ATO Interpretative Decision

ATO ID 2006/29 (Withdrawn)

Income tax

• This ATO ID is withdrawn from the database due to legislative changes to section 23AG of the Income Tax Assessment Act 1936 which took effect from 1 July 2009. Despite its withdrawal, this ATOID continues to be a precedential view in respect of decisions for income years up to, and including, the 2008/2009 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, while employed in Hungary, assessable under subsection 6-5 (2) of the Income Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The salary and wages received by the Australian resident taxpayer, while employed in Hungary, are assessable under subsection 6-5 (2) of the ITAA 1997 as they are not exempt from tax under paragraph 23AG(2)(b) of the Income Tax Assessment Act 1936 (ITAA 1936).

Facts

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

The taxpayer provided dependant personal services in Hungary.

The taxpayer's employer is not a resident of Australia or Hungary.

The employer does not have a permanent establishment or fixed base in Hungary

The taxpayer is present in Hungary for less than 91 days.

The taxpayer has been engaged in continuous foreign service for more 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 from foreign service 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 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 treaties 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 ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Schedule 33 to the Agreements Act contains the tax treaty between Australia and the Republic of Hungary (the Hungarian Agreement). The Hungarian Agreement operates to avoid the double taxation of income received by Australian and Hungarian residents.

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

However, Article 15(2) of the Hungarian Agreement provides that remuneration derived by a resident of Australia in respect of employment in Hungary shall be taxable only in Australia if:

(a)

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

(b)

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

(c)

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

Article 15(2)(a) and (b) of the Hungarian Agreement are satisfied as the taxpayer will be present in Hungary for a period or periods not exceeding in the aggregate 183 days during the Hungarian fiscal year of income and the employer is not a resident of Hungary. Article 15(2)(c) of the Hungarian Agreement is also satisfied as the remuneration is not borne by a permanent establishment or fixed base which the employer has in Hungary.

Therefore, Article 15(2) of the Hungarian Agreement will apply.

The salary and wages received by the taxpayer are not exempt from tax under subsection 23AG(1) of the ITAA 1936, as paragraph 23AG(2)(b) of the ITAA 1936 applies.

Accordingly, the salary and wages received by the taxpayer from employment in Hungary will be assessable under subsection 6-5(2) of the ITAA 1997.

Year of income:  Year ended 30 June 2004

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

Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/13
Taxation Ruling TR 96/15
Taxation Ruling TR 96/15 - Addendum
Taxation Ruling TR 96/15 - Erratum

Keywords
Double tax agreements
Exempt income
Foreign income
Foreign salary & wages
Hungary
International tax

Business Line:  Public Groups and International

Date of publication:  10 February 2006

ISSN: 1445-2782