ATO ID 2005/179: Assessability of employment income received by an Australian resident for service aboard a Swiss ship operated in international waters
Date of decision: 15 June 2005
Year of income: Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007
Business line: Public Groups and International

Issue
Are salary and wages income received by the Australian resident taxpayer from service aboard a Swiss ship operated in international waters assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The salary and wages income received by the Australian resident taxpayer from service aboard a Swiss ship operated in international waters is assessable under subsection 6-5(2) of the ITAA 1997.

Facts
The taxpayer is a resident of Australia for income tax purposes. The taxpayer is also a citizen of Australia. The taxpayer is employed by an individual who is a national of Switzerland for a continuous period of not less than 91 days on a privately owned Swiss vessel operated in international waters. The vessel is considered to be a ship in this instance. The taxpayer receives salary and wages income from which no tax is deducted in any other foreign country.

Reasons for decision
Summary: 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 earned from employment are ordinary income for the purposes of subsection 6-5 of the ITAA 1997 [also refer to subsection 995-1(1) of ITAA 1997]. Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income 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 ITAA 1936 which deals with overseas employment income. Subsection 23AG(1) of the Income Tax Assessment Act 1936 (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 from foreign service will be exempt from tax in Australia. Subsection 23AG(7) of the ITAA 1936 defines 'foreign service' as service in a foreign country as the holder of an office or in the capacity of an employee and 'foreign earnings' include salary, wages, commission, bonuses or allowances. Paragraph 19 of Taxation Ruling TR 96/15 states that for the purposes of subsection 23AG(1) of the ITAA 1936, service on a foreign ship in international waters does not constitute foreign service as it is not performed in a foreign country ( Chaudhri v. FCT (2001) 109 FCR 416; (2001) 47 ATR 126; (2001) ATC 4212]). In determining liability for Australian tax on foreign sourced income received by an Australian 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 (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. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions). Schedule 15 to the Agreements Act contains the double tax agreement between Australia and Switzerland (the Swiss Agreement). The Swiss Agreement operates to avoid the double taxation of income received by Australian and Swiss residents. Article 15 of the Swiss Agreement provides that salary, 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 Switzerland. If the employment is exercised in Switzerland, then the remuneration derived from that employment may be taxed in Switzerland. Further, paragraph (3) of Article 15 provides that the remuneration received in respect of employment exercised aboard a ship or aircraft operated in international traffic by a resident of Switzerland, may be taxed in Switzerland. Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting tax treaties. Paragraph 23 states that the phrase 'may be taxed' normally means that the source country has a non-exclusive entitlement to tax the income. However, under normal international tax principles, the other country may also continue to tax its residents on income, wherever sourced, provided it is permissible under domestic law, and the double tax agreement does not explicitly prevent it from doing so. The Swiss Agreement does not explicitly prevent Australia from taxing the taxpayer on this income earned from services aboard a Swiss ship. As the country of residence, Australia has an entitlement to tax salary and wages received by a taxpayer from the Swiss employer under the ITAA 1936 and ITAA 1997. The salary and wages received by the taxpayer in relation to the employment on a Swiss ship in international waters, would not be exempt under subsection 23AG(1) of the ITAA 1936, as the taxpayer has not been engaged in foreign service. The additional criteria - that the taxpayer be engaged for a continuous period of not less than 91 days - need not be considered. Accordingly, the taxpayer's assessable income will include salary and wages received from service aboard the Swiss ship under subsection 6-5(2) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1936 section 23AG subsection 23AG(1) subsection 23AG(1AA) subsection 23AG(7) subsection 160AF(1)
Case references: Chaudhri v. FCT (2001) 109 FCR 416 (2001) 47 ATR 126 2001 ATC 4214
Related public rulings and determinations: Taxation Ruling TR 96/15 | Taxation Ruling TR 96/15A - Addendum | Taxation Ruling TR 96/15E - Erratum | Taxation Ruling TR 2001/13
Related ATO interpretative decisions: ATO ID 2003/187 | ATO ID 2003/620 | ATO ID 2003/1007
Subject references: Double tax agreements Exempt income Foreign income Foreign salary and wages International tax Switzerland Ship International waters