ATO Interpretative Decision

ATO ID 2004/906 (Withdrawn)

Income tax

• This ATOID 2004/906 is to be withdrawn from 1 July 2008 as the position stated in the ATOID is no longer current due to changes in the law dealing with tax offsets and the repeal of legislation dealing with the foreign tax credit system.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is income earned by a non-resident taxpayer of both Australia and East Timor from services in the Joint Petroleum Development Authority (JPDA) assessable under sub section 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. Income earned by a non-resident taxpayer of both Australia and East Timor from services in the JPDA is assessable under subsection 6-5(3) of the ITAA 1997.

Facts

The taxpayer is a non-resident of both Australia and East Timor.

The taxpayer works for an Australian company in the JPDA.

Reasons for Decision

The Timor Sea between northern Australia and East Timor contains proven petroleum resources in the seabed. Australia and East Timor have competing claims to the resources of this seabed. The Timor Sea Treaty (Treaty) enables Australia and East Timor to jointly develop the petroleum resources of a major part of the seabed of the Timor Sea, defined in Article 3 of the Treaty as the JPDA, pending agreement to a seabed boundary with East Timor.

The Treaty was signed between the Government of East Timor and the Government of Australia on 20 May 2002. The Treaty entered into force on 2 April 2003 but is taken to have effect and all of the provisions will apply and be taken to have applied on and from the date of signature, 20 May 2002.

Both Australia and East Timor continue to have sovereignty over the area and therefore, for the purposes of Australian law, the area is considered part of Australian territory. Article 2 of the Treaty recognises that the treaty is without prejudice to both Australia's and East Timor's legal claims to the seabed in the Timor Sea.

Further, Article 13 of the Treaty provides that the JPDA shall be deemed to be, and treated by Australia as part of Australia (and by East Timor as part of East Timor) for the purposes of taxation law related directly or indirectly to:

(a)

the exploration for or the exploitation of petroleum in the JPDA, or

(b)

acts, matters, circumstances and things touching, concerning arising out of or connected with such exploration and exploitation.

Therefore, the JPDA is treated by Australia as part of Australia's maritime zones under the arrangement and the income will be taxed in Australia.

Article 13(3) of the Tax Code under the Treaty provides that JPDA income derived by an individual who is not a resident of either Australia or East Timor in respect of employment exercised in the JPDA may be taxed in Australia on 100% of that income. The taxpayer will then receive a rebate of tax of the Australian reduction percentage (that is, 90%) of their gross tax. In effect the taxpayer, being a resident of a third country, is taxed at 10% of the normal non resident tax rates.

The taxpayer is not entitled to claim any foreign tax credits as the taxpayer is not a resident of Australia.

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non resident taxpayer includes:

(a)

ordinary income derived directly or indirectly from all Australian sources during the income year, and

(b)

other ordinary income that a provision includes as assessable income on some basis other than having an Australian source.

Salary and wages are ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

Accordingly, the income earned by the taxpayer from service in the JPDA is assessable under subsection 6-5(3) of the ITAA.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   subsection 6-5(3)

Related ATO Interpretative Decisions
ATO ID 2003/202 (withdrawn)
ATO ID 2004/288

Other References:
Explanatory Memorandum to the Petroleum (Timor Sea Treaty) Bill 2003
Timor Sea Treaty between the Government of Australia and the Government of East Timor, Dili, 20 May 2002
Tax facts. The Timor Sea Treaty: tax changes affecting the Joint Petroleum Development Area

Keywords
Foreign tax credits
International law
International tax
Rebate of tax
Timor Sea Zone of Cooperation
Salary & wages
Timor Gap Treaty

Business Line:  Public Groups and International

Date of publication:  19 November 2004

ISSN: 1445-2782