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Is the allowance received by an Australian resident taxpayer from employment in the Republic of Kiribati (Kiribati) assessable under subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The allowance received by an Australian resident taxpayer from employment in Kiribati is assessable under subsection 6-10(4) of the ITAA 1997 as it is included in assessable income under paragraph 26(e) of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is an Australian resident for income tax purposes.

The taxpayer is employed in Kiribati by an entity for a period not less than 91 days.

The taxpayer receives a fixed living allowance from the entity.

The living allowance received by the taxpayer in Kiribati is exempt from income tax under a provision of Kiribati law.

Subsection 6-10(4) of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes statutory income from all sources, whether in or out of Australia.

Section 10-5 of the ITAA 1997 lists those provisions dealing with statutory income. Included in this list is paragraph 26(e) of the ITAA 1936 which provides that assessable income will include the value to a taxpayer of all allowances received in relation to any employment or services rendered.

Generally, the word 'allowance' refers to any other kind of reward allowed or conceded by the employer to the employee as part of the remuneration. An allowance includes 'a grant of something additional to ordinary wages for the purpose of meeting some particular requirement connected with the service rendered by the employee or as compensation for unusual conditions of that service' ( Mutual Acceptance Co Ltd v. Federal Commissioner of Taxation (1944) 69 CLR 389; (1944) 7 ATD 506).

The living allowance received by the taxpayer is therefore an allowance to which paragraph 23(e) of the ITAA 1936 applies.

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.

Subsection 23AG(7) of the ITAA 1936 defines 'foreign service' as service in a foreign country as the holder of an office or in the capacity as an employee, and 'foreign earnings' include salary, wages, commission, bonuses or allowances.

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. Under paragraph 23AG(2)(c) of ITAA 1936, where income derived in the capacity of an employee is generally exempt in the foreign country under provisions of a law of the foreign country, 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. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 34 to the Agreements Act contains the agreement between Australia and Kiribati (the Kiribati Agreement). The Kiribati Agreement operates to avoid the double taxation of income received by Australian and Kiribati residents.

Article 15(1) of the Kiribati Agreement provides that salary, wages and other similar remuneration derived by a resident of Australia is taxable only in Australia unless the employment is exercised in Kiribati. If the employment is exercised in Kiribati, it may be taxed in Kiribati.

The living allowance received by the taxpayer fits within the meaning of the term 'other similar remuneration' under Article 15(1) of the Kirabati Agreement as it is paid for the purpose of meeting the needs connected with the service rendered by the taxpayer in the capacity of an employee.

The allowance paid to the taxpayer may therefore be taxed in Kiribati. However, as a provision of Kiribati law exempts the allowance from Kiribati tax, paragraph 23AG(2)(c) of the ITAA 1936 will operate to deny the exemption under subsection 23AG(1) of the ITAA 1936 from applying.

The allowance received by the taxpayer is statutory income under paragraph 26(e) of the ITAA 1936 and is therefore included in the taxpayer's assessable income under subsection 6-10(4) of the ITAA 1997.