Assessability of foreign employment income derived by an Australian resident taxpayer in Thailand

Is the income derived by an Australian resident taxpayer, while working in Thailand, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The income derived by an Australian resident taxpayer, while working in Thailand, is not assessable under subsection 6-5(2) of the ITAA 1997 as the income is exempt under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is a resident of Australia for tax purposes.

The taxpayer worked in Thailand for a period more than 90 days, but less than 183 days.

The taxpayer worked continuously during the overseas posting.

The taxpayer was employed by an Australian company in Thailand.

The taxpayer's employer has a permanent establishment (PE) in Thailand.

The Government of Thailand imposes income tax on income earned in Thailand.

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 11-15 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 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 of an employee, and 'foreign earnings' include salary and wages (subsection 23AG(7) of the ITAA 1936).

However subsection 23AG(2) of the ITAA 1936 states that foreign earnings will not be exempt from tax under subsection 23AG(1) of the ITAA 1936 if the amount is exempt from income tax in the foreign country only because of any of the reasons listed.

Paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 provide that no exemption is available under subsection 23AG(1) when an amount of foreign earnings is exempt from tax in the foreign country solely because of a double tax agreement or a law of that country giving effect to such an agreement.

In determining liability for tax on foreign sourced income received by a resident taxpayer, it is therefore 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 ITAA 1997 so that those Acts are read as one.

Schedule 30 to the Agreements Act contains the double tax agreement between Australia and the Kingdom of Thailand (the Thai Agreement). The Thai Agreement operates to avoid the double taxation of income received by Australian and Thai residents.

Article 15(1) of the Thai Agreement provides that remuneration or other income derived by an individual who is a resident of Australia in respect of employment shall be taxable only in Australia unless the services are performed or exercised in Thailand. If the services are performed or exercised in Thailand, the income may be taxed in Thailand.

Article 15(2) of the Thai Agreement provides that, notwithstanding the provisions of paragraph 1, remuneration derived by an Australian resident in respect of employment exercised in Thailand shall be taxable only in Australia if: (a) the recipient is present in Thailand for a period not exceeding the aggregate of 183 days in the tax year of Thailand; (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of Thailand; and (c) the remuneration is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has in Thailand.

The taxpayer's employer has a PE in Thailand. Under Article 7 of the Thai Agreement the PE would be taxed on its profits in Thailand. Accordingly, the remuneration paid to the taxpayer would be deductible in determining the taxable profits of the PE. Therefore the employment income received by the taxpayer may be taxed in Thailand under Article 15(1) of the Thai Agreement.

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 Thailand because of the operation of the double tax 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 does not provide for the imposition of income tax or provides 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.

As the government of Thailand imposes income tax on income earned in Thailand, paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936 will also not apply.

As the taxpayer has been engaged in foreign service for a continuous period of not less than 91 days, and none of the circumstances in subsection 23AG(2) of the ITAA 1936 apply, the employment income received by the taxpayer is exempt under subsection 23AG(1) of the ITAA 1936.

Therefore, the salary and wages received by the taxpayer from employment in Thailand are not assessable under subsection 6-5(2) of the ITAA 1997 as they are exempt under subsection 23AG(1).