Assessability of salary and wages received by a UK citizen working in Australia

Are the salary and wages received from Australia by a taxpayer, who is both a resident of Australia and the United Kingdom (UK) for income tax purposes, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The salary and wages received from Australia by a taxpayer, who is both a resident of Australia and the UK for income tax purposes, are assessable under subsection 6-5(2) of the ITAA 1997.

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

The taxpayer is a citizen of the UK and also a resident of the UK for the purposes of UK tax.

The taxpayer had a pre-arranged work contract before they entered Australia.

The taxpayer receives salary and wages from the Australian employer.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian 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.

In determining liability to tax on Australian sourced income received by the taxpayer, 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 1997 so that those Acts are read as one.

Schedule 1 to the Agreements Act contains the double tax agreement between Australia and the United Kingdom of Great Britain and Northern Ireland (the UK Agreement). Schedule 1A to the Agreements Act contains the Protocol amending the UK Agreement (the UK Protocol). The UK Agreement and the UK Protocol operate to avoid the double taxation of income received by Australian and UK residents.

Article 3 of the UK Agreement provides the rules where an individual is a resident of Australia and the UK for tax purposes (the 'tie breaker tests'). The tiebreaker tests ensure that the individual is only treated as a resident of one country for the purposes of applying the UK Agreement.

Article 3(2) of the UK Agreement provides that where an individual is both an Australian resident and UK resident under domestic tax laws: (a) the person will be treated solely as a UK resident : (i) if the person has a permanent home available to them in the UK and has not a permanent home available in Australia; (ii) if (a)(i) is not applicable, but the person has an habitual abode in the UK and not a habitual abode in Australia; (iii) if neither (a)(i) or (a)(ii) apply, if the country with which the person has the closer personal and economic relations is the UK. (b) the person will be treated solely as an Australian resident : (i) if the person has a permanent home available to them in Australia and has not a permanent home available in the UK; (ii) if (a)(i) is not applicable, but the person has an habitual abode in Australia and not a habitual abode in the UK; (iii) if neither (a)(i) or (a)(ii) apply, if the country with which the person has the closer personal and economic relations is Australia.

The taxpayer does not have a permanent home in either Australia or the UK. The taxpayer also has a habitual home in both the UK and Australia. The taxpayer does not have any immediate family in either country but they do have extended family in the UK. As the taxpayer's personal ties are closer to the UK, the taxpayer will be deemed to be a resident of the UK under Article 3(2)(a) of the UK Agreement.

Article 12(1) of the UK Agreement provides that salary, wages and other similar remuneration derived by a resident of the UK in respect of employment shall be taxable only in the UK unless the employment is exercised in Australia. If the employment is exercised in Australia, the income may be taxed in Australia.

As the taxpayer's employment is exercised in Australia, the taxpayer will be liable for tax in Australia.

Paragraph 66 of Taxation Ruling TR 98/17 states that where the tie breaker tests are used in determining the residence of an individual to a treaty partner country, the terms of the relevant double tax agreement should be referred to in determining the tax liability. TR 98/17 also states that where the tie breaker tests are used in determining the residence of an individual to a treaty partner country, the Australian resident status is not lost for the operation of the ITAA 1997 and the individual continues to be eligible, for example, for the tax-free threshold in respect of the Australian sourced income.

Even though the taxpayer is a resident of the UK under the tie breaker tests, the taxpayer's Australian resident status is not lost for the operation of the ITAA 1997.

Accordingly, the salary and wages received from Australia will form part of the assessable income of the taxpayer under subsection 6-5(2) of the ITAA 1997. Note: Article 19(1) of the UK Agreement specifies that Australian tax paid, by a United Kingdom resident in respect of income or gains sourced in Australia, shall be allowed as a credit against United Kingdom tax payable in respect of that income.