ATO Interpretative Decision

ATO ID 2005/351

Income tax

• This ATO ID has been amended to remove references in the Reasons for Decision to repealed legislation dealing with foreign tax credit rules. With effect from 1 July 2008 the foreign tax credit will by replaced by a foreign income tax offset.
  This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
  Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.

Issue

Is the employment income received by an Australian resident while studying in Denmark assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The employment income received by an Australian resident while studying in Denmark is assessable under subsection 6-5(2) of the ITAA 1997.

Facts

The taxpayer is a Danish citizen.

The taxpayer is a resident of Australia for income tax purposes.

The taxpayer visits Denmark for a period of six weeks at a time for the purpose of study.

The taxpayer will be present in Denmark for less than 91 days.

The taxpayer receives employment income from Denmark while working as a temporary employee for a Danish employer.

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.

Employment income is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

In determining liability to Australian tax on foreign sourced income received by an Australian resident, it is necessary to consider not only our income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and ITAA 1997, so that those Acts are read as one.

Schedule 18 to the Agreements Act contains the tax treaty between Australia and the Kingdom of Denmark (Danish Agreement). The Danish Agreement operates to avoid the double taxation of income received by Australian and Danish residents.

Article 15(1) of the Danish Agreement provides that salary and wages and other similar remuneration derived by an individual who is a resident of Australia in respect of an employment, shall be taxable only in Australia unless the employment is exercised in Denmark. If the employment is exercised in Demark, the remuneration may be taxed in Denmark.

Article 15(2) of the Danish Agreement provides that remuneration derived by an Australian resident individual in respect of an employment exercised in Denmark shall be taxable only in Australia if:

•

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

•

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

•

the remuneration is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has in Denmark, and

•

the remuneration is, or upon that application of this Article will be subject to tax in Australia.

Article 15(2) of the Danish Agreement does not apply to the taxpayer as the remuneration will be paid by a Denmark resident employer.

Therefore, Article 15(1) of the Danish Agreement applies and the employment income is assessable under subsection 6-5(2) of the ITAA 1997.

Article 23 of the Danish Agreement provides that, subject to the provisions of law of Australia, a credit for Danish tax paid will be allowed against Australian tax payable in respect of that foreign income.

The taxpayer has paid foreign tax in respect of that income, profit or gain for which the taxpayer was personally liable.

Section 160AF of the ITAA 1936 limits the amount of the foreign tax credit to the lessor of foreign tax paid, or the amount of Australian tax payable on the assessable income, profit or gain.

Where foreign tax has been paid in relation to the employment income by the taxpayer, a foreign income tax offset will be allowed.

Year of income:  Year ending 30 June 2006

Legislative References:
Income Tax Assessment Act 1936
   section 4

Keywords
Denmark
Double tax agreements
Employment income
International tax

Siebel/TDMS Reference Number:  4889033

Business Line:  Public Groups and International

Date of publication:  16 December 2005

ISSN: 1445-2782