ATO Interpretative Decision

ATO ID 2003/861 (Withdrawn)

Income Tax

• This ATO ID is withdrawn from the database because it contains references to the tax treaty between Australia and Norway that was replaced with a new tax treaty effective from 12 September 2007. Despite its withdrawal from the database, this ATO ID continues to be a precedential view in respect of decisions for income years up to, and including, the 2007-08 income year.
  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 Norway assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The salary and wages received by the taxpayer are not taxable in Australia because Article 22(4)(a) of Schedule 23 to the International Tax Agreements Act 1953 (the Agreements Act) provides that the income is taxable only in Norway. Even though the income may meet all the criteria for exemption from Australian tax under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936), it will not be taken into account as an exempt amount for the purposes of the calculation in subsection 23AG(3) of the ITAA 1936.

Facts

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

The taxpayer was employed as an engineer on an oil drilling platform situated in Norwegian territorial waters.

The taxpayer was employed offshore in Norway for more than 30 days.

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

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 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. In the event of inconsistent provisions, the Agreements Act overrides the ITAA 1936 and ITAA 1997 (except in some limited situations).

Schedule 23 to the Agreements Act contains the double tax agreement between Australia and Norway (the Norwegian Agreement). The Norwegian Agreement operates to avoid double taxation of income received by Australian and Norwegian residents.

Article 22(4)(a) of the Norwegian Agreement provides that salaries and wages received by a resident of Australia in respect of employment connected with the exploration or exploitation of the sea-bed and the sub-soil and their natural resources situated in Norway shall be taxable only in Norway provided the duties are performed offshore and for a period exceeding 30 days in any 12 month period.

As the taxpayer is employed aboard an offshore oil rig in Norwegian territorial waters for a period exceeding 30 days, the salaries and wages received by the taxpayer will be taxable only in Norway.

Even though the salary and wages income received by the taxpayer meets all the criteria for exemption from Australian tax under section 23AG(1) of the ITAA 1936, it will not be taken into account in working out the Australian tax payable on the taxpayer's other assessable income for the purposes of subsection 23AG(3) of the ITAA 1936.

Subsection 23AG(3) of the ITAA 1936 refers to 'an amount that is exempt from tax under this section' and applies to income that qualifies for exemption from tax in Australia only because of section 23AG of the ITAA 1936, and not for any other reason. In this case, Australia is not permitted to tax the income because of Article 22(4)(a) of the Norwegian Agreement.

Therefore, the salary and wages received by the taxpayer from employment in Norway will not be assessable under subsection 6-5(2) of the ITAA 1997 and are not taken into account for the purposes of the 'exemption with progression' calculations in subsection 23AG(3) of the ITAA 1936.

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1936
   section 23AG
   subsection 23AG(1)
   subsection 23AG(2)
   paragraph 23AG(2)(b)
   subsection 23AG(3)
   subsection 23AG(7)

Keywords
Double tax agreements
Exempt income
Foreign income
Foreign salary & wages
Oil rig
Norway

Business Line:  Public Groups and International

Date of publication:  26 September 2003

ISSN: 1445-2782