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Are the salary and wages received by a resident taxpayer performing governmental functions in Malaysia on behalf of the Australian government assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The salary and wages received by a resident taxpayer performing governmental functions in Malaysia on behalf of the Australian government are assessable under subsection 6-5(2) of the ITAA 1997.

The taxpayer is a resident of Australia for income tax purposes.

The taxpayer is a citizen of Australia.

The taxpayer is an Australian Defence Force (ADF) member stationed in Malaysia.

The taxpayer's duties involve the discharge of governmental functions.

The taxpayer receives salary and wages from the Australian government.

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 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 and 'foreign earnings' include income consisting of salary and 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 exclusions listed therein.

In determining liability to Australian tax on foreign sourced income received by a resident, it is necessary to consider not only the income tax laws, but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one.

Schedule 16 to the Agreements Act contains the double tax agreement between Australia and Malaysia (the Malaysian Agreement). Schedule 16A to the Agreements Act contains the Malaysian Protocol amending the Malaysian Agreement (Malaysian Protocol). The Malaysian Agreement and the Malaysian Protocol operate to avoid the double taxation of income received by Australian and Malaysian residents.

Article 18(1) of the Malaysian Agreement provides that remuneration paid by Australia to an individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia. However, such remuneration shall be taxable only in Malaysia if the services are rendered in Malaysia and the recipient is a resident of Malaysia who: (a) is a citizen or national of Malaysia; or (b) did not become a resident of Malaysia solely for the purpose of performing the services.

The taxpayer is a citizen of Australia. The taxpayer is a serving ADF member posted to Malaysia. The taxpayer is paid by the Australian government. The taxpayer is providing services in the discharge of governmental functions. Australia retains the sole taxing right to the salary and wages paid to the taxpayer in accordance with Article 18(1) of the Malaysian Agreement.

Paragraph 23AG(2)(b) of the ITAA 1936 provides that where the income is exempt in the foreign country as a result of the operation of a double tax agreement, the income will not be exempt under subsection 23AG(1).

Therefore, as the salary and wages are exempt in Malaysia because of Article 18(1) of the Malaysian Agreement, the salary and wages are not exempt in Australia.

Therefore, as the taxpayer is a resident of Australia, the salary and wages received by the taxpayer from working for the Australian government in Malaysia are assessable under subsection 6-5(2) of the ITAA 1997.