Assessability of employment income received by an Australian resident working in the territorial waters of the Faroe Islands

Are the salary and wages received by an Australian resident taxpayer, while working on an oil exploration vessel in the territorial waters of the Faroe Islands, assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The salary and wages received by an Australian resident taxpayer, while working on an oil exploration vessel in the territorial waters of the Faroe Islands, are not assessable income under subsection 6-5(2) of the ITAA 1997 as they are exempt from tax under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is an Australian resident for income tax purposes.

The taxpayer's employer is not a resident of Australia or the Faroe Islands.

The taxpayer performs the duties of their employment on an oil exploration vessel that operates in various locations including the territorial waters of the Faroe Islands.

The taxpayer has been engaged in service in a number of foreign countries for a continuous period of not less than 91 days.

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 is engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that service will be exempt. 'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes salary and wages income (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. Some of the reasons listed therein include where: • the income is exempt in the foreign country because of a double tax agreement; or • the provisions of a law of the foreign country under which income derived in the capacity of an employee is generally exempt from income tax; or • the law of the foreign country does not provide for the imposition of income tax (paragraphs 23AG(2)(b), (c) and (d) of the ITAA 1936).

Paragraph 23AG(2)(b) of the ITAA 1936 will not apply as there is no double tax agreement between Australia and the Faroe Islands.

As the laws of the Faroe Islands provide for the imposition of income tax and do not generally exempt employment income from income tax, paragraphs 23AG(2)(c) and (d) of the ITAA 1936 will not apply.

As the taxpayer has been engaged in foreign service for a continuous period of not less than 91 days, the salary and wages received by the taxpayer from employment in the Faroe Islands are exempt from tax under subsection 23AG(1) of the ITAA 1936.

Accordingly, the salary and wages received by the taxpayer, while working on an oil exploration vessel in the territorial waters of the Faroe Islands, are not assessable income under subsection 6-5(2) of the ITAA 1997.