Assessability of salary and wages received by an Australian resident working for the United Kingdom Government

Are the salary and wages received from the United Kingdom (UK) Government by an Australian resident assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The salary and wages received from the UK Government by an Australian resident are not assessable income under subsection 6-5(2) of the ITAA 1997 as they are exempt under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is an Australian resident for income tax purposes.

The taxpayer is employed by the UK Government as a naval officer operating in UK territorial waters.

The taxpayer has been working in UK territorial waters for less than 183 days.

The taxpayer has been engaged in foreign service for a continuous period of not less than 91 days.

The taxpayer receives salary and wages from the UK Government.

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 taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived from 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 tax treaty 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.

Former Schedule 1 to the Agreements Act contains the previous double tax agreement between Australia and the UK (the UK Agreement). Schedule 1A to the Agreements Act contains the protocol amending the UK Agreement (the UK Protocol). The UK Agreement and the UK Protocol operate to avoid the double taxation of income received by Australian and UK residents.

Article 15(1) of the UK Agreement provides that remuneration paid by the UK Government to any individual for services rendered to the UK Government in the discharge of governmental functions, shall be exempt from UK tax if the individual is not ordinarily resident in the UK, or is ordinarily resident in the UK solely for the purpose of rendering those services.

Article 15(2) of the UK Agreement provides that remuneration paid by the UK Government to any individual for services rendered to the UK Government in the discharge of governmental functions shall be exempt from Australian tax if the individual is not a resident of Australia, or is resident of Australia solely for the purpose of rendering those services.

As the taxpayer is not ordinarily a resident in the UK and is a resident of Australia for income tax purposes, Article 15 of the UK Agreement does not apply.

Article 12(1) of the UK Agreement provides that salary and wages derived by an individual who is a resident of Australia in respect of an employment shall be subject to tax only in Australia, unless the employment is exercised in the UK. If the employment is exercised in the UK, such salary and wages as is derived shall be deemed to have source in, and may be taxed, in the UK.

Article 12(2) of the UK Agreement provides that salary and wages derived by a resident of Australia in respect of an employment exercised in the UK shall be exempt from tax in the UK if: (a) the taxpayer is present in the UK for a period or periods not exceeding in the aggregate 183 days in the UK year of income; and (b) the remuneration is paid by or on behalf of an employer who is not a UK resident; and (c) the remuneration is not deductible in determining the profits of a permanent establishment which the employer has in the UK.

As the taxpayer is an Australian resident who is employed and paid by a UK resident, Article 12(2) of the UK Agreement will not apply. Accordingly, the salary and wages may be taxed in Australia and the UK.

The salary and wages earned by the Australian resident in the UK are not made exempt from tax in the UK by the operation of a double tax agreement (paragraph 23AG(2)(b) of the ITAA 1936).

As subsection 23AG(2) of the ITAA 1936 does not apply, the salary and wages received by an Australian resident working for the UK Government will be exempt from income tax under subsection 23AG(1) of the ITAA 1936 and will not be assessable under subsection 6-5(2) of the ITAA 1997. Note: This ATO ID ceases to apply as of 30 June 2004 to correspond with the cessation of the UK Agreement. A new UK tax treaty was negotiated and became effective on 5 December 2003. This new tax treaty, known as the 2003 UK Convention, applies from 1 July 2004.