ATO Interpretative Decision

ATO ID 2005/232 (Withdrawn)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• This ATO ID is withdrawn from the database due to legislative changes to section 23AG of the Income Tax Assessment Act 1936 which took effect from 1 July 2009. Despite its withdrawal, this ATOID continues to be a precedential view in respect of decisions for income years up to, and including, the 2008/2009 income year.
  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 from employment in Sri Lanka assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The salary and wages received by an Australian resident taxpayer from employment in Sri Lanka are not assessable under subsection 6-5(2) of the ITAA 1997 because they are exempt from income tax under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Facts

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer is employed by an Australian company to work in Sri Lanka for a continuous period of not less than 91 days.

The taxpayer is employed in Sri Lanka for more than 183 days.

The taxpayer receives salary and wages in relation to that employment.

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

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 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).

Therefore, 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.

Schedule 31 to the Agreements Act contains the double tax agreement between Australia and Democratic Socialist Republic of Sri Lanka (the Sri Lankan Agreement). The Sri Lankan Agreement operates to avoid the double taxation of income received by Australian and Sri Lankan residents.

Article 15(1) of the Sri Lankan Agreement provides that salaries and wages derived by a resident of Australia in respect of an employment shall only be taxable in Australia unless the employment is exercised in Sri Lanka. If the employment is so exercised, the remuneration may also be taxed in Sri Lanka.

Therefore paragraph 23AG(2)(b) of the ITAA 1936 will not apply as the salary and wages received by the taxpayer are not exempt from tax in Sri Lanka.

The law of Sri Lanka provides for the imposition of income tax on employment income and does not generally exempt such income from income tax. Therefore paragraphs 23AG(2)(c) and (d) of the ITAA 1936 will not apply. None of the other reasons listed in subsection 23AG(2) apply to the taxpayers situation.

As the taxpayer is engaged in foreign service for a continuous period of not less than 91 days, and none of the circumstances in subsection 23AG(2) of the ITAA 1936 apply, the employment income received by the taxpayer is exempt under subsection 23AG(1) of the ITAA 1936.

Therefore, the salary and wages received by the taxpayer from employment in Sri Lanka are not assessable under subsection 6-5(2) of the ITAA 1997 as they are exempt under subsection 23AG(1) of the ITAA 1936.

Year of income:  Year ending 30 June 2006 Year ending 30 June 2007

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

Keywords
Double tax agreements
Foreign income
Foreign salary & wages
International law
International tax
Salary & wages income
Sri Lanka
Treaties

Business Line:  Public Groups and International

Date of publication:  12 August 2005

ISSN: 1445-2782