ATO Interpretative Decision

ATO ID 2004/770 (Withdrawn)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• This ATO ID is withdrawn from the database due to legislative changes to section 23AG of the Income Tax Assessment Act 1936 which took effect from 1 July 2009.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 received by a resident taxpayer from serving as a member of the Australian Defence Force (ADF) in the Marshall Islands with the Pacific Patrol Boat Project assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The salary and wages received by a resident taxpayer from serving as a member of the ADF in the Marshall Islands with the Pacific Patrol Boat Project are not assessable under subsection 6-5(2) of the ITAA 1997 as the salary and wages are exempt under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

Facts

The taxpayer is an Australian resident for income tax purposes.

The taxpayer is a member of the ADF.

The taxpayer served in the Marshall Islands as part of Australia's contribution to the Pacific Patrol Boat Project.

The Pacific Patrol Boat project is a part of Australia's Defence Cooperation Program. The program's aim is to support Australia's defence relationships in the Pacific region by contributing to the maintenance of regional security and assisting with the development of security capabilities of various South Pacific countries, including the Marshall Islands.

The taxpayer served in the Marshall Islands for a continuous period of not less than 91 days.

The taxpayer received salary and wages from the ADF.

A certificate under paragraph 23AD(1)(a) of the ITAA 1936 has not been issued by the Chief of the Defence Force to the effect that the taxpayer is on eligible duty with a specified organisation in a specified area outside Australia.

There is no double tax agreement between Australia and the Marshall Islands.

The salary and wages received by the taxpayer were not exempt in the Marshall Islands because of a law (or regulations) corresponding to the International Organizations (Privileges and Immunities) Act 1963 or under an international agreement to which Australia is a party that deals with privileges and immunities of persons connected with international organisations or relating to diplomatic or consular matters.

The taxpayer's salary and wages were exempt from income tax in the Marshall Islands under the terms of a Memorandum of Understanding (MoU) between the governments of Australia and the Marshall Islands.

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 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' includes income consisting of salary and 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).

However, if the foreign earnings are exempt from tax in the foreign country because of another reason (for example, an MoU and/or a specific exemption in the foreign country's tax law), subsection 23AG(2) of the ITAA 1936 will not apply to deny the exemption under subsection 23AG(1). This is because the foreign earnings are not exempt in the foreign country solely because of events listed in that subsection - the foreign earnings are exempt because of the MoU and/or specific exemption which is not a reason listed in subsection 23AG(2).

The taxpayer's salary and wages were exempt from tax in the Marshall Islands under the terms of the MoU signed by the governments of Australia and the Marshall Islands. This is not a reason listed in subsection 23AG(2) of the ITAA 1936.

Accordingly, because the taxpayer's salary and wages were not exempt only because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936, the salary and wages derived by the taxpayer from service in the Marshall Islands are exempt under subsection 23AG(1) of the ITAA 1936 and will not be assessable under subsection 6-5(2) of the ITAA 1997.

Year of income:  Year ended 30 June 1997 Year ended 30 June 1998 Year ended 30 June 1999

Legislative References:
Income Tax Assessment Act 1936
   paragraph 23AD(1)(a)
   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
Defence force members
Defence force overseas service
Foreign income
Foreign salary & wages
Income
International tax
Marshall Islands

Business Line:  Public Groups and International

Date of publication:  24 September 2004

ISSN: 1445-2782