ATO Interpretative Decision

ATO ID 2005/168 (Withdrawn)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• This ATO ID is withdrawn from the database due to legislative changes to section 23AG of the Income Tax Assessment Act 1936 which took effect from 1 July 2009 and the entering into force of a new double tax agreement between Australia and the United Kingdom on 17 December 2003.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Are the salary and wages received by an Australian resident taxpayer, while working on an oil exploration vessel in the territorial waters of the United Kingdom (UK), assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The salary and wages received by an Australian resident taxpayer, while working on an oil exploration vessel in the territorial waters of the UK, are assessable income under subsection 6-5(2) of the ITAA 1997.

Facts

The taxpayer is an Australian resident for income tax purposes.

The taxpayer's employer is not a resident of Australia or the UK.

The taxpayer performs the duties of their employment on an oil exploration vessel that operates in various locations including the territorial waters of the UK.

The taxpayer works in the territorial waters of the UK for less than 183 days.

The taxpayer has been engaged in service in a number of foreign countries for a continuous period of not less than 91 days.

The remuneration paid to the taxpayer is not deductible in determining taxable profits of the employer's permanent establishment in the UK.

The taxpayer pays UK tax on the salary and wages.

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 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 is engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that service will be exempt. 'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes salary and wages income (subsection 23AG(7) of the ITAA 1936).

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 therein.

One of the reasons listed is where the income is exempt in the foreign country because of a double tax agreement (paragraph 23AG(2)(b) of the ITAA 1936).

Therefore, in determining the liability to Australian tax on foreign sourced income received by a resident taxpayer 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 the ITAA 1997 so that those Acts are read as one.

Schedule 1 to the Agreements Act contains the double tax agreement between Australia and the United Kingdom of Great Britain and Northern Ireland (the UK Agreement). Schedule 1 to the Agreements Act contains the protocol amending the UK Agreement (the UK Protocol). The UK Agreement and the UK Protocol operate to avoid the double taxation of income received by Australian and UK residents.

Article 12(1) of the UK Agreement provides that remuneration derived by an individual who is a resident of Australia in respect of an employment shall be subject to tax only in Australia, unless the employment is exercised in the UK. If the employment is so exercised, such remuneration as is derived from that exercise shall be deemed to have source in, and may be taxed in the UK.

However, Article 12(2) of the UK Agreement provides that remuneration derived by a resident of Australia in respect of an employment exercised in the UK shall be exempt from tax in the UK if:

(a)

the taxpayer is present in the UK for a period or periods not exceeding in the aggregate 183 days in the UK year of income; and

(b)

the remuneration is paid by or on behalf of an employer who is not a UK resident; and

(c)

the remuneration is not deductible in determining the profits of a permanent establishment which the employer has in the UK.

As all requirements of Article 12(2) of the UK Agreement are satisfied, the income received by the taxpayer from employment on an oil exploration vessel operated in the territorial waters of the UK is exempt from tax in the UK. The employment income will be subject to tax in Australia under Article 12(1) of the UK Agreement.

As the income is exempt from tax in the UK by the operation of a double tax agreement, the exemption under subsection 23AG(1) of the ITAA 1936 will not apply.

Therefore, the salary and wages received by the taxpayer from employment in the UK are assessable income under subsection 6-5(2) of the ITAA 1997.

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1936
   section 23AG
   subsection 23AG(1)
   subsection 23AG(2)
   paragraph 23AG(2)(a)
   paragraph 23AG(2)(b)
   subsection 23AG(6)
   paragraph 23AG(6)(a)
   subsection 23AG(7)

Related Public Rulings (including Determinations)
Taxation Ruling IT 2441
Taxation Ruling IT 2015

Related ATO Interpretative Decisions
ATO ID 2005/167

Keywords
Double tax agreements
Exempt income
Foreign income
Foreign salary & wages
International law
International tax
Treaties
United Kingdom

Business Line:  Public Groups and International

Date of publication:  17 June 2005

ISSN: 1445-2782