ATO Interpretative Decision

ATO ID 2003/956 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as the issue is now dealt with in Taxation Ruling 2005/8.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Are salary and wages received by the taxpayer, who is a resident of Australia, from working for the Australian government in Indonesia assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. Salary and wages received by the taxpayer, who is a resident of Australia, from working for the Australian government in Indonesia are assessable under subsection 6-5(2) of the ITAA 1997.

Facts

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

The taxpayer is a resident of Indonesia for Indonesian income tax purposes and for the purposes of the double tax agreement between Australia and Indonesia, contained in Schedule 37 to the International Tax Agreements Act 1953 (the Agreements Act).

The taxpayer is employed by the Australian government.

The taxpayer receives salary and wages from their employment.

The taxpayer exercises their employment duties in Indonesia.

The taxpayer is not covered by any laws relating to diplomatic privileges or immunities.

The taxpayer will be present in Indonesia for two years.

The taxpayer is present in Indonesia solely for the purposes of their employment.

Reasons for Decision

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an resident taxpayer includes ordinary income derived directly or indirectly from all sources, inside or outside 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 as an employee (subsection 23AG(7) of the ITAA 1936). 'Foreign earnings' includes income consisting of salary or wages (subsection 23AG(7) of the ITAA 1936).

However 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 reasons listed therein.

Under paragraph 23AG(2)(b) 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 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 37 to the Agreements Act contains the double tax agreement between Australia and Indonesia (the Indonesian Agreement). The Indonesian Agreement operates to avoid the double taxation of income received by Australian and Indonesian residents.

Article 19(1) of the Indonesian Agreement provides that remuneration paid by Australia to an individual who is a citizen of Australia for services rendered to the Australian government is taxable only in Australia. However, the remuneration will be taxable only in Indonesia if the services are rendered in Indonesia and the individual is a resident of Indonesia who :

(a)

is a citizen or national of Indonesia; or

(b)

did not become a resident of Indonesia solely for the purposes of performing the services.

The taxpayer became a resident of Indonesia solely for the purposes of performing the services to the Australian government. Therefore, the salary and wages received by the taxpayer are taxable only in Australia.

Because the salary and wages received by the taxpayer are exempt from tax in Indonesia as a result of the operation of a double tax agreement, paragraph 23AG(2)(b) of the ITAA 1936 will apply and the income will not be exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936.

Accordingly, as the taxpayer is a resident of Australia, the salary and wages received from services rendered to the Australian government in Indonesia are assessable under subsection 6-5(2) of the ITAA 1997.

Year of income:  Year ended 30 June 2003 Year ended 30 June 2004 Year ended 30 June 2005

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

Keywords
Double tax agreements
Foreign income
Foreign salary & wages
Indonesia
International tax
Treaties

Business Line:  Public Groups and International

Date of publication:  24 October 2003

ISSN: 1445-2782