ATO Interpretative Decision

ATO ID 2005/119 (Withdrawn)

Income tax

• This ATO ID is withdrawn and replaced by ATO ID 2006/118
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the income derived in New Zealand by an Australian resident taxpayer, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The income derived by an Australian resident taxpayer while working in New Zealand is assessable under subsection 6-5(2) of the ITAA 1997 as the income will not be exempt 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 worked in New Zealand for the New Zealand Ministry of Foreign Affairs and Trade (MFAT) through an arrangement with the Australian Agency for International Development (AusAID) for a period of two years and three months.

The taxpayer received salary and wages from AusAID and remained an employee of AusAID while working in New Zealand.

AusAID is not a resident of New Zealand and has no permanent establishment (PE) in that country.

There is a double tax agreement between Australia and New Zealand.

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 it is not included in 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 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).

In determining liability to Australian tax on foreign sourced income, 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. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited situations).

Schedule 4 of the Agreements Act contains the double tax agreement between Australia and New Zealand (the New Zealand Agreement). The New Zealand Agreement operates to avoid the double taxation of income received by Australian and New Zealand residents.

Article 20(1) of the New Zealand Agreement provides that remuneration paid by the Australian Government to an individual in respect of services rendered to the New Zealand Government, shall be exempt from New Zealand tax, if the individual is not a resident of New Zealand for the purposes of New Zealand tax or is resident in New Zealand for the purposes of New Zealand solely for the purpose of rendering those services.

As the taxpayer is a resident of Australia for tax purposes, Article 20(1) of the New Zealand Agreement applies to give Australia the sole taxing right to the foreign income earned in New Zealand.

Subsection 23AG(2)(b) of the ITAA 1936 operates to remove that exemption provided under subsection 23AG(1) of the ITAA 1936 and accordingly, the salary and wages earned in New Zealand are included in the taxpayer's assessable income under subsection 6-5(2) of the ITAA 1997.

Year of income:  Year ended 30 June 2002 Year ended 30 June 2003 Year ended 30 June 2004

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

Related ATO Interpretative Decisions
ATO ID 2003/86

Keywords
Double tax agreements
Exempt income
Foreign income
New Zealand

Business Line:  Public Groups and International

Date of publication:  13 May 2005

ISSN: 1445-2782