Issue
Is the training grant received by an Australian resident taxpayer for traineeship at the European Commission (EC) in Brussels assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The training grant received by the resident taxpayer for traineeship at the EC in Brussels is not assessable under subsection 6-5(2) of the ITAA 1997, as it is exempt under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).
Facts
The taxpayer is a resident of Australia for income tax purposes.
The taxpayer is employed as a full time trainee at the EC in Brussels for a period of 5 months. The taxpayer receives regular income from the EC in Brussels while performing the duties of a trainee.
The training grant is not subject to income tax in Belgium.
Reasons for Decision
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.
The training grant is 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 income consisting of earnings (subsection 23AG (7) of the ITAA 1936).
Subsection 23AG(2) of the ITAA 1936 denies the exemption under subsection 23AG(1) of the ITAA 1936 where the amount of foreign earnings derived in a foreign country is exempt from income tax in the foreign country only because of the conditions listed in paragraphs (a) to (g) of that subsection. One of those conditions relates to income that is made exempt in the foreign country by the operation of a double tax agreement (paragraph 23AG(2)(b) of the ITAA 1936).
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 the ITAA 1997 so that those Acts are read as one. In the event of inconsistent provisions, the Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 (except in some limited situations).
Schedule 13 of the Agreements Act, amended by Schedule 13A to the Agreements Act, contains the double tax agreement between Australia and Belgium (the Belgian Agreement). The Belgian Agreement operates to avoid the double taxation of income received by Australian and Belgian residents.
Article 15(1) of the Belgian Agreement provides that salary and wages and other similar remuneration derived by an individual who is a resident of Australia in respect of an employment will be taxable only in Australia unless the employment is exercised in Belgium. If the employment is exercised in Belgium, the remuneration may be taxed in Belgium.
However, remuneration derived by an Australian resident individual taxpayer in respect of an employment exercised in Belgium will be taxable only in Australia if the following conditions in Article 15(2) of the Belgian Agreement are met: • the taxpayer is present in Belgium for a period or periods not exceeding in the aggregate 183 days in the year of income • the remuneration is paid by, or on behalf of, an employer who is not a Belgian resident, and • the remuneration is not deductible in determining the taxable profits of a permanent establishment or fixed base which the employer has in Belgium.
Article 15(2) of the Belgian Agreement will not apply as the taxpayer does not satisfy all the conditions. Therefore, Belgium continues to enjoy the right to tax the remuneration under Article 15(1) of the Belgian Agreement.
As no exemption from income tax in Belgium is available due to the Belgian Agreement or any of the other conditions under subsection 23AG(2) of the ITAA 1936, subsection 23AG(2) of the ITAA 1936 will not apply.
The training grant received from the EC is exempt from tax under subsection 23AG(1) of the ITAA 1936 as the taxpayer has been engaged in foreign service for a continuous period of not less than 91 days.
Accordingly, the training grant received by the taxpayer from the EC will not form part of their assessable income under subsection 6-5(2) of the ITAA 1997.