ATO Interpretative Decision

ATO ID 2002/897

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is income derived by a taxpayer who is to be employed in Korea and paid by an Australian employer, exempt from tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

Yes, the overseas employment income is exempt foreign income under section 23AG of the ITAA 1997.

Facts

The taxpayer is to be employed in Korea for approximately 18 months.

Wages will continue to be paid by the taxpayer's Australian employer.

The taxpayer will be present in Korea for more than 183 days during the Korean year of income (1 January to 31 December).

The taxpayer is a resident of Australia for income tax purposes.

Reasons for Decision

Subsection 23AG(1) of the ITAA 1936 states that 'where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the person from that foreign service is exempt from tax'. This section is subject to the proviso contained in subsection 23AG(2) of the ITAA 1936, which removes the exemption for income that is treated as exempt income in the foreign country in which it is earned.

Subsection 23AG(7) of the ITAA 1936 defines 'foreign service' as service in a foreign country as the holder of an office or in the capacity of an employee, and 'foreign earnings' include salary, wages, commission, bonuses or allowances.

Paragraph (1) of Article 15 of Schedule 22 to the International Tax Agreements Act 1953 provides that salary and wages derived by an Australian resident from employment exercised in Korea may be taxed in Korea.

However, paragraph (2) of Article 15 of Schedule 22 provides that:

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if the taxpayer is present in Korea for an aggregated period of 183 days or less during the Korean year of income, and

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the salary and wages are paid by an employer who is not a resident of Korea and which are not deductible to the employer in determining the taxable profits of a permanent establishment or fixed base in Korea

the income derived will only be taxable in Australia.

The taxpayer was present in Korea for more than 183 days in the Korean year of income and therefore the income may be taxed in Korea.

As the period of employment was greater than 91 days, the taxpayer's wages are therefore exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936 but are subject to tax in Korea.

Note: if a payment is exempt income, an employer is not required to withhold an amount of tax from salary and wages (subsection 12-1(1) of Schedule 1 to the Taxation Administration Act 1953).

Legislative References:
Income Tax Assessment Act 1936
   section 23AG
   subsection 23AG(1)
   subsection 23AG(2)

Keywords
Double tax agreements
Foreign income
Foreign salary and wages
Exempt income
Korea

Business Line:  Small Business/Individual Taxpayers

Date of publication:  11 September 2002

ISSN: 1445-2782