Issue
Is the income derived by an Australian citizen working in the United States (US) for an Australian Government organisation assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The income derived by an Australian citizen working in the US for an Australian Government organisation is not assessable under subsection 6-5(3) of the ITAA 1997 as it is exempt income under paragraph 23(r) of the Income Tax Assessment Act 1936 (ITAA 1936).
Facts
The taxpayer is an Australian citizen.
The taxpayer is a non resident of Australia for taxation purposes.
The taxpayer is a resident of the US for taxation purposes.
The taxpayer works for an Australian Government organisation in the US.
The taxpayer's employment does not involve the discharge of governmental functions within the meaning of Article 19 of Schedule 2 to the International Tax Agreements Act 1953 (the Agreements Act).
The taxpayer receives salary and wages in respect of their employment.
The salary and wages are not exempt from tax in the US.
Reasons for Decision
Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non resident taxpayer includes: (a) ordinary income derived directly or indirectly from all Australian sources during the income year, and (b) other ordinary income that a provision includes as assessable income on some basis other than having an Australian source.
Salary and wages are ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.
Section 6-15 of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income. An amount is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law (subsection 6-20(1) of the ITAA 1997).
Section 11-15 of the ITAA 1997 lists provisions about exempt income. Included in this list is paragraph 23(r) of the ITAA 1936.
Paragraph 23(r) of the ITAA 1936 provides that income derived by a non-resident from sources wholly out of Australia (except income that a provision of this Act includes in a taxpayer's assessable income on some other basis than having an Australian source) is exempt from Australian tax.
In determining liability to Australian tax on income received by a non resident taxpayer, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the Agreements Act.
Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 and the ITAA 1936 so 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 US Protocol amending the US Convention (US Protocol). The US Convention and the US Protocol operate to avoid the double taxation of income received by Australian and US residents.
Article 15(1) of the US Convention provides that salaries, wages and other similar remuneration derived by an individual who is a resident of the US in respect of an employment shall be taxable only in the US unless the employment is exercised in Australia.
The taxpayer is a resident of the US for taxation purposes and for the purposes of the US Convention and exercises the duties of their employment wholly in the US.
Accordingly Article 15(1) of the US Convention applies and the income is taxable only in the US.
Therefore, the income derived by an Australian citizen while working in the US for an Australian Government organisation is exempt from tax under paragraph 23(r) of the ITAA 1936 and is not assessable under subsection 6-5(3) of the ITAA 1997.