ATO Interpretative Decision

ATO ID 2002/270 (Withdrawn)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• This ATO ID is withdrawn from the database due to legislative changes to section 23AG of the Income Tax Assessment Act 1936 which took effect from 1 July 2009.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 ATO ID 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

Is an Australian resident taxpayer on an exchange teacher program to Canada assessable on their employment income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) where their employer is a non-government school?

Decision

No. The employment income derived in Canada is exempt from tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

Facts

The taxpayer will be temporarily leaving Australia on a teaching exchange program in Canada for one year.

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

The taxpayer will be engaged in foreign service in Canada for more than 91 continuous days.

The taxpayer's Australian employer is a non-government school.

The taxpayer's Australian employer does not have a base in Canada.

The taxpayer's non-government Australian employer will pay salary and wages to the taxpayer during the period that they are teaching in Canada.

The taxpayer is a resident of Australia for tax purposes.

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 during the income year.

Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

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.

However, subsection 23AG(2) of the ITAA 1936 provides that the foreign earnings will not be exempt from tax if the income is exempt from tax in the foreign country because of (among other things) a double tax agreement.

Schedule 3 to the International Tax Agreements Act 1953 (Agreements Act) contains the double tax agreement between Australia and Canada (Canadian Convention). The Canadian Convention operates to avoid the double taxation of income received by Australian and Canadian residents.

Article 14 of the Canadian Convention allocates taxing rights between Australia and Canada in relation to income derived by an Australian resident in respect of professional services, which includes independent teaching activities. The taxpayer is in an employment relationship and does not perform independent teaching activities. Accordingly, Article 14 of the Canadian Convention is not applicable.

Article 19 of the Canadian Convention deals with remuneration paid by the Government of either Australia or Canada in respect of services rendered in the discharge of governmental functions. As the taxpayer's employer is a non-government school, Article 19 of the Canadian Convention is also not applicable.

Article 15 of the Canadian Convention is the applicable Article of the Convention as it provides, under paragraph 1, that salary and wages derived by an Australian resident in respect of employment exercised in Canada may be taxed in Canada.

Paragraph 2 of Article 15 of the Canadian Convention further provides that if the taxpayer is present in Canada for an aggregated period of 183 days or less during the Canadian year of income and certain other conditions are met, the income derived will only be taxable in Australia. However, as the taxpayer will be present in Canada for more than 183 days in the Canadian year of income, this paragraph of the Convention will not be satisfied and the income derived by the taxpayer may be taxed in Canada under Article 15 of the Canadian Convention.

Accordingly, as the taxpayer is engaged in foreign service for more than 91 continuous days, and the income is not exempt from tax in Canada under the Canadian Convention, the income will be exempt in Australia under section 23AG of the ITAA 1936.

Legislative References:
Income Tax Assessment Act 1997
   section 6-5
   subsection 6-5(2)

Keywords
Double tax agreements
Double tax relief
Canada

Business Line:  Small Business/Individual Taxpayers

Date of publication:  22 March 2002

ISSN: 1445-2782