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Are the salary and wage income earned by a resident taxpayer while working in Fiji assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) when it is exempt from tax in Fiji under a Memorandum of Understanding (MOU)?

No. The salary and wages income earned by a resident taxpayer while working in Fiji is not assessable under subsection 6-5(2) of the ITAA 1997 as it is exempt from tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is an Australian resident for taxation purposes.

The taxpayer worked on a project in Fiji for a period in excess of 90 days.

The project is part of the Australian government's bilateral aid program to Fiji.

The Australian and Fiji Governments have signed a MOU in relation to the project. The salary and wage income received by the taxpayer is exempt from tax in Fiji under this MOU.

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.

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 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 (subsections 23AG(6) and 23AG(7) of the ITAA 1936).

However subsection 23AG(2) of the ITAA 1936 states that foreign earnings will not be exempt from tax under subsection 23AG(1) of the ITAA 1936 if the amount is exempt from income tax in the foreign country only because of any of the reasons listed.

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

In determining liability to Australian tax on foreign sourced income 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. In the event of inconsistent provisions, the Agreements Act overrides the ITAA except in some limited situations.

Schedule 32 to the Agreements Act contains the double tax agreement between Australia and Fiji (the Fijian Agreement). The Fijian Agreement operates to avoid the double taxation of income received by Australian and Fijian residents.

Article 15(1) of the Fijian Agreement provides that salary and wages income derived by an individual who is a resident of Australia in respect of employment exercised in Fiji may be taxable in both Australia and Fiji.

Article 21 of the Fijian Agreement provides that salary and wages derived by an individual who is a resident of Australia shall be exempt from tax in Fiji if they participated in the Australian Government's Bilateral Aid Program to Fiji.

The taxpayer's salary and wage income is exempt from tax in Fiji under the MOU between Australia and Fiji.

Paragraph 23AG(2)(b) of the ITAA 1936 will not apply because the salary and wages income earned in Fiji is not exempt in Fiji solely because of Article 21 of the Fijian Agreement. The exemption provided by the MOU does not fit within any of the other categories excluding exemption under subsection 23AG(2) of the ITAA 1936.

As the taxpayer is engaged in foreign service for a continuous period of not less than 91 days, the salary and wages income will be exempt from tax under subsection 23AG(1) of the ITAA 1936.