ATO Interpretative Decision

ATO ID 2003/862 (Withdrawn)

Income Tax

• This decision has been withdrawn as the Russian double tax agreement has not yet entered into force.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

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

Decision

No. The salary and wages income received by an Australian resident taxpayer from employment in Russia 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 as an engineer on an oil drilling platform in Russian territorial waters.

The taxpayer is employed by a company that is a resident of the United States of America (US) that operates the oil drilling platform.

The taxpayer was employed offshore in Russia for less than 183 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 46 to the Agreements Act contains the double tax agreement between Australia and the Russian Federation (the Russian Agreement). The Russian Agreement operates to avoid double taxation of income received by Australian and Russian residents.

Article 15(1) of the Russian Agreement provides that salary and wages derived by an individual who is a resident of Australia in respect of an employment shall be taxable only in Australia unless the employment is exercised in Russia. If the employment is exercised in Russia, the salary and wages may also be taxed in Russia.

However, Article 15(2) of the Russian Agreement provides that the income derived from employment exercised in Russia will be exempt from tax in Russia if:

•

the taxpayer is present in Russia for a period or periods not exceeding in the aggregate 183 days in any 12 month period commencing or ending in the Russian year of income;

•

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

•

the remuneration is not borne by a permanent establishment or a fixed base which the employer has in Russia.

Article 5(2)(f) of the Russian Agreement deems a mine, oil or gas well, a quarry or any other place relating to the exploration for or exploitation of natural resources to be a permanent establishment for the purposes of the Russian Agreement.

As the taxpayer's employment income is attributable to the permanent establishment operated by the taxpayer's employer in Russia, Article 15(2) of the Russian Agreement will not apply. The salary and wages received by the taxpayer may also be taxed in Russia under Article 15(1) of the Russian 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 Russia.

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

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

Year of income:  Year ended 30 June 2003

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
Exempt income
Foreign income
Foreign salary & wages
Russia
Foreign Service

Business Line:  Public Groups and International

Date of publication:  26 September 2003

ISSN: 1445-2782