wages derived by an individual who is a resident of Australia in respect of an employment shall be taxable only in Australia unless the employment is exercised in Russia. If the employment is exercised in Russia, the salary and wages may be taxed in Russia.
Article 15(2) of the Russian Agreement provides that the income derived by an Australian resident individual in respect of employment exercised in Russia shall be taxable only in Australia if: • the taxpayer is present in Russia for a period or periods not exceeding in the aggregate 183 days in any 12 month period commencing or ending in the Russian year of income • the remuneration is paid by, or on behalf of, an employer who is not a Russian resident; and • the remuneration is not borne by a permanent establishment or a fixed base which the employer has in Russia.
As the taxpayer will be present in Russia for a period exceeding in the aggregate 183 days in a 12 month period, Article 15(2) will not apply. The salary and wages received by the taxpayer may be taxed in Russia under Article 15(1) of the Russian Agreement.
Therefore, paragraphs 23AG(2)(a) and 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 Russia because of the Russian Agreement.
Paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936 list further exceptions that apply where the income is exempt in the foreign country because the law of the foreign country either does not provide for the imposition of income tax or provides for a general exemption from income tax on one or more of the following categories of income: (i) income derived in the capacity of an employee (ii) income from personal services, or (iii) similar income.
Paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936 will not apply as the salary and wages received by the taxpayer are not exempt from tax in Russia.
Paragraphs 23AG(2)(e), 23AG(2)(f) and 23AG(2)(g) of the ITAA 1936 list the final exceptions which apply where the income is exempt in the foreign country because of a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations.
Paragraphs 23AG(2)(e), 23AG(2)(f) and 23AG(2)(g) of the ITAA 1936 do not apply to the salary and wages received by the taxpayer.
As the taxpayer is engaged in foreign service for a continuous period of not less than 91 days and the salary and wages are not exempt from tax in Russia only because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936, the income received from Russia will be exempt from tax under subsection 23AG(1) of the ITAA 1936.
Therefore, the salary and wages received by the taxpayer from working in Russia will not be assessable under subsection 6-5(2) of the ITAA 1997. Note: the Russian Agreement entered into force with effect to income derived in the 2005 and subsequent years of income. For income derived in the 2004 and prior income years, refer to ATO ID 2004/341.