Assessability of salary and wages received while working as a director of studies and a teacher at an education institution in China

Is the salary and wages earned by a taxpayer while working as a director of studies and a teacher in China assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The salary and wages earned by a taxpayer while working as a director of studies and a teacher in China will be assessable under subsection 6-5(2) of the ITAA 1997.

The taxpayer is an Australian resident for tax purposes.

The taxpayer was employed on contract as a director of studies and a teacher in China. The contract was for a period of 150 days.

The taxpayer was employed by an Australian resident company, which has a fixed base of operation in China. The office in China reimbursed the Australian resident company for the cost of the taxpayer's salary.

There was no break in employment during the contract.

The taxpayer was a teacher in Australia prior to taking up this contract.

The taxpayer's contractual duties as a director of studies and teacher were to: • develop a teaching program for the semester • confirm student numbers were correct and all enrolment administration work was completed prior to/near after semester began • develop and implement the timetable of teaching and the teaching resources to support the timetable • meet and inform all teachers/support staff and handout teaching material, • manage the continuous administration of the program • where necessary mentor local teachers and conduct teacher training if required • liaise with management from the partnering Institution, and • teach in the program (a maximum of 16 hours teaching).

The taxpayer returned to Australia on completion of the contract.

No tax was paid in China on the salary and wage income.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes the ordinary income derived by the taxpayer directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages are considered to be ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Section 6-15 of the ITAA 1997 provides that an amount of ordinary income which is exempt income is not assessable income.

Section 6-20 of the ITAA 1997 provides that an amount of ordinary income is exempt income if it is made exempt from income tax by a provision of the Income Tax Assessment Act 1936 (ITAA 1936), the ITAA 1997 or another Commonwealth law.

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).

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 therein.

Under paragraph 23AG(2)(b) of the ITAA 1936 where income is exempt in the foreign country as a result of the operation of a tax treaty that income is not exempt under subsection 23AG(1) of the ITAA 1936.

In determining liability to Australian tax of foreign sourced income it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (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. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 28 to the Agreements Act contains the tax treaty between Australia and China (the Chinese Agreement). The Chinese Agreement operates to avoid the double taxation of income received by Australian and Chinese residents.

Article 15(1) of the Chinese Agreement provides that the salary and wages income of an Australian resident will be taxable only in Australia unless the employment is exercised in China. If the employment is exercised in China then China may tax the income.

However under Article 15(2) of the Chinese Agreement where the employment is exercised in China the income will not be taxable in China if one of the following conditions applies,

The taxpayer is present in China for a period or periods not exceeding 183 days in any consecutive period of 12 months

The remuneration is paid by an employer who is not a Chinese resident; and the remuneration is not borne by a permanent establishment or fixed base that the employer has in China.

Under Article 20(1) of the Chinese Agreement where a professor or teacher who is a resident of Australia visits China for a period not exceeding two years for the purpose of teaching or carrying out advanced study or research at a university, college, school or other educational institution in China, any remuneration the person receives for such teaching, advanced study or research shall be exempt from tax in China to the extent to which that remuneration is, or upon the application of this Article will be, subject to tax in Australia.

The term 'teaching' is not defined in the Chinese Agreement. However, Article 3(3) of the Chinese Agreement provides that any term not defined in the Agreement shall, unless the context requires otherwise, have the meaning which it has under a country's domestic tax laws at the time the country applies the Agreement.

The term 'teaching' is also not defined in the ITAA 1936 or the ITAA 1997. Therefore, it takes its ordinary meaning. The Macquarie Dictionary , 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW defines the term 'teach' as 'to impart knowledge of or skill to; to give instruction to'.

The duties of a teacher are also not defined in the Chinese Agreement or the Explanatory Memorandum (EM) to the Taxation Laws Amendments (International Agreements) Bill 1990 (EM to the Chinese Agreement)

The duties of a teacher, was dealt with in Sim v. Rotherham Metropolitan Borough Council and other actions [1986] 3 All ER 387. In Scott J's decision (at p.393) he made reference to the duties undertaken by the head teacher to include controlling the internal organisation, management and discipline of the school and the arrangement of classes and the exercising of supervision over the teaching and non teaching staff, to arrange compilation of a school timetable, to delegate the tasks to one or more fairly senior members of staff, consult with staff particularly heads of departments. The Court held that the professional obligations of a teacher cannot be confined to the imparting of academic knowledge to the pupils.

The concept of teacher workloads was further discussed in a review of the Teachers (Victorian Government Schools) Conditions of Employment Award 1995 which observed that class room instruction is but one aspect of a teacher's duties. There are several other duties including administrative and planning time, correction of examination papers, projects and like activity, accompanying students on school excursions, attendance at sporting, recreation and cultural activities and increased playground supervision.

Whilst in China the taxpayers' duties related to the overall management of a course run in conjunction with a Chinese University as well as a teacher to teach English.

Furthermore the provisions of Article 20(1) of the Chinese Agreement states: 'for the purpose of teaching' and does not stipulate whether that teaching be the primary or main purpose. Given the discussions on teaching duties and teacher workloads it is considered that the role undertaken primarily reflects one of teaching. Given that the teaching in the class room is limited to a specified number of hours per week, the further duties or functions undertaken reflect that of a normal workload of a director of studies and teacher and as such we consider that to be part of the duties of a teacher.

As the taxpayer is a teacher and visited China for a period not exceeding two years for the purpose of teaching at an educational institution in China, Article 15 of the Chinese Agreement does not apply and Article 20 of the Chinese Agreement will apply. Accordingly the income from teaching will be exempt from tax in China.

The income earned from teaching in China is exempt from tax in China because of the operation of a tax treaty, paragraph 23AG(2)(b) of the ITAA 1936 applies and the income would not be exempt from tax under subsection 23AG(1) of the ITAA 1936. Therefore, the income earned in China is assessable under subsection 6-5(2) of the ITAA 1997.