Assessability of foreign income received by an Australian resident performing research in the USA

Is the income received by an Australian resident taxpayer from an Australian research institution while conducting research in the United States of America (USA) assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The income received by an Australian resident taxpayer from an Australian research institution while conducting research in the USA is not assessable under subsection 6-5(2) of the ITAA 1997 as the income would be exempt under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is a resident of Australia for tax purposes.

The taxpayer is the recipient of a four year fellowship offered by an Australian resident research institution.

The taxpayer will be working on research projects in the USA for the first two years and the remaining two years in Australia.

The taxpayer will receive a salary from the research institution including an accommodation and cost of living allowance whilst in the USA.

The taxpayer is not considered to be a student for the purpose of the fellowship.

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

Salary and allowances for the research fellowship award are ordinary income for the purpose 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 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 earnings, salary, wages and 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 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 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.

Schedule 2 and 2A of the Agreements Act contain the Double Tax Convention (the US Convention) and Protocol respectively between Australia and the United States of America. The US Convention and Protocol operates to avoid the double taxation of income received by Australian and US residents.

Article 15(1) of the US Convention provides that salary and wages derived by a resident of Australia shall be taxable only in Australia unless the employment is exercised in the USA. If the employment is exercised in the USA then the income may be taxed in the USA.

Paragraph 23AG(2)(b) of the ITAA 1936 will not apply as the salary received by the taxpayer is not exempt from tax in the USA under Article 15(1) of the US Convention.

Subsection 23AG(1) of the ITAA 1936 will apply as the taxpayer is engaged in foreign service for a continuous period of not less than 91 days and is in receipt of foreign earnings.

Accordingly, income (including the accommodation and cost of living allowance) received whilst performing research in the USA will not be assessable under subsection 6-5(2) of the ITAA 1997. However income received performing research in Australia will be assessable under subsection 6-5(2) of the ITAA 1997.