ATO Interpretative Decision

ATO ID 2004/884 (Withdrawn)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• This ATO ID is withdrawn from the database due to legislative changes to section 23AG of the Income Tax Assessment Act 1936 which took effect from 1 July 2009.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 ATO ID 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 derived by an Australian resident individual working in Sri Lanka as a LES for an Australian Government organisation assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The salary and wages derived by an Australian resident individual working in Sri Lanka as a LES for an Australian Government organisation are assessable under subsection 6-5(2) of the ITAA 1997.

Facts

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

The taxpayer is not a resident of Sri Lanka for Sri Lankan taxation purposes.

The taxpayer works for an Australian Government organisation in Sri Lanka.

The taxpayer is employed as a LES.

The taxpayer's employment as a LES involves the discharge of governmental functions for the purposes of Article 19 of Schedule 31 to the International Tax Agreements Act 1953 (the Agreements Act).

The taxpayer receives salary and wages in respect of their employment.

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

The salary and wages received by the taxpayer were not exempt in Sri Lanka because of a law (or regulations) of Sri Lanka corresponding to the International Organizations (Privileges and Immunities) Act 1963.

The salary and wages received by the taxpayer were not exempt in Sri Lanka because of an international agreement (or law giving effect to such an agreement), to which Australia is a party, that deals with diplomatic or consular privileges and immunities or in relation to persons connected with international organisations.

The salary and wages are not exempt from income tax in Sri Lanka for any other reason.

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 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (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 of an employee and 'foreign earnings' includes income consisting of salary or wages (subsection 23AG(7) of the ITAA 1936).

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 only because of any of the following reasons:

(a)

a law of the foreign country giving effect to a double tax agreement;

(b)

a double tax agreement

(c)

provisions of a law of the foreign country under which income covered by any of the following categories is generally exempt from income tax:

(i)

income derived in the capacity of an employee

(ii)

income from personal services

(iii)

similar income

(d)

the law of the foreign country does not provide for the imposition of income tax on one or more of the categories of income mentioned in paragraph (c);

(e)

a law of the foreign country corresponding to the International Organizations (Privileges and Immunities) Act 1963 or to the regulations under that Act

(f)

an international agreement to which Australia is a party and that deals with:

(i)

diplomatic or consular privileges and immunities;

(ii)

privileges and immunities in relation to persons connected with international organisations;

(g)

a law of the foreign country giving effect to an agreement covered by paragraph (f).

In determining liability for Australian tax on foreign sourced income 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 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 the 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 19(1) of the Sri Lankan Agreement provides that remuneration, other than a pension or annuity, paid by Australia or a political subdivision or local authority of Australia to any individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia.

However, Article 19(1) of the Sri Lankan Agreement further provides that such remuneration shall be taxable only in Sri Lanka if the services are rendered in Sri Lanka and the individual is a resident of Sri Lanka who:

(i)

is a citizen or national of Sri Lanka; or

(ii)

did not become a resident of Sri Lanka solely for the purposes of rendering the services.

As the taxpayer is not a resident of Sri Lanka for Sri Lankan tax purposes, the salary and wages derived by the taxpayer are not taxable in Sri Lanka and are taxable only in Australia under Article 19(1) of the Sri Lankan Agreement.

As the income received by the taxpayer is exempt in Sri Lanka only because of the operation of a double tax agreement, paragraph 23AG(2)(a) applies and the income will not be exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936.

Accordingly, as the taxpayer is an Australian resident, the salary and wages received from working in Sri Lanka for the Australian Government will be assessable under subsection 6-5(2) of the ITAA 1997.

Year of income:  Year ended 30 June 2004 Year ended 30 June 2005 Year ended 30 June 2006

Legislative References:
Income Tax Assessment Act 1936
   section 23AG
   subsection 23AG(1)
   subsection 23AG(2)
   paragraph 23AG(2)(a)
   paragraph 23AG(2)(b)
   paragraph 23AG(2)(c)
   paragraph 23AG(2)(d)
   paragraph 23AG(2)(e)
   paragraph 23AG(2)(f)
   paragraph 23AG(2)(g)
   subsection 23AG(7)

Keywords
Double tax agreement
Income
International tax
Governmental functions
Sri Lanka

Business Line:  Public Groups and International

Date of publication:  12 November 2004

ISSN: 1445-2782