Assessability of employment income received by an Australian resident working in the United Kingdom as a medical practitioner

Are salary and wages received by an Australian resident taxpayer, while employed in the United Kingdom (UK) as a medical practitioner in a hospital contracted through a UK resident employer, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The salary and wages received by the taxpayer, while employed in the UK as a medical practitioner in a hospital contracted through a UK resident employer, are assessable under subsection 6-5(2) ITAA 1997, as they are not exempt from tax under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is a citizen of Australia and the UK.

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

The taxpayer is employed as a medical practitioner in a UK hospital contracted through a UK resident employer, for a period of four months.

The taxpayer will receive salary and wages income.

The taxpayer will be taking two weeks of unpaid leave from the UK employer in order to undertake volunteer work in another foreign country.

The taxpayer's period of volunteer work will be undertaken in the middle of their four month period of UK foreign service.

The taxpayer's foreign service will be broken into two periods, neither of which is for a continuous period of 91 days or more.

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 earned from employment 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 taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived from that 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, wages, bonuses and allowances (subsection 23AG(7) of the ITAA 1936).

Subsection 23AG(6) of the ITAA 1936 extends the meaning of the term 'engaged in foreign services' and identifies certain temporary absences from a period of foreign service which, when related to the foreign service will not be taken to constitute a break in a period of foreign service. These absences are recreational leave wholly attributable to the period of foreign service and sick leave. Unpaid leave is not a recognised form of absence and therefore will be taken to constitute a break in a period of foreign service.

As the taxpayer will be undertaking unpaid leave during their period of foreign service, hence breaking their period of foreign service and neither period of foreign service on either side of the unpaid leave is more than 91 days, any foreign earnings derived from their UK employment will not be exempt from tax in Australia under section 23AG of the ITAA 1936.

It is also necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (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 1 to the Agreements Act contains the 2003 United Kingdom Convention and Notes between Australia and the United Kingdom of Great Britain and Northern Ireland, (the 2003 UK Convention). The 2003 UK Convention operates to avoid the double taxation of income received by Australian and UK residents.

Article 14(1) of the 2003 UK Convention provides that salaries, wages and other similar remuneration derived by a resident of Australia in respect of an employment shall be taxable only in Australia unless the employment is exercised in the UK. If the employment is so exercised in the UK, the remuneration may be taxed in the UK.

However, Article 14(2) of the 2003 UK Convention provides that remuneration derived by a resident of Australia in respect of employment in the UK shall be taxable only in Australia if: (a) the taxpayer is present in the UK for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year of income of the UK; and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the UK; and (c) the remuneration is not deductible in determining taxable profits of a permanent establishment which the employer has in the UK.

Article 14(2)(a) and 14(2)(c) of the 2003 UK Convention are satisfied as the taxpayer will be present in the UK for a period or periods not exceeding in the aggregate 183 days during the UK fiscal year of income and the remuneration is not deductible in determining taxable profits of a permanent establishment which the employer has in the UK. However, Article 14(2)(b) of the UK Convention will not be satisfied as the remuneration is paid by, or on behalf of, an employer who is a resident of the UK.

Article 14(2) of the 2003 UK Convention will therefore not be applicable.

As the taxpayer is a resident of Australia for income tax purposes, Article 14(1) of the UK Convention applies, and as the employment is exercised in the UK, the remuneration may be taxed in the UK.

Paragraph 23 of Taxation Ruling TR 2001/13 provides that the phrase 'may be taxed' normally means that the source country has a non-exclusive entitlement to tax the income. However, under normal international tax principles, the other country may also continue to tax its residents on income, wherever sourced, provided it is permissible under domestic law and the double tax agreement (DTA) does not explicitly prevent it from doing so.

The UK Convention does not explicitly prevent Australia from taxing the taxpayer on this UK sourced income. As the country of residence, Australia would tax salary and wages the taxpayer receives from their UK employer under the ITAA 1936 and the ITAA 1997 as they are not exempt from tax under subsection 23AG(1) of the ITAA 1936. This is because the taxpayer has not been engaged in foreign service for a continuous period of not less than 91 days.

Accordingly, the taxpayer's assessable income will include salary and wages they receive from the UK employer for service as a medical practitioner under subsection 6-5(2) of the ITAA 1997. Note: If the taxpayer has paid UK tax on the salary and wages, they will be entitled to a foreign tax credit for UK tax paid on that income against Australian tax payable in respect of that income under subsection 160AF(1) of the ITAA 1936 and Article 22(1)(a) of the 2003 UK Convention. Where the UK tax paid is greater than the Australian tax payable, the taxpayer will only be entitled to a foreign tax credit equal to the value of the Australian tax payable and cannot recover any excess UK tax paid. However, under section 160AFE of the ITAA 1936, any excess foreign tax credit can be carried forward for a maximum of five years for application against any future tax payable on the taxpayer's foreign income of the same class.