Assessability of employment income received from Fiji by resident taxpayer

Are the salary and wages received by a resident taxpayer while employed as a minister of religion in Fiji, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The salary and wages received by a resident taxpayer while employed as a minister of religion in Fiji are not assessable under subsection 6-5(2) of the ITAA 1997 as they are exempt from tax under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is a resident of Australia for income tax purposes.

The taxpayer is employed as a minister of religion in Fiji for a term of three years by an Australian resident employer.

The taxpayer receives salary and wages income from the Australian employer.

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' include income consisting of salary and 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 county only because of any of the exclusions listed therein.

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.

Therefore, 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 32 of 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.

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

Paragraph 23AG(2)(b) of the ITAA 1936 will not apply as the salary and wages received by the taxpayer are not exempt from tax in Fiji.

As the taxpayer is employed in Fiji for a continuous period of not less than 91 days and the salary and wages are not exempt from tax in Fiji under the Fijian Agreement, the income received from Fiji will be exempt from tax under subsection 23AG(1) of the ITAA 1936.

Accordingly, the salary and wages received by the resident taxpayer while employed in Fiji will not be assessable under subsection 6-5(2) of the ITAA 1997.