Assessability of employment income derived by an Australian resident working in Malaysia

Is the income derived by an Australian resident taxpayer, while working for a British company in Malaysia, assessable in Australia 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 Malaysia, is not assessable under subsection 6-5(2) of the ITAA 1997 as it 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 was engaged in continuous foreign service for a period of more than 90 days

The taxpayer worked in Malaysia for a period of less than 183 days.

The taxpayer had an employment contract with a British company and performed those services in Malaysia.

The taxpayer's remuneration was paid by a Malaysian based subsidiary of that British company, and as a consequence the taxpayer paid income tax in Malaysia.

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 it is not included in 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 is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the taxpayer from the foreign service will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes income consisting of salary and wages (subsection 23AG(7) of the ITAA 1936).

However subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country only because of any of the reasons listed. One of the listed reasons is where the income earned by the resident in the foreign country is made exempt by the operation of a double tax agreement (paragraph 23AG(2)(b) of the ITAA 1936).

Therefore, 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 1936 and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Schedule 16 to the Agreements Act contains the double tax agreement between Australia and Malaysia (the Malaysian Agreement). The Malaysian Agreement operates to avoid the double taxation of income received by Australian and Malaysian residents.

Article 14(1) of the Malaysian Agreement provides that subject to Articles 15, 18, 19 and 20, remuneration (other than a pension) derived by an individual who is a resident of Australia in respect of personal (including professional) services may be taxed only in Australia unless the services are performed in Malaysia. If the services are so performed, such remuneration as is derived in respect thereof may be taxed in Malaysia.

Article 14(2) of the Malaysian Agreement provides that notwithstanding the provisions of paragraph 1, remuneration (other than a pension) derived by an individual who is a resident of Australia in respect of personal (including professional) services performed in Malaysia shall be taxable only in Australia if: (a) the recipient is present in Malaysia for a period or periods not exceeding in the aggregate 183 days in the basis year or year of income, as the case may be, of Malaysia; (b) the remuneration is paid by, or on behalf of, a person who is not a resident of Malaysia; and (c) the remuneration is not deductible in determining taxable profits of a permanent establishment (PE) which that person has in Malaysia.

The taxpayer worked in Malaysia for a period not exceeding 183 days, and while their contract was with a British based company, the taxpayer's remuneration was paid by a Malaysian resident subsidiary of that company. As a consequence, the remuneration received by the taxpayer may be taxed in Malaysia under Article 14(1) of the Malaysian Agreement.

Therefore, as the salary and wages received by the taxpayer may be taxed in Malaysia under Article 14(1) of the Malaysian Agreement, paragraph 23AG (2)(b) of the ITAA 1936 does not apply.

As the taxpayer had 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 the taxpayer earned in Malaysia is exempt under subsection 23AG(1) of the ITAA 1936.

Therefore, the salary and wages received by the taxpayer from employment in Malaysia is not assessable under subsection 6-5(2) of the ITAA 1997 as it is exempt under subsection 23AG(1) of the ITAA 1936.