ATO Interpretative Decision

ATO ID 2003/1145

Income Tax

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

Issue

Are the salary and wages received by an Australian resident taxpayer from employment in India assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The salary and wages received by an Australian resident taxpayer from employment in India are not assessable under subsection 6-5(2) of the ITAA 1997 as they are exempt from tax under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Facts

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

The taxpayer is employed in Indian territorial waters by a company that is a resident of Singapore.

The taxpayer receives salary and wages income from that employment.

The taxpayer was employed offshore in India for less than 183 days.

The taxpayer has been engaged in continuous foreign service for not less than 91 days.

Whilst working in India, the taxpayer's remuneration will be deductible in determining taxable profits of a permanent establishment that the taxpayer's employer has in India.

Reasons for Decision

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

Salary and wages are ordinary income for the purposes 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 then it is not 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 salary and 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 exclusions listed therein.

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

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

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

Schedule 35 to the Agreements Act contains the double tax agreement between Australia and the Republic of India (the Indian Agreement).

Article 15(1) of the Indian Agreement provides that salary and wages derived by an Australian resident in respect of an employment will be taxable only in Australia unless the employment is exercised in India. If the employment is exercised in India, the salary and wages may be taxed in India.

However, Article 15(2) of the Indian Agreement provides that remuneration derived by a Australian resident in respect of an employment exercised in India will be taxable only in Australia if:

•

the taxpayer is present in India for a period or periods not exceeding in the aggregate 183 days in the Indian year of income;

•

the remuneration is paid by, or on behalf of, an employer who is not a resident of India; and

•

the remuneration is not deductible in determining the taxable profits of a permanent establishment or a fixed base that the employer has in India.

Article 15(2) of the Indian Agreement will not apply as the salary and wages will be deductible in determining the taxable profits of a permanent establishment that the taxpayer's employer has in India.

Therefore, the taxpayer's salary and wages may be taxed in Australia and in India under Article 15(1) of the Indian Agreement. Paragraph 23AG(2)(b) of the ITAA 1936 will not apply as the salary and wages received by the taxpayer are not exempt from tax in India.

As the taxpayer is engaged in foreign service for a continuous period of not less than 91 days and the salary and wages are not exempt from tax in India under the Indian Agreement, the salary and wages received from India will be exempt from tax under subsection 23AG(1) of the ITAA 1936.

Therefore, the salary and wages received by the taxpayer from employment in India will not be assessable under subsection 6-5(2) of the ITAA 1997.

Year of income:  Year ended 30 June 2002 Year ended 30 June 2003 Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1936
   section 23AG
   subsection 23AG(1)
   subsection 23AG(2)
   paragraph 23AG(2)(b)
   subsection 23AG(7)

Keywords
Double tax agreements
Foreign income
Foreign salary & wages
India
International tax

Business Line:  Public Groups and International

Date of publication:  19 December 2003

ISSN: 1445-2782