Assessability of salary and wages derived by an Australian resident in Canada

Are salary and wages earned by a resident taxpayer employed by an Australian employer, seconded to work at a University in Canada, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The salary and wages earned by a resident taxpayer employed by an Australian employer, seconded to work at a University in Canada, is not assessable under subsection 6-5(2) of the ITAA 1997 as the income will be exempt under section 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer receives salary and wage income from their Australian employer who does not maintain a permanent establishment or fixed base in Canada.

The number of days spent by the taxpayer in Canada during the 2004 income year was 192 days. The Canadian income year is from 1 January to December 31.

The taxpayer continues to be paid by their Australian resident employer while working in Canada and will continue to contribute to their employer sponsored superannuation fund.

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 11-5 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 (subsection 23AG(7) of the ITAA 1936). 'Foreign earnings' includes income consisting of salary or 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 reasons 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.

In determining liability to Australian tax on foreign sourced income, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreement 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. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 3 to the Agreements Act contains the double tax agreement between Australia and Canada (the Canadian Convention). Schedule 3A to the Agreements Act contains the Canadian Protocol amending the Canadian Convention (Canadian Protocol). The Canadian Convention and the Canadian Protocol operate to avoid the double taxation of income received by Australian and Canadian residents.

Paragraph (1) of Article 15 of the Canadian Convention provides that the salary and wages income of an Australian resident will be taxable only in Australia unless the employment is exercised in Canada. If the employment is exercised in Canada, then Canada may also tax the income.

However, if the taxpayer is present in Canada for a period or periods of 183 days or less during the Canadian year of income, then the employment income will only be taxable in Australia (paragraph (2) of Article 15 of the Canadian Convention).

Canada's year of income runs from 1 January to 31 December. As the taxpayer will be present in Canada for 192 days a period in excess of 183 days, paragraph (2) of Article 15 of the Canadian Convention does not apply.

Under paragraph (1) of Article 15 of the Canadian Convention, although the taxpayer's income is subject to tax in Australia it may also be subject to tax in Canada. Therefore the taxpayer's income is not exempt from tax in Canada and accordingly subsection 23AG(2) of the ITAA 1936 does not apply.

As subsection 23AG(2) of the ITAA 1936 does not apply, the taxpayer's income earned in Canada will be exempt from tax under subsection 23AG(1) of the ITAA 1936 and is not included in their assessable income under subsection 6-5(2) of the ITAA 1997.