Assessability of employment income received by German citizen studying in Australia

Are the salary and wages received by a taxpayer who is a resident of Australia and of Germany from Australian sources assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The salary and wages received by a taxpayer who is a resident of Australia and of Germany from Australian sources are assessable under subsection 6-5(2) of the ITAA 1997.

The taxpayer is a citizen of Germany and a resident of Germany for tax purposes.

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

The taxpayer is a full-time student at a German University.

The taxpayer came to Australia to complete a practical training requirement for the purposes of their studies.

The taxpayer carried out the practical training requirement at an Australian university.

The taxpayer was present in Australia for over 12 months.

The taxpayer lived in a rented house while in Australia.

The taxpayer previously lived with their family in Germany.

The taxpayer received salary and wages income from the Australian university in return for the work done by the taxpayer as part of the practical training requirement.

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

Section 6-15 of the ITAA 1997 provides that exempt income is not assessable income. Section 11-15 of the ITAA 1997 list certain types of exempt income. Included in this list is section 51-10 of the ITAA 1997 which deals with income derived by full-time students.

Item 2.1A in the table in section 51-10 of the ITAA 1997 provides that if you are a full-time student at a school, college or university, a scholarship, bursary, educational allowance or educational assistance you receive is exempt from income tax, unless any of the exceptions listed in section 51-35 of the ITAA 1997 apply.

Paragraph 51-35(c) of the ITAA 1997 provides that an amount is not exempt if the payment you receive is made on the condition that you will (or will if required) become, or continue to be, an employee of the payer.

While the taxpayer was completing a training component which is related to their education, the taxpayer's position at the Australian university was essentially that of an employee. Therefore, the income is not exempt under section 51-10 of the ITAA 1997 because of section 51-35 of the ITAA 1997.

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 Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and ITAA 1997 so that those Acts are read as one.

Schedule 9 to the Agreements Act contains the double tax agreement between Australia and the Federal Republic of Germany (the German Agreement). The German Agreement operates to avoid the double taxation of income received by Australian and German residents.

Article 4 of the German Agreement provides tests of residency which are used where the individual would otherwise be a resident of two countries ('tie breaker tests'). The tiebreaker tests ensure that the individual is only treated as a resident of one country for the purposes of working out liability to tax on their income.

Article 4(2) of the German Agreement provides that a person's residency status for the purpose of applying the German Agreement shall be determined as follows: (a) the person shall be deemed to be a resident of the country in which he/she has a permanent home available; (b) if the person has a permanent home in both countries, or does not have a permanent home in either, the person will be deemed to be a resident of the country in which he/she has a habitual abode; (c) the person has a habitual abode in both countries, or does not have a habitual abode in either, the person will be deemed to be a resident of the country with which his/her personal and economic relations are closest.

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

Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting double tax agreements. At paragraph 104, it says 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 rental properties.

The taxpayer lived in a rented house for the entire duration of their stay in Australia. This house was available to the taxpayer at all times continuously.

Accordingly, the taxpayer had a permanent home in Australia. The taxpayer also had a permanent home available in Germany being the home where they resided with their family.

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

Further, the comparison must be made over a sufficient length of time for it to be possible to determine whether the residence in each country is habitual and to also determine the intervals at which the stays take place.

The taxpayer resided in Australia for the entire duration of their stay and did not return to Germany or another country during that time.

Therefore, the taxpayer's habitual abode was in Australia and not in Germany.

Therefore, for the purposes of applying the German Agreement, the taxpayer is solely a resident of Australia.

Article 19(2) of the German Agreement provides that where a student who is a resident of Australia and who is temporarily present in Germany solely for the purposes of education receives payments from sources outside Germany for the purpose of his maintenance or education shall not be taxed in Germany.

As the taxpayer is treated as a resident of Australia for the purposes of the German Agreement, this aspect of Article 19(2) of the German Agreement does not apply as the taxpayer is present in Australia.

Article 19(2) of the German Agreement alternatively provides that where a student, who was a resident of Germany immediately before visiting Australia and who is temporarily present in Australia solely for the purpose of education, receives payments from sources outside Australia for the purpose of their maintenance or education shall not be taxed in Australia.

The taxpayer was a resident of Germany immediately before visiting Australia and was temporarily present in Australia solely for the purposes of their education. However, the payments received by the taxpayer were from sources within Australia and were paid in return for the services provided to the Australian university, rather than for the purposes of their maintenance or education.

Therefore, Article 19 of the German Agreement does not apply to the taxpayer.

Article 14(1) of the German Agreement provides that employment income derived by a resident of Australia shall be taxable only in Australia unless the employment is exercised in Germany. If the employment is exercised in Germany, the income may also be taxed in Germany.

As the taxpayer is a resident of Australia for the purposes of the German Agreement and worked wholly in Australia, the employment income received from the Australian University is taxable only in Australia.

Accordingly, the salary and wages received by the taxpayer from the Australian university is assessable under subsection 6-5(2) of the ITAA 1997.