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Is the foreign income received by an ADF member while serving in the Solomon Islands on a specific deployment during the 1987, 1988 and 1989 years of income exempt from tax pursuant to section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

No. The foreign income received by an ADF member whilst serving in the Solomon Islands on a specific deployment during the 1987, 1988 and 1989 years of income is not exempt from tax under section 23AG of the ITAA 1936.

The taxpayer is a resident of Australia for taxation purposes. The taxpayer is an ADF member.

The taxpayer served in the Solomon Islands as part of the Pacific Patrol Boat Project for a continuous period of not less than 91 days, during the 1987 to 1989 years of income.

The taxpayer received salary and wages in relation to that service.

The taxpayer advised that no tax was paid in the Solomon Islands relating to the salary and wages received.

A certificate under paragraph 23AD(1)(a) of the ITAA 1936 has not been issued by the Chief of the Defence Force to the effect that the taxpayer is on eligible duty with a specified organisation in a specified area outside Australia.

There is no double tax agreement between Australia and Solomon Islands.

The law of the Solomon Islands provides for the imposition of income tax on employment income under (section 114 of the Income Tax Act ) and does not generally exempt such income from income tax.

The Australian and Solomon Islands Governments have signed a MOU in relation to the Pacific Patrol Boat project effective from December 1990. The salary and wage income received by the taxpayer is not exempt from tax in the Solomon Islands 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.

Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Generally, the income of persons serving with the Defence Force and Reserves are taxed in the same was as civilian taxpayers. Amounts based on periods of service or special duty and comparable allowances are fully included in assessable income in the absence of specific statutory exclusions.

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.

The former 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 365 days, any foreign earnings derived from that foreign service will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity of an employee and 'foreign earnings' includes income consisting of salary and wages (subsection 23AG(7) of the ITAA 1936).

However, overseas employment income derived by an Australian resident prior to 30 June 1987 was exempt from tax under former section 23(q) of the ITAA 1936 provided the income was subject to tax in the foreign country.

In regard to 1990 and prior years, the former subsection 23AG(3) of the ITAA 1936 applied and provided that: An amount of foreign earnings derived in a foreign country is not exempt from tax under this section unless - (a) the amount is not exempt from income tax in that country; and (b) if there is a liability for payment of income tax in that country in respect of that payment - the Commissioner is satisfied that the tax has been or will be paid.

Therefore, section 23AG provisions for 1990 and prior income years required that the Commissioner be satisfied that tax had been paid.

The law of the Solomon Islands provides for the imposition of income tax on employment income and does not generally exempt such income from tax.

The taxpayer has advised that no tax was paid in the Solomon Islands in relation to the income earned during the period they were employed there.

The exemption provided by the MOU does not apply as the taxpayer's period of income was prior to December 1990, the effective date of the MOU and there is no retrospective clause included.

Accordingly the taxpayer's salary and wages income earned in the Solomon Islands during the 1987 to 1989 years of income will not be exempt from tax under subsection 23AG(1) of the ITAA 1936.