Issue
Are salary and allowances received by the taxpayer exempt from income tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) where the taxpayer is a member of the Australian Defence Force on a long-term, diplomatic posting to East Timor?
Decision
No. The salary and allowances received by the taxpayer are not exempt from income tax under section 23AG of the ITAA where the taxpayer is a member of the Australian Defence Force and is on a long-term diplomatic posting to East Timor, as the diplomatic exception to the exemption (contained in paragraph 23AG(2)(f) of the ITAA 1936) applies.
Facts
The taxpayer is a member of the Australian Defence Force. The Department of Defence paid all salary and allowances to the taxpayer in respect of their overseas service.
The taxpayer is posted to East Timor for a period of 12 months.
The taxpayer is attached to the Australian Mission to East Timor. The taxpayer performs duties at the instruction of the Australian Mission. The taxpayer is recognised as having diplomatic status in East Timor as they are one of Australia's representative staff.
The taxpayer's overseas service income is not exempt under section 23AD of the ITAA 1936.
Reasons for Decision
Subsection 23AG(1) of the ITAA 1936 provides a general exemption from income tax for the foreign earnings of an Australian resident taxpayer who works overseas for a continuous period of not less than 91 days.
Subsection 23AG(2) of the ITAA 1936 withdraws that exemption where the foreign earnings are exempt from income tax in the foreign country only because of any of the following reasons: • A double tax agreement or law of that foreign country that gives effect to a double tax agreement; • The foreign country exempts income from employment or does not tax employment income generally; or • A law of another country or an international agreement with which Australia is a party dealing with the privileges and immunities of diplomats or consuls, or of persons connected with international organisations.
UNTAET Regulation 2000/31, On the Establishment of Representative Offices of Foreign Governments in East Timor, of 27 September 2000, provides for the granting of privileges and immunities to representatives of foreign governments in East Timor.
Subsection 20.3 of UNTAET Regulation 2000/31 exempts from taxation in East Timor: the salary and emoluments of the members of representative staff paid to them by the foreign government they represent. Section 1 of UNTAET Regulation 2000/31 defines representative staff as meaning persons employed by a foreign government to serve with its representative office. Australia's representative office in East Timor is the Australian Mission to East Timor.
The taxpayer is employed by the Australian government to serve in the Australian Mission. The taxpayer is considered to be a member of Australia's representative staff. The taxpayer's salary and allowances paid in respect of their service whilst attached to the Australian Mission to East Timor is exempt from East Timorese tax under subsection 20.3 of UNTAET Regulation 2000/31.
The salary and allowances earned by the taxpayer during their attachment to the Australian Mission is exempt from East Timorese tax as a result of the operation of an international agreement to which Australia is a party or an international law regarding the privileges and immunities of diplomats. Paragraph 23AG(2)(f) of the ITAA 1936 withdraws the exemption for overseas employment income in respect of the income earned during the taxpayer's attachment to the Australian Mission.
The salary and allowances earned by the taxpayer during their diplomatic posting are not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. The taxpayer will be required to include the amount as assessable income for the relevant income year. Note: East Timor is a country but not a State at international law, so it is unable to enter into the Vienna Convention on Diplomatic Relations on its own behalf. The position of diplomatic staff will need to be reconsidered from the date that East Timor achieves independence.