Assessability of income received while conducting research in Sweden

Is the income received by an Australian resident taxpayer from an Australian University while conducting research in Sweden 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 University while conducting research in Sweden is not assessable under subsection 6-5(2) of the ITAA 1997 as the income is exempt under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is an Australian resident for tax purposes.

The taxpayer is employed as a researcher by an Australian University under the terms of an employment contract.

Under the terms of the employment contract, the taxpayer receives income which includes an accommodation and cost of living allowance.

The Swedish income year runs from 1 January to 31 st December.

The taxpayer conducted research in Sweden from late November 2005 to early September 2006.

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

The employer did not have a permanent establishment or fixed base in Sweden and the taxpayer's remuneration was not deductible in determining taxable profits.

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.

The income received by the taxpayer is 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). The income received by the taxpayer comes within the meaning of foreign earnings under subsection 23AG(7) of the ITAA 1936.

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 tax treaty 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 17 of the Agreements Act contains the tax treaty between the Government of Australia and the Government of Sweden (the Swedish Agreement). The Swedish Agreement operates to avoid the double taxation of income received by Australian and Swedish residents.

Article 15(1) of the Swedish Agreement provides that salary, wages and other similar remuneration derived by a resident of Australia shall be taxable only in Australia unless the employment is exercised in Sweden. If the employment is exercised in Sweden then the income may be taxed in Sweden.

However, Article 15(2) of the Swedish Agreement provides that remuneration derived by a resident of Australia in respect of employment in Sweden shall be taxable only in Australia if: (a) the recipient is present in Sweden for a period or periods not exceeding in the aggregate 183 days in the Swedish year of income; and (b) the remuneration is paid by, or on behalf of an employer who is not a resident of Sweden; and (c) the remuneration is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has in Sweden; and (d) the remuneration is, or upon the application of Article 15 will be, subject to tax in Australia.

In relation to the 2005 Swedish year of income, Article 15(2)(a) of the Swedish Agreement was satisfied as the taxpayer was present in Sweden for a period or periods not exceeding in the aggregate 183 days. Article 15(2)(d) of the Swedish Agreement will not be satisfied if the income is not subject to tax in Australia. In such circumstances, Article 15(1) of the Swedish Agreement applies.

In relation to the 2006 Swedish year of income, Article 15(2)(a) of the Swedish Agreement was not satisfied as the taxpayer was in Sweden for an aggregate period of greater than 183 days.

As the resident taxpayer was engaged in foreign service for a continuous period of not less than 91 days, the income derived from that foreign service will be exempt from tax under subsection 23AG(1) of the ITAA 1936.

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