ATO Interpretative Decision

ATO ID 2004/305

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Are the salary and wages received by an Australian resident taxpayer from working in Afghanistan assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The salary and wages received by an Australian resident taxpayer from working in Afghanistan are not assessable under subsection 6-5(2) of the ITAA 1997 as they are exempt from tax under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Facts

The taxpayer is a resident of Australia for tax purposes.

The taxpayer worked in Afghanistan as an employee for a continuous period of more than 90 days.

The taxpayer received salary and wages in respect of that employment.

The tax laws of Afghanistan provide for the imposition of income tax on employment income and do not generally exempt such income from tax.

The salary and wages received by the taxpayer is not exempt in Afghanistan because of a law (or regulations) corresponding to the International Organizations (Privileges and Immunities) Act 1963 (IO(P&I) Act) 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 did not pay tax in Afghanistan as there was no system of collection in place at the time the taxpayer was working in Afghanistan.

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 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 ITAA 1936 which deals with overseas employment income.

Subsection 23AG(1) of the ITAA 1936 provides that where a resident is engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that service will be exempt. 'Foreign service' includes service in a foreign country in the capacity of an employee (subsection 23AG(7) of the ITAA 1936). 'Foreign earnings' includes salary and wages income (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 tax in the foreign country only because of any of the reasons listed therein.

One of the reasons listed is where the income is exempt in the foreign country because of a double tax agreement (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936).

There is no double tax agreement between Australia and Afghanistan. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply.

Paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936 list further exceptions that apply where the income is exempt in the foreign country because the law of the foreign country either generally exempts from income tax or does not provide for the imposition of income tax on one or more of the following categories of income:

(i)

income derived in the capacity of an employee

(ii)

income from personal services, or

(iii)

similar income.

The law of Afghanistan provides for the imposition of income tax on employment income and does not generally exempt such income from income tax.

Therefore, paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936 will not apply.

Paragraphs 23AG(2)(e), 23AG(2)(f) and 23AG(2)(g) of the ITAA 1936 list exceptions to section 23AG(1) that apply where the income is exempt in the foreign country because of a law corresponding to the IO(P&I) Act or 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.

As the taxpayer's earnings are not subject to any such laws or agreements, paragraphs 23AG(2)(e), 23AG(2)(f) and 23AG(2)(g) will also not apply.

The fact that there was no effective collection system in place at the time the taxpayer was working in Afghanistan which meant that the taxpayer did not actually pay tax is irrelevant for the purposes of subsection 23AG(2) of the ITAA 1936.

As the taxpayer was employed in Afghanistan for a continuous period of not less than 91 days and the salary and wages are not exempt from tax in Afghanistan for any of the reasons listed in subsection 23AG(2) of the ITAA 1936, the income received from Afghanistan will be exempt from tax under subsection 23AG(1) of the ITAA 1936.

Accordingly, the salary and wages received by the resident taxpayer while employed in Afghanistan will not be assessable under subsection 6-5(2) of the ITAA 1997.

Year of income:  Year ended 30 June 2001 Year ended 30 June 2002

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)
   subsection 23AG(7)

Keywords
Afghanistan
Exempt income
Foreign income
International tax
Salary & wage income

Business Line:  Public Groups and International

Date of publication:  2 April 2004

ISSN: 1445-2782