Assessability of foreign income received by an Australian resident performing research in Denmark

Is the income received by an Australian resident taxpayer, employed by an Australian University conducting research in Denmark, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The income received by an Australian resident taxpayer, employed by an Australian University conducting research in Denmark, is not assessable under subsection 6-5(2) of the ITAA 1997, as it is exempt from tax under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

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

The taxpayer received a Research Fellowship. An Australian University will act as employer/administrator for the four years of the fellowship.

The taxpayer will receive salary and wage income.

The taxpayer will be working in Denmark in excess of 91 days.

The taxpayer is not considered to be a student for the purposes of the fellowship.

Subsection 6-5(2) of the ITAA 1997 states that if you are an Australian resident, your assessable income includes 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.

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 as an employee (subsection 23AG(7) of the ITAA 1936). 'Foreign earnings' includes income consisting of salary or wages (subsection 23AG(7) of the ITAA 1936).

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 following reasons: (a) law of the foreign country giving effect to a double tax agreement (b) a double tax agreement (c) provisions of a law of the foreign country under which income covered by any of the following categories is generally exempt from income tax: (i) income derived in the capacity of an employee (ii) income from personal services (iii) similar income (d) the law of the foreign country does not provide for the imposition of income tax on one or more of the categories of income mentioned in paragraph (c) (e) a law of the foreign country corresponding to the International Organizations (Privileges and Immunities) Act 1963 or to the regulations under that Act (f) an international agreement to which Australia is a party and that deals with: (i) diplomatic or consular privileges and immunities (ii) privileges and immunities in relation to persons connected with international organisations (g) a law of the foreign country giving effect to an agreement covered by paragraph (f).

None of the reasons listed in subsection 23AG(2) of the ITAA 1936 apply, therefore the salary and wages received by the taxpayer will be exempt from income 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.

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 Agreements Act.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1997 so that those Acts are read as one.

Schedule 18 to the Agreements Act contains the tax treaty between Australia and the Kingdom of Denmark (the Danish Agreement). The Danish Agreement operates to avoid the double taxation of income received by Australian and Danish residents.

Article 15(1) of the Danish Agreement provides that salary, wages and other similar remuneration derived by an individual who is a resident of Australia in respect of employment shall be taxable only in Australia unless the employment is exercised in Denmark. However, the remuneration may be taxable in Denmark if it is derived in Denmark.

Article 15(2) of the Danish Agreement provides that notwithstanding the provisions of paragraph 1, remuneration derived by an individual who is a resident of Australia in respect of an employment exercised in Denmark shall be taxable only in Australia if : (a) the recipient is present in Denmark for a period or periods not exceeding in aggregate 183 days in the year of income of Denmark; and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of Denmark; and (c) the remuneration is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has in Denmark; and (d) the remuneration is, or upon the application of this Article will be subject to tax in Australia.

Since the taxpayer will be employed in Denmark for more than 183 days of the Danish year of income, Article 15(2) of the Danish Agreement will not apply. Therefore, Article 15(1) of the Danish Agreement will apply and the income may be taxed in Denmark.

Accordingly, the salary and wages received whilst performing research in Denmark will not be assessable income under subsection 6-5(2) of the ITAA 1997 as it is exempt under subsection 23AG(1) of the ITAA 1936.