Assessability of salary and wages received by a dual resident paid by a Japanese employer to undertake research in Australia

Are the salary and wages derived by a dual resident which is paid by a Japanese employer to undertake research in Australia assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The salary and wages derived by a dual resident which is paid by a Japanese employer to undertake research in Australia is not assessable under subsection 6-5(2) of the ITAA 1997.

The taxpayer is a resident of Japan for taxation purposes.

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer is undertaking research in Australia as an Adjunct Professor at an Australian University for a period of less than two years.

The taxpayer receives salary and wages from their Japanese employer to conduct research in Australia.

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 then it is not assessable income.

Subsection 6-20(1) of the ITAA 1997 provides that an amount of ordinary income or statutory income is exempt income if it is made exempt from income tax by a provision of this Act or another Commonwealth law.

In determining liability to tax on Australian sourced income received by a dual resident, it is necessary to consider not only the income tax laws but also any applicable double tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 and Income Tax Assessment Act 1936 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 11(1) of the Japanese Agreement provides that remuneration derived by an individual who is a resident of Japan in respect of employment shall be taxable only in Japan unless the employment is exercised in Australia. If the employment is exercised in Australia, the income derived from that exercise may be taxed in Australia.

Article 11(1) of the Japanese Agreement is also subject to Article 15 of the Japanese Agreement.

Article 15 of the Japanese Agreement provides that where a professor or teacher, who is a resident of Japan, is temporarily present in Australia 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 Australia, remuneration derived by them for teaching or conducting research for that period shall be exempt from tax in Australia.

As the taxpayer is a professor and is temporarily in Australia for the purpose of conducting research Article 15 of the Japanese Agreement will apply.

Accordingly, the salary and wages received by the dual resident whilst conducting research in Australia will be exempt and therefore not assessable under subsection 6-5(2) of the ITAA 1997. Note: The Japanese Agreement does not contain a tie-breaker test where a taxpayer is a resident of Japan and a resident of Australia