ATO ID 2004/202: Assessability of salary and wages income derived by German academic working in Australia where initial employment contract for less than two years later extended
Date of decision: 25 February 2004
Year of income: Year ended 30 June 2003
Business line: Public Groups and International

Issue
Are the salary and wages received by a German citizen from undertaking research in a university in Australia assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) where the taxpayer initially contracts to perform research at the university for less than two years but later extends the period of the contract to more than two years and who becomes an Australian resident taxpayer at that time?

Decision
The salary and wages received before the change in intention by the taxpayer to stay in Australia for a period exceeding two years are not assessable under subsection 6-5(3) of the ITAA 1997 as Article 19(1) of Schedule 9 to the International Tax Agreements Act 1953 (the Agreements Act) applies. However, the salary and wages received after the change in intention by the taxpayer to extend the period of contract to undertake research in Australia for more than two years are assessable under subsection 6-5(2) of the ITAA 1997.

Facts
The taxpayer, a German academic, is employed to undertake research with a university in Australia under an employment contract for less than two years. The taxpayer initially intended to stay in Australia for no more than two years. However, prior to the expiry of the initial employment contract, the taxpayer accepted a further term of employment to carry out research with the university. The taxpayer became a resident of Australia and ceased to be a resident of Germany for tax purposes at the time the taxpayer's intention changed. The taxpayer's total period of employment in Australia now exceeds two years. The taxpayer receives salary and wages from the Australian university.

Reasons for decision
Summary: Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly or indirectly from Australian sources during the income year. Salary and wages are ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997. In determining liability to tax on Australian sourced income received by a non resident, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the Agreements Act. Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. Schedule 9 to the Agreements Act contains the double tax agreement between Australia and Germany (the German Agreement). The German Agreement operates to avoid the double taxation of income received by Australian and German residents. Article 19(1) of the German Agreement provides that remuneration received by a professor or teacher who is a resident of Germany, will not be taxable in Australia where the taxpayer visits Australia for a period not exceeding two years for the purpose of carrying out advanced study or research or of teaching at a university, college, school or other educational institution. Taxation Determination TD 2001/22 provides guidance as to the application of Article 19(1) of the German Agreement. Paragraph 5 of TD 2001/22 states that, if during the period of teaching or after it has finished, an intention is formed to remain in Australia for a period that in total (with the earlier period) exceeds two years, the teaching income derived before the person's intention had changed will remain exempt. However, the exemption will not apply to any teaching income earned after the person's intention changed. The salary and wages received before the change in intention by the taxpayer to stay in Australia for a period exceeding two years are therefore exempt from tax in Australia under Article 19(1) of the German Agreement. Article 19(1) will cease to apply once the taxpayer's intention changes, as the visit will exceed two years. Further, the taxpayer ceased to be a German resident and became an Australian resident at the time their intention changed and as such the German Agreement ceases to apply to the taxpayer after that time. 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. The remuneration derived by the taxpayer from working in Australia after becoming an Australian resident is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. Accordingly, the salary and wages received before the change in intention by the taxpayer to remain in Australia for a period exceeding two years are not assessable under subsection 6-5(3) of the ITAA 1997. The salary and wages received after the change in intention to remain in Australia for a period exceeding two years are assessable under subsection 6-5(2) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 6-5 subsection 6-5(2) subsection 6-5(3)
Related public rulings and determinations: Taxation Determination TD 2001/22
Subject references: Double tax agreements Exempt income Germany International tax Non resident individuals Residence in Australia