Assessability of foreign salary and wages from services performed on an overseas project in a country with which there is no Double Tax Agreement

Is the Australian resident taxpayer assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) on salary and wages from services performed on an overseas project in a foreign country?

No. The Australian resident taxpayer is not assessable under subsection 6-5(2) of the ITAA 1997 on salary and wages from services performed on an overseas project in a foreign country, as this income is exempt under subsection 23AG(1) of the Income Tax Assessment Act 1936 ( ITAA 1936).

The taxpayer is a resident of Australia.

The taxpayer is employed on a foreign aid project in a foreign country and earns salary and wages from that employment.

The taxpayer will work in the foreign country for a continuous period of at least 91 days.

The salary and wages earned by the taxpayer is not exempt from tax in the foreign country.

The foreign aid project has not been certified as an approved overseas project by the Minister of Trade.

There is no double tax agreement between Australia and the foreign country.

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 during the income year.

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

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). However, there is no double tax agreement between Australia and the foreign country and therefore the income tax laws will govern the assessability of the salary and wages.

Section 23AF of the ITAA 1936 deals with the exemption of certain income derived in respect of approved overseas projects. To be approved for the purposes of this section the project must be the subject of a certificate issued by the Minister of Trade (subsection 23AF(11) of the ITAA 1936).

As this project has not been certified as an approved overseas project the salary and wages earned by the taxpayer are not exempt under section 23AF of the ITAA 1936.

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 (subsection 23AG(7) of the ITAA 1936). 'Foreign earnings' includes income consisting of salary or 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 reasons listed therein. As the income derived by the taxpayer is not exempt from tax in the foreign country, the exception provided under subsection 23AG(2) will not apply.

Accordingly, the taxpayer's salary and wages will not be assessable under subsection 6-5(2) of the ITAA 1997 as the income is exempt under subsection 23AG(1) of the ITAA 1936.