ATO Interpretative Decision

ATO ID 2005/161 (Withdrawn)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• This ATO ID is withdrawn from the database due to legislative changes to section 23AG of the Income Tax Assessment Act 1936 which took effect from 1 July 2009.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 allowances received by an Australian resident taxpayer from employment in the Solomon Islands assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

The salary and part of the allowances received by an Australian resident taxpayer from employment in the Solomon Islands are not assessable under subsection 6-5(2) of the ITAA 1997 as they are exempt under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936). However, part of the allowance received by the taxpayer that covers activities undertaken prior to the commencement or after the completion of foreign service is not derived from that foreign service, and is not exempt from tax under subsection 23AG(1) of the ITAA 1936.

Facts

The taxpayer is an Australian resident for taxation purposes.

The taxpayer is employed in the Solomon Islands for a continuous period of not less than 91 days.

As part of the overall remuneration package, the taxpayer receives monthly salary and two types of allowances.

The 'accommodation and living allowance' covers the taxpayer's living and utilities costs in the Solomon Islands.

The 'airfare and other allowance' covers the costs of airfares (pre and post foreign service, when taking leave), visa application, departure taxes, leave fares, mobilisation, demobilisation, travel/medical insurance and pre-mobilisation medical examinations and vaccinations.

The laws of the Solomon Islands provide for the imposition of income tax and do not generally exempt employment income from income tax.

A Memorandum of Understanding (MOU) exists between Australia and the Solomon Islands, which exempts the taxpayer's employment income from income tax in the Solomon 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 allowances 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 it is not included in 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 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, wages, bonuses or allowances (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.

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 the Solomon Islands. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply.

As the laws of the Solomon Islands provide for the imposition of income tax and do not generally exempt employment income from income tax, paragraphs 23AG(2)(c) and (d) of the ITAA 1936 will not apply.

None of the other reasons in subsection 23AG(2) of the ITAA 1936 apply to the taxpayer's situation.

The taxpayer's salary and wages are exempt from tax in the Solomon Islands under the terms of a MOU signed by the governments of Australia and the Solomon Islands. This is not one of the reasons listed in subsection 23AG(2) of the ITAA 1936.

However, to qualify for the exemption the 'foreign earnings' must be derived from the 'foreign service'. That does not mean that the foreign earnings need to be derived at the time of engaging in foreign service. The important test is that the foreign earnings, when derived, need to be derived as a result of the undertaking of that foreign service.

As the taxpayer has been engaged in foreign service for a continuous period of not less than 91days, the salary received by the taxpayer from service in the Solomon Islands is exempt from tax under subsection 23AG(1) of the ITAA 1936 and is not assessable income under subsection 6-5(2) of the ITAA 1997.

The 'accommodation and living allowance' received by the taxpayer is exempt from tax under subsection 23AG(1) of the ITAA 1936.

That part of the 'airfare and other allowance' received by the taxpayer relating to the airfares when taking leave and travel/medical insurance is exempt from tax under subsection 23AG(1) of the ITAA 1936 as they are foreign earnings from that foreign service.

That part of the 'airfare and other allowance' received by the taxpayer relating to the pre and post service airfares, visa applications, departure taxes, mobilisation, demobilisation and pre-mobilisation medical examinations and vaccinations undertaken prior to the commencement, or after the completion of foreign service, is not derived from that foreign service and is not exempt from tax under subsection 23AG(1) of the ITAA 1936.

Year of income:  Year ending 30 June 2005 Year ending 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)
   subsection 23AG(7)

Keywords
Employee allowances
Exempt income
Foreign income
Income
International tax
Salary & wages income
Solomon Islands

Business Line:  Public Groups and International

Date of publication:  17 June 2005

ISSN: 1445-2782