ATO Interpretative Decision

ATO ID 2005/16

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Are the salary and wages derived by an Australian citizen working in Japan for an Australian State Government organisation assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The salary and wages derived by an Australian citizen working in Japan for an Australian State Government organisation are not assessable under subsection 6-5(3) of the ITAA 1997 as they are exempt under paragraph 23(r) of the Income Tax Assessment Act 1936 (ITAA 1936).

Facts

The taxpayer is an Australian citizen and a non-resident of Australia for income tax purposes.

The taxpayer is neither a national of Japan nor is admitted to Japan for permanent residence.

The taxpayer is employed by an Australian State Government organisation in Japan and is discharging governmental functions.

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

Reasons for Decision

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non-resident includes all the ordinary income derived directly or indirectly from all Australian sources during the income year.

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 paragraph 23(r) of the ITAA 1936 which provides that income derived by a non-resident from sources wholly out of Australia (except where it is specifically included by a provision on a basis other than having an Australian source) will be exempt from tax.

The source of income derived from employment is generally the place where the duties or services are performed (Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 11 ATD 288; (1957) 7 AITR 76). Therefore, the salary and wages received by the taxpayer from employment in Japan have a foreign source.

In determining the liability to tax of income derived by a taxpayer who is not an Australian resident, from sources wholly out of Australia, it is also necessary to consider the application of any relevant double tax agreements forming part of the International Tax Agreements Act 1953 (Agreements Act).

Sub-section 4(1) of the Agreements Act provides that the ITAA 1936 and the ITAA 1997 are incorporated and read as one with the Agreements Act. By virtue of sub-section 4(2), the Agreements Act overrides the ITAA 1997 and the ITAA 1936 where there are inconsistent provisions, except in certain limited situations that do not presently apply.

Schedule 6 of the Agreements Act contains the Double Tax Agreement (and Protocol) between the Governments of Australia and of Japan for the avoidance of double taxation and the prevention of fiscal evasion in relation to taxes on income imposed by each of these Governments (the Japanese Agreement).

Article 14(1) of the Japanese Agreement provides that remuneration (other than pensions) paid by the Commonwealth Government, any State of the Commonwealth, or a local governing body in Australia to any individual for services rendered to that Government or body in the discharge of governmental functions shall be exempt from Japanese tax unless the individual is a national of or permanent resident of Japan.

In this case, Article 14(1) of the Japanese Agreement applies to exempt from Japanese tax the salary and wages paid by an Australian State Government body, to a taxpayer who is not an Australian resident, for governmental services rendered to that State Government in Japan.

As the taxpayer is not an Australian resident and is deriving income from sources wholly out of Australia, paragraph 23(r) of the ITAA 1936 applies to exempt the income from income tax in Australia. Further there are no other provisions in the ITAA 1936, the ITAA 1997 or the Agreements Act which provide for this income to be included in the assessable income of the taxpayer on some basis other than having an Australian source.

Consequently, the salary and wages received by the taxpayer are not assessable under subsection 6-5(3) 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
   paragraph 23(r)

Case References:
Federal Commissioner of Taxation v. French
   (1957) 98 CLR 398
   (1957) 11 ATD 288
   (1957) 7 AITR 76

Related ATO Interpretative Decisions
ATO ID 2003/448
ATO ID 2004/82

Keywords
Double tax agreements
Foreign income
Income
International tax
Japan

Business Line:  Public Groups and International

Date of publication:  14 January 2005

ISSN: 1445-2782