ATO Interpretative Decision

ATO ID 2004/782 (Withdrawn)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• This ATO ID is withdrawn as the issue is now dealt with in Taxation Ruling 2005/8.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

Is the income derived by a dual resident of Australia and the US working in the US as a LES for an Australian Government organisation assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The income derived by a dual resident of Australia and the US working in the US for an Australian Government organisation is not assessable under subsection 6-5(2) of the ITAA 1997.

Facts

The taxpayer is an Australian citizen.

The taxpayer is a resident of Australia for taxation purposes as the taxpayer is a member of a superannuation scheme established under the Superannuation Act 1990.

The taxpayer is also a resident of the US for taxation purposes.

The taxpayer works for an Australian Government organisation in the US.

The taxpayer is employed as a locally engaged staff by an Australian government organisation in the US.

The taxpayer's employment does not involve the discharge of governmental functions within the meaning of Article 19 of Schedule 2 to the International Tax Agreements Act 1953 (the Agreements Act).

The taxpayer receives salary and wages in respect of their employment.

The taxpayer maintains a home in the US but does not maintain a home in Australia.

The law of the US provides for the imposition of income tax on employment income and does not generally exempt such income from income tax.

The salary and wages received by the taxpayer are not exempt in the US because of a law (or regulations) corresponding to the International Organizations (Privileges and Immunities) Act 1963 or under an international agreement to which Australia is a party that deals with privileges and immunities of persons connected with international organisations or relating to diplomatic or consular matters.

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 Income Tax Assessment Act 1936 (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 1936 and ITAA 1997 except in some limited situations.

Schedule 2 to the Agreements Act contains the double tax convention between Australia and the US (the US Convention). Schedule 2A to the Agreements Act contains the US Protocol amending the US Convention (US Protocol). The US Convention and the US Protocol operate to avoid the double taxation of income received by Australian and US residents.

As the taxpayer is a dual resident of Australia and of the US, it is necessary to consider the tie breaker rules in the US Convention.

Article 4(2) of the US Convention sets out the tiebreaker rules for residency for individuals. The tiebreaker rules ensure that the individual is only treated as a resident of one country for the purposes of working out liability to tax on their income under the US Convention. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes.

Article 4(2) of the US Convention provides that if an individual is a resident of both Australia and US, they shall be deemed to be a resident of the State:

(a)

in which they maintain a permanent home

(b)

if the provisions of (a) do not apply, in which they have an habitual abode, or

(c)

if the provisions of (a) and (b) do not apply, with which their personal and economic relations are closer.

Article 4(2) of the US Convention further provides that in determining an individual's permanent home, regard shall be given to the place where the individual dwells with their family, and in determining the country with which an individual's personal and economic relations are closer, regard shall be given to their citizenship (if the individual is a citizen of one of the countries).

The terms 'permanent home', 'habitual abode' and 'personal and economic relations' are otherwise undefined in the US Convention. Article 3(2) of the US Convention provides that any term not defined shall, unless the context otherwise requires, have the meaning which it has under the law relating to taxes of the country applying the US Convention.

Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting double tax agreements. Paragraph 104 of TR 2001/13 provides that the OECD Model Tax Convention and Commentary will often need to be considered in interpreting double tax agreements.

The OECD Commentary provides that in relation to a 'permanent home':

(a)

for a home to be permanent, an individual must have arranged and retained it for his or her permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short duration. The dwelling has to be available at all times continuously and not occasionally for the purposes of a stay, which owing to the reasons for it is necessarily of short duration (eg travel for pleasure, business travel, attending a course etc)

(b)

any form of home may be taken into account, including a house or apartment belonging to or rented by the individual and a rented furnished room.

The taxpayer maintains a residence in the US and does not maintain a residence in Australia. Accordingly, the taxpayer will be treated solely as a resident of the US for the purposes of applying the provisions of the US Convention.

Article 15(1) of the US Convention provides that salaries, wages and other similar remuneration derived by an individual who is a resident of the US in respect of an employment shall be taxable only in the US unless the employment is exercised in Australia.

The taxpayer is a resident of the US for taxation purposes and for the purposes of the US Convention and exercises the duties of their employment wholly in the US.

Accordingly Article 15(1) of the US Convention applies and the income is taxable only in the US.

Therefore, the employment income received by a taxpayer who is a resident of Australia and the US is not assessable under subsection 6-5(2) of the ITAA 1997.

Year of income:  Year ended 30 June 2003 Year ended 30 June 2004 Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007

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)

Related Public Rulings (including Determinations)
Taxation Determination TD 94/58
Taxation Ruling TR 2001/13

ATO Interpretative Decisions overturned by this decision
ATO ID 2002/283

Other References:
OECD Model Tax Convention on Income and on Capital

Keywords
Double tax agreement
Income
International tax
Salary & wages income
United States

Business Line:  Public Groups and International

Date of publication:  24 September 2004

ISSN: 1445-2782