ATO Interpretative Decision

ATO ID 2006/131 (Withdrawn)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• This ATO ID is withdrawn from the database due to legislative changes to section 23AG of the Income Tax Assessment Act 1936 which took effect from 1 July 2009.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(s)

Are the salary and allowances earned by an Australian resident discharging Australian governmental functions in the United States (US) assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The salary and allowances earned by an Australian resident discharging Australian governmental functions in the US are assessable under subsection 6-5(2) of the ITAA 1997. The salary and wages are not exempt from tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

Facts

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

The taxpayer is employed by the Australian Government.

The taxpayer's duties as an employee of the Australian Government involve the discharge of governmental functions.

The taxpayer worked for more than 91 days continuously in the US.

The taxpayer receives salary and wages from the Australian Government for the services provided by the taxpayer in respect of the discharge of governmental functions in the US.

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 then it is not assessable income.

Section 11-15 of the ITAA 1997 provides that if an amount is exempt income then it is not assessable 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' include income consisting of salary and wages (subsection 23AG(7) of the ITAA 1936).

However subsection 23AG(2) of the ITAA 1936 states that foreign earnings will not be exempt from tax under subsection 23AG(1) of the ITAA 1936 if the amount is exempt from income tax in the foreign country only because of any of the reasons listed.

Under paragraph 23AG(2) of the ITAA 1936, where income is exempt in the foreign country as a result of the operation of a double tax agreement, that income is not exempt under subsection 23AG(1) of the ITAA 1936.

In determining liability to Australian tax on foreign sourced income received by a resident, 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 (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 2 to the Agreements Act contains the double tax agreement between Australia and the United States (the US Convention).

Note: Schedule 2A to the Agreements Act contains the Protocol amending the US Convention (US Protocol) The US Convention and the US Protocol operate to avoid the double taxation of income received by Australian and US residents. The US Protocol entered into force in Australia on 13 May 2003 and has effect in respect of income tax other than withholding taxes for any year of income beginning on or after 1 July 2004. Accordingly, the US Protocol has no effect in respect of the 2001 and 2002 income tax years.

Article 19 of the US Convention provides that salary and wages paid by Australia to a citizen of Australia in respect of labour or personal services performed as an employee in the discharge of governmental functions shall be exempt from tax in the US.

As the taxpayer is a citizen of Australia and is employed by the Australian Government to perform duties that involve the discharge of governmental functions, the taxpayer's salary and wage income is exempt in the US under Article 19 of the US Convention.

Paragraph 23AG(2)(b) of the ITAA 1936 will apply because the salary and wages income earned in the US is exempt in the US under Article 19 of the US Convention.

Accordingly, the salary and allowances earned by the Australian resident discharging Australian governmental functions in the US are assessable under subsection 6-5(2) of the ITAA 1997. The salary and wages are not exempt from tax in Australia under section 23AG of the ITAA 1936.

Year of income:  Year ended 30 June 2001 Year ended 30 June 2002

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

Related Public Rulings (including Determinations)
Taxation Ruling TR 2005/8

Keywords
Double tax agreements
Exempt income
Foreign income
International tax
Salary & wages income
Treaties
United States

Business Line:  Public Groups and International

Date of publication:  19 May 2006

ISSN: 1445-2782