Assessability of allowance received by an Australian resident working in Kiribati

Is the allowance received by an Australian resident taxpayer from employment in the Republic of Kiribati (Kiribati) assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The allowance received by an Australian resident taxpayer from employment in Kiribati is not assessable under subsection 6-5(2) of the ITAA 1997 as it is exempt from tax under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is an Australian resident for income tax purposes and for the purposes of the double tax agreement between Australia and Kiribati (the Kiribati Agreement) contained in Schedule 34 to the International Tax Agreements Act 1953 (the Agreements Act).

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

The Kiribati entity is not an international organisation under which persons connected with the entity are granted privileges or immunities in relation to salary and wages under either an international agreement to which Australia is a party or a Kiribati law corresponding to the International Organizations (Privileges & Immunities) Act 1963 or its regulations.

The taxpayer receives a weekly fixed living allowance from the Kiribati entity.

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

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 6-5(1) of the ITAA 1997 defines ordinary income to mean income according to ordinary concepts.

Ordinary income has generally been held to include 3 categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of ordinary income that have evolved from case law include receipts that: • are earned • are expected • are relied upon; and • have an element of periodicity, recurrence or regularity.

The taxpayer earns the living allowance through the provision of personal services. It is paid regularly and is expected and relied upon by the taxpayer to cover expenses incurred. The living allowance is an allowance which meets the characteristics of ordinary income.

However, 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 from that foreign service will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes income consisting of earnings, salary, wages, commission, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).

The living allowance received by the taxpayer is paid in relation to services provided in Kiribati as an employee of the Kiribati entity and is therefore foreign earnings derived from foreign service.

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)(b) of the ITAA 1936, where income is exempt from income tax 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, in determining the liability to Australian tax on foreign sourced income received by a resident taxpayer it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the Agreements Act.

Schedule 34 to the Agreements Act contains 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, Kiribati may tax that income.

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

The allowance paid to the taxpayer may therefore be taxed in Kiribati under Article 15(1) of the Kiribati Agreement. Therefore, paragraph 23AG(2)(b) of the ITAA 1936 will not apply to disqualify the taxpayer from the exemption provided in subsection 23AG(1) of the ITAA 1936.

Paragraph 23AG(2)(c) of the ITAA 1936 provides that 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.

Similarly, paragraph 23AG(2)(d) of the ITAA 1936 provides that where the law of the foreign country does not provide for the imposition of income tax on one or more of the categories of income mentioned in paragraph 23AG(2)(c) of the ITAA 1936, that income is not exempt under subsection 23AG(1) of the ITAA 1936.

While Kiribati retains a taxing right over the allowance received by the taxpayer, the exemption provided in the Kiribati income tax law is a specific exemption that applies because of the taxpayer's particular circumstances. The Kiribati income tax law generally provides for the taxation of employment income. Therefore, neither paragraph 23AG(2)(c) nor 23AG(2)(d) of the ITAA 1936 applies.

As the taxpayer has been working in Kiribati for a continuous period of not less than 91 days, the living allowance received by the taxpayer will be exempt from tax under subsection 23AG(1) of the ITAA 1936 and is not included in assessable income under subsection 6-5(2) of the ITAA 1997. The allowance will also be exempt from tax in Kiribati.