Issue
Are the salary and wages received by a resident taxpayer from serving in Iraq as a member or civilian employee of the Australian Defence Force (ADF) assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
The salary and wages received by a resident taxpayer from serving in Iraq as an ADF member or civilian employee are not assessable under subsection 6-5(2) of the ITAA 1997 as the salary and wages are exempt under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936), except to the extent that the salary and wages are derived from service in Iraq between 1 January 2003 to 31 December 2003. Salary and wages derived from service in Iraq between 1 January 2003 and 31 December 2003 are assessable under subsection 6-5(2) of the ITAA 1936.
Facts
The taxpayer is an Australian resident for income tax purposes.
The taxpayer is employed by the ADF.
The taxpayer served in Iraq as part of the Australian effort to assist the US-led coalition with the rehabilitation of Iraq.
The taxpayer served in Iraq for a continuous period of not less than 91 days.
The taxpayer received salary and wages from the ADF from that service.
A certificate under paragraph 23AD(1)(a) of the ITAA 1936 has not been issued by the Chief of the Defence Force to the effect that the taxpayer is on eligible duty with a specified organisation in a specified area outside Australia.
There is no double tax agreement between Australia and Iraq.
The salary and wages received by the taxpayer were not exempt in Iraq because of a law (or regulations) corresponding to the International Organizations (Privileges and Immunities) Act 1963 or under an international agreement to which Australia is a party that deals with privileges and immunities of persons connected with international organisations or relating to diplomatic or consular matters.
The Income Tax Law of Iraq provides for the imposition of income tax on employment income and does not generally exempt such income from income tax.
However, on 19 September 2003, the Administrator of the Coalition Provisional Authority (CPA), issued CPA Order Number 37 outlining the Iraq Tax Strategy for 2003.
Section 2 of CPA Order 37 suspended the income tax law of Iraq from 16 April 2003 to 31 December 2003.
On 19 February 2004, the Administrator of the CPA issued CPA Order Number 49 outlining the Iraq Tax Strategy for 2004.
Section 8 of CPA Order 49 further suspended the income tax law of Iraq from 1 January 2004 to 31 March 2004.
Section 4 of CPA Order 49 also provided that from 1 January 2004, employees of departments and agencies of Coalition Forces' governments and other non-Iraqi governments, international organizations and non-governmental organizations (registered pursuant to CPA Order 45) that are providing technical, financial, logistical, administrative or other assistance to Iraq are specifically exempt from Iraq income tax on income received from their employment with those entities.
The taxpayer's salary and wages were exempt from Iraqi income tax under section 4 of CPA Order 49 from 1 January 2004.
On 30 April 2004, the Administrator of the CPA issued CPA Order Number 84 which amended CPA Orders 37 and 49.
Section 2 of CPA Order 84 amended CPA Order 37 to suspend the income tax law of Iraq for the whole of the 2003 calendar year.
Section 3(5) of CPA Order 84 revised Section 8 of CPA Order 49 to the effect that the suspension of income tax in Iraq on items of income affecting individuals as set out in Article 2 of the Iraq Income Tax Law 113 of 1982 was extended to 30 April 2004.
Article 2(5) of the Iraq Income Tax Law refers to the taxation of salary and wage income of individuals.
Reasons for Decision
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.
Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.
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' includes income consisting of salary and 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 following reasons: (a) a law of the foreign country giving effect to a double tax agreement (b) a double tax agreement (c) provisions of a law of the foreign country under which income covered by any of the following categories is generally exempt from income tax: (i) income derived in the capacity of an employee (ii) income from personal services, (iii) similar income (d) 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 (c) (e) a law of the foreign country corresponding to the International Organizations (Privileges and Immunities) Act 1963 or to the regulations under that Act (f) an international agreement to which Australia is a party and that deals with: (i) diplomatic or consular privileges and immunities (ii) privileges and immunities in relation to persons connected with international organisations (g) a law of the foreign country giving effect to an agreement covered by paragraph (f).
For the period up to 1 January 2003, the salary and wages received by the taxpayer were not exempt from income tax in Iraq.
For the period 1 January 2003 to 30 April 2004, the salary and wages received by the taxpayer were exempt from tax in Iraq under the provisions of CPA Order Number 37, CPA Order Number 49 and CPA Order Number 84. The effect of those Orders was to suspend the income tax law of Iraq for that period.
Accordingly, for the period 1January 2003 to 30 April 2004, the law of Iraq did not provide for the imposition of income tax on employment income. This is a reason listed in paragraph 23AG(2)(d) of the ITAA 1936.
However, section 4 of CPA Order 49 also provided that from 1 January 2004, employees of departments and agencies of Coalition Forces' governments and other non-Iraqi governments that are providing technical, financial, logistical, administrative or other assistance to Iraq are specifically exempt from Iraq income tax on income received from their employment with those entities. As this is a specific exemption from income tax, this is not a reason listed in subsection 23AG(2) of the ITAA 1936.
Accordingly, for the period 1 January 2004 onwards, the salary and wages received by the taxpayer were also specifically exempt from Iraqi income tax because of CPA Order Number 49. This is not a reason listed in subsection 23AG(2) of the ITAA 1936.
Therefore, from 1 January 2003 to 31 December 2003, the taxpayer's salary and wages were exempt from income tax in Iraq only because of paragraph 23AG(2)(d) of the ITAA 1936. Therefore, the salary and wages derived by the taxpayer from service in Iraq from 1 January 2003 to 31 December 2003 are not exempt under subsection 23AG(1) of the ITAA 1936.
From 1 January 2004, the taxpayer's salary and wages were not exempt only because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936. Therefore, the salary and wages derived by the taxpayer from service in Iraq from 1 January 2004 are exempt under subsection 23AG(1) of the ITAA 1936.
Therefore, the salary and wages received by the taxpayer from serving in Iraq will be exempt from income tax under subsection 23AG(1) of the ITAA 1936, except to the extent that they are derived from service from 1 January 2003 to 31 December 2003. The salary and wages derived by the taxpayer from service between 1 January 2003 to 31 December 2003 are assessable under subsection 6-5(2) of the ITAA 1997 as paragraph 23AG(2)(d) of the ITAA 1936 applies.