ATO Interpretative Decision

ATO ID 2004/381 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as the issue is now dealt with in Taxation Ruling 2005/8.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Are the salary and allowances earned by an Australian resident discharging Australian governmental functions in Canada assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The salary and allowances earned by an Australian resident discharging Australian governmental functions in Canada are assessable under subsection 6-5(2) of the ITAA 1997. The salary and wages are not exempt from tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

Facts

The taxpayer is an Australian resident for income tax purposes.

The taxpayer worked for more than 91 days continuously in Canada, but less than 183 days.

The Australian government will provide remuneration in the form of salary and allowances, for services provided by the taxpayer in respect of the discharge of governmental functions in Canada.

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 allowances 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' include income consisting of salary and wages (subsection 23AG(7) of the ITAA 1936).

However subsection 23AG(2) of the ITAA 1936 states that foreign earnings will not be exempt from tax under subsection 23AG(1) of the ITAA 1936 if the amount is exempt from income tax in the foreign country only because of any of the reasons listed.

Under paragraph 23AG(2)(b) of the ITAA 1936, where income is exempt 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 liability to Australian tax on foreign sourced income received by an Australian resident, 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 ITAA 1997 so that those Acts are read as one. In the event of inconsistent provisions, the Agreements Act overrides the ITAA except in some limited situations.

Schedule 3 to the Agreements Act contains the double tax agreement between Australia and Canada (the Canadian Agreement). Schedule 3A to the Agreements Act contains the Protocol amending the Canadian Agreement (Canadian Protocol). The Canadian Agreement and Canadian Protocol operate to avoid the double taxation of income received by Australian and Canadian residents.

Article 19 of the Canadian Agreement provides that salary and wages paid by Australia to any individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia. However, such remuneration shall be taxable only in Canada if the services are rendered in Canada and the recipient is a resident of Canada who:

(a)

is a citizen of Canada, or

(b)

did not become a resident of Canada solely for the purpose of performing the service.

The taxpayer is not a citizen of Canada and was in Canada solely for the purpose of performing the services. The taxpayer's salary and wage income is therefore exempt from tax in Canada under Article 19 of the Canadian Agreement.

Paragraph 23AG(2)(b) of the ITAA 1936 will apply because the salary and wages income earned in Canada is exempt in Canada under Article 19 of the Canadian Agreement.

Accordingly, the salary and allowances earned by the Australian resident discharging Australian governmental functions in Canada are assessable under subsection 6-5(2) of the ITAA 1997. The salary and wages are not exempt from tax in Australia under section 23AG of the ITAA 1936.

Year of income:  30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   subsection 6-5(2)
   subsection 6-15(2)
   section 11-15

Keywords
Canada
Double tax agreements
Double tax relief
International tax

Business Line:  Public Groups and International

Date of publication:  7 May 2004

ISSN: 1445-2782