Assessability of income derived under contract by an Australian resident in the Solomon Islands

Is the income derived by a resident taxpayer under a contract of service in the Solomon Islands assessable in Australia under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The income derived by a resident taxpayer under contract in the Solomon Islands is not assessable under subsection 6-5(2) of the ITAA 1997 as the income is exempt from tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is an Australian resident for tax purposes.

The taxpayer entered into a contract with an Australian company (the company) to provide services as a consultant in the Solomon Islands.

The terms of the contract, as a whole, characterise the relationship between the parties as that of employer and employee.

The taxpayer is receiving a monthly fee for providing services to the company and has worked in the Solomon Islands in excess of 90 days.

The taxpayer's services were contracted by the company as part of an Australian government project being carried out in the Solomon Islands.

The Australian and Solomon Islands government have entered into an agreement in relation to the project. Under this agreement, income derived by the taxpayer is exempt from income tax in the Solomon Islands.

The Solomon Islands has a tax system in place that taxes employment income.

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.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.

A monthly fee paid under contract is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

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 is engaged in foreign service for a continuous period of not less than 91 days, foreign income derived from that service will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity of employee and 'foreign earnings' includes income consisting of a weekly fee paid under contract (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 double tax agreement or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b)); • the law of a foreign country generally exempts from, or does not provide for the imposition of income tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and (d)); or • a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies (paragraphs 23AG(2)(e),(f) and (g)).

There is no double taxation agreement between Australia and the Solomon Islands and the privileges and immunities of persons connected with an international organisation do not apply to the situation in the Solomon Islands. Furthermore, the taxpayer's employment income is not exempt from income tax under a general provision of Solomon Islands law.

Therefore, the taxpayer's employment income, is not assessable under subsection 6-5(2) of the ITAA 1997 as the income is exempt from tax in Australia under section 23AG of the ITAA 1936.