Assessability of income derived in Denmark by an Australian academic

Is the income derived by an Australian academic from a Research Institute in Denmark assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The income derived by an Australian academic from a Research Institute in Denmark is assessable under subsection 6-5(2) of the ITAA 1997.

The taxpayer is a resident of Australia for Australian income tax purposes. The taxpayer held the position as a lecturer and researcher at an Australian University.

The taxpayer entered into a contract with a Research Institute in Demark to undertake a Research Project in a particular field in which the taxpayer was recognised as a leading expert.

The Commissioner, having examined the terms of the contract between the taxpayer and the Research Institute in Denmark determined that the taxpayer was engaged as an independent contractor, and not an employee of the Research Institute.

During the currency of his engagement in Denmark, the Research Institute provided the taxpayer with an office furnished with a computer and desk. The taxpayer was also supplied with computer software and stationery.

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.

In determining the liability to Australian tax of foreign sourced income, it is necessary to consider not only the provisions of the Income Tax Assessment Act 1936 and the ITAA 1997, (together 'the Assessment Act'), but also any applicable Agreements contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the Assessment Act so that those Acts are read as one. In the event of inconsistent provisions, the Agreements Act overrides the Assessment Act (except in some limited situations).

Schedule 18 of the Agreements Act contains the Agreement between the Governments of Australia and the Government of the Kingdom of Denmark (the Danish Agreement). The Danish Agreement operates, amongst other things, to avoid the double taxation of income received by persons who are residents of either or both of Australia or Denmark.

Paragraph (1) of Article 14 of the Danish Agreement provides that income derived by an individual who is a resident of Australia in respect of professional services or other independent activities of a similar character shall be taxable only in Australia unless that individual has a fixed base regularly available to him or her in Denmark for the purpose of performing those services. If such a fixed base is available to the individual, the income may also be taxed in Denmark but only so much of it as is attributable to activities exercised from that fixed base. Pursuant to Article 23 of the Danish Agreement, Danish tax paid under the law of Denmark in accordance with the Danish Agreement in respect of income derived by an Australian resident from sources in Denmark shall be allowed as a credit against Australian tax payable in respect of that income. However, this is subject to the provisions of the laws of Australia, which may limit the amount of the credit.

Paragraph (2) of Article 14 of the Danish Agreement defines the term 'professional services' to include, amongst other things, services performed in the exercise of independent scientific, educational or teaching activities.

The income derived by the taxpayer from the Research Institute in Denmark is in respect of 'professional services' for the purposes of paragraph (2) of Article 14 of the Danish Agreement.

As the taxpayer is a resident of Australia for Australian income tax purposes, the professional services income derived by the taxpayer from the Research Institute in Denmark is subject to Australian income tax under subsection 6-5(2) of the ITAA 1997. In accordance with Article 23 of the Danish Agreement, and subject to Australian domestic tax laws governing the entitlement of an Australian resident taxpayer to foreign tax credits, Danish tax paid under the Danish Agreement in respect of the professional services income derived by the taxpayer from the Research Institute in Denmark shall be allowed as a credit against the Australian income tax payable in respect of that income. Note: With effect from 1 July 2008 the foreign tax credit system is replaced by the foreign income tax offset system. The ATOID is still current.