Assessability of allowances received by an Australian resident from undertaking research in Japan

Are the allowances received by an Australian University lecturer while conducting research in Japan, assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The allowances received by an Australian University lecturer while conducting research in Japan are assessable income under subsection 6-5(2) of the ITAA 1997.

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

The taxpayer is a lecturer at an Australian University.

The taxpayer is awarded a research fellowship to undertake research at a Japanese University.

The taxpayer undertakes research in Japan for a continuous period of more than 9 months.

The taxpayer's receives monthly maintenance allowance and a number of other allowances for undertaking research in Japan.

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.

Allowances 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 Income Tax Assessment Act 1936 (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 earnings' include income consisting of allowances (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 exclusions listed therein.

Under paragraph 23AG(2)(b) of the ITAA 1936, where income is exempt from income tax in the foreign country as a result of the operation of a double tax agreement, that income is not exempt under subsection 23AG(1) 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 the ITAA 1997 so that those Acts are read as one.

Schedule 6 to the Agreements Act contains the tax treaty between Australia and Japan and the Protocol to that agreement (the Japanese Agreement). The Japanese Agreement operates to avoid double taxation of income received by Australian and Japanese residents.

Article 15 of the Japanese Agreement provides that where a professor or teacher, who is a resident of Australia, is temporarily present in Japan for the purpose of teaching or conducting research during a period not exceeding two years at a university, college, school or other educational institution in Japan, remuneration derived by them for teaching or conducting research for that period shall be exempt from tax in Japan.

The allowances received by the taxpayer are remuneration derived by them for conducting research in Japan.

Paragraph 23AG(2)(b) of the ITAA 1936 will apply as the allowances received by the taxpayer are exempt from tax in Japan under Article 15 of the Japanese Agreement as the taxpayer was temporarily present in Japan for the purpose of conducting research for a period of 9 months at a Japanese University. Therefore, the allowances are not exempt from tax under subsection 23AG(1) of the ITAA 1936.

Accordingly, the allowances received by the resident taxpayer from conducting research in Japan will be assessable income under subsection 6-5(2) of the ITAA 1997.