Issue
Are the salary and wages received by a resident taxpayer from serving as a member of the Australian Defence Force (ADF) in the Cook Islands with the Pacific Patrol Boat Project assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The salary and wages received by a resident taxpayer from serving as a member of the ADF in the Cook Islands with the Pacific Patrol Boat Project 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).
Facts
The taxpayer is an Australian resident for income tax purposes.
The taxpayer is a member of the ADF.
The taxpayer served in the Cook Islands as part of Australia's contribution to the Pacific Patrol Boat Project.
The Pacific Patrol Boat project is a part of Australia's Defence Cooperation Program. The program's aim is to support Australia's defence relationships in the Pacific region by contributing to the maintenance of regional security and assisting with the development of security capabilities of various South Pacific countries, including the Cook Islands.
The taxpayer served in the Cook Islands for a continuous period of not less than 91 days.
The taxpayer received salary and wages from the ADF.
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 the Cook Islands.
The Income Tax Act 1997 of the Cook Islands provides for the imposition of income tax on employment income and does not generally exempt such income from income tax.
The taxpayer's salary and wages were exempt from income tax in the Cook Islands under the terms of a Memorandum of Understanding (MoU) between the Governments of Australia and the Cook Islands.
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).
However, if the foreign earnings are exempt from tax in the foreign country because of another reason (for example, an MoU and/or a specific exemption in the foreign country's tax law), subsection 23AG(2) of the ITAA 1936 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 and/or specific exemption which is not a reason listed in subsection 23AG(2).
The taxpayer's salary and wages were exempt from tax in the Cook Islands under the terms of an MoU signed by the Governments of Australia and the Cook Islands. This is not a reason listed in subsection 23AG(2) of the ITAA 1936.
Accordingly, because 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, the salary and wages derived by the taxpayer from service in the Cook Islands are exempt under subsection 23AG(1) of the ITAA 1936 and will not be assessable under subsection 6-5(2) of the ITAA 1997.