Assessability of foreign salary and wages received by an Australian resident working in Saudi Arabia

Are the salary and wages received by an Australian resident taxpayer while working in Saudi Arabia assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The salary and wages received by an Australian resident taxpayer while working in Saudi Arabia are assessable under subsection 6-5(2) of the ITAA 1997 as the salary and wages are not exempt 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 has worked in Saudi Arabia in the capacity of an employee for a continuous period of at least 91 days.

The law of Saudi Arabia does not provide for the imposition of income tax on employment income.

There is no double tax agreement between Australia and Saudi Arabia.

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.

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 (subsection 23AG(7) of the ITAA 1936). 'Foreign earnings' includes income consisting of salary or wages (subsection 23AG(7) of the ITAA 1936).

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.

One of the reasons listed is where the income is exempt in the foreign country because of a double tax agreement (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936).

There is no double tax agreement between Australia and Saudi Arabia. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply.

Paragraph 23AG(2)(d) of the ITAA 1936 lists a further exception that applies where the income is exempt in the foreign country because the law of the foreign country does not provide for the imposition of income tax on one or more of the following categories of income: (i) income derived in the capacity of an employee (ii) income from personal services, or (iii) similar income.

As the law of Saudi Arabia does not provide for the imposition of income tax on any of the categories of income listed above, the salary and wages received by the taxpayer from working in Saudi Arabia will not be exempt from income tax under subsection 23AG(1) of the ITAA 1936 because paragraph 23AG(2)(d) of the ITAA applies.

Therefore, the salary and wages received by an Australian resident taxpayer working in Saudi Arabia are assessable under subsection 6-5(2) of the ITAA 1997.