Issue
Are the salary and wages income earned by an ADF member from serving in Cambodia as part of Operation Banner between 8 October 1993 and 4 October 1999 assessable under paragraph 25(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) or subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The salary and wages income earned by an ADF member from serving in Cambodia as part of Operation Banner between 8 October 1993 and 4 October 1999 are not assessable under paragraph 25(1)(a) of the ITAA 1936 or subsection 6-5(2) of the ITAA 1997 as the salary and wages are exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936.
Facts
The taxpayer is an Australian resident for taxation purposes.
The taxpayer is a member of the ADF.
The taxpayer served in Cambodia for a continuous period of not less than 91 days as part of Operation Banner.
The taxpayer received salary and wages in relation to their period of service in Cambodia.
Operation Banner was an ADF operation that commenced on 20 October 1991 and ended on 4 October 1999.
For the period 20 October 1991 to 7 October 1993, pay and allowances earned by an ADF member serving as part of Operation Banner were exempt under section 23AC of the ITAA 1936. Section 23AC of the ITAA 1936 ceased to apply to pay and allowances earned by ADF members deployed as part of Operation Banner on 7 October 1993.
The taxpayer's deployment to Cambodia commenced after 7 October 1993.
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 in respect of their deployment to Cambodia.
There is no double tax agreement between Australia and Cambodia.
The law of Cambodia provides for the imposition of income tax on employment income and does not generally exempt such income from income tax.
The salary and wages received by the taxpayer are not exempt in Cambodia 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 Australian and the Cambodian Governments signed a Memorandum of Understanding (MOU) on 28 November 1994 which, among other things, covered the services provided by members of the ADF as part of Operation Banner.
The MOU provides an exemption from Cambodian income tax on salary and wages received by those ADF members from 28 November 1994.
Reasons for Decision
Paragraph 25(1)(a) of the ITAA 1936 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. For the income tax year beginning 1 July 1997, the equivalent provision is subsection 6-5(2) of the ITAA 1997.
Salary and wages are ordinary income for the purposes of paragraph 25(1)(a) of the ITAA 1936 and 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 no exemption is available under subsection 23AG(1) in circumstances where an amount of foreign earnings derived in a foreign country is exempt from tax in the foreign country solely because of: • a double tax agreement or law of a country that gives effect to such an agreement (paragraphs (a) and (b) of subsection 23AG(2)); • a law of that foreign country which generally exempts from, or does not provide for, the imposition of tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs (c) and (d) of subsection 23AG(2)); and • a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations (paragraphs (e), (f) and (g) of subsection 23AG(2));
However, where foreign earnings are exempt from tax in the foreign country because of another reason (for example, a MOU or some similar agreement), subsection 23AG(2) will not apply to deny the exemption under subsection 23AG(1). This is because the foreign earnings are not exempt in the foreign country solely because of events listed in that subsection - the foreign earnings are exempt because of the MOU or similar agreement which is not a reason listed in subsection 23AG(2).
To the extent that an ADF member performed service in Cambodia as part of Operation Banner on or after 8 October 1993 but before 28 November 1994, the salary and wages earned by the ADF member are exempt under subsection 23AG(1) of the ITAA 1936 as none of the circumstances in subsection 23AG(2) apply.
Further, as the exemption from Cambodian tax provided by the MOU from 28 November 1994 does not fall within any of the categories excluding exemption under subsection 23AG(2) of the ITAA 1936, subsection 23AG(1) exempts the salary and wages earned by ADF members deployed to Cambodia from service in Cambodia performed on or after that date.
Accordingly, the salary and wages received by an ADF member from serving in Cambodia between 8 October 1993 and 4 October 1999 as part of Operation Banner will be exempt from income tax under subsection 23AG(1) of the ITAA 1936 and will not be assessable under paragraph 25(1)(a) of the ITAA 1936 or subsection 6-5(2) of the ITAA 1997.