Assessability of consulting income from China received by a resident taxpayer

Is the income received by an Australian resident taxpayer from independent consulting services performed in China assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The income received by a taxpayer from independent consulting services performed in China is assessable under subsection 6-5(2) of the ITAA 1997.

The taxpayer is an Australian resident for tax purposes.

The taxpayer provides short-term independent consultancy services in China in a specialised field.

The income received by the taxpayer will not be subject to tax in China.

The taxpayer will be in China for less than 183 days in any consecutive 12 month period.

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

Income from professional services is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

In determining the liability to Australian tax on foreign sourced income received by a resident, 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 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 and the ITAA 1997, so that those Acts are read as one.

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

Article 14(1) of the Chinese Agreement provides that income derived by an individual who is a resident of Australia in respect of professional services or other independent activities of a similar character shall be taxable only in Australia except in one of the following circumstances: (a) if the individual has a fixed base regularly available to the individual in China for the purpose of performing the individual's activities. If such a fixed based is available to the individual, the income may also be taxed in China but only so much of it as is attributable to the activities exercised from that fixed base; (b) if the individual's stay in China is for a period or periods exceeding in the aggregate 183 days in any consecutive period of 12 months. In such a case, the income may also be taxed in China but only so much of it as is derived from the individual's activities performed in China.

Article 14(2) of the Chinese Agreement provides that the term 'professional services' includes especially those performed in the exercise of independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.

The consultancy income derived by the taxpayer in China constitutes 'professional services' income under Article 14(2) of the Chinese Agreement.

As the taxpayer is a resident of Australia for income tax purposes, the 'professional services' income derived by the taxpayer in China will be taxable in Australia pursuant to Article 14(1) of the Chinese Agreement.

Accordingly, the consultancy income derived by the Australian resident taxpayer as a short-term consultant in China is assessable under subsection 6-5(2) of the ITAA 1997.