Assessability of income derived in Indonesia and received by a resident taxpayer

Is the income received by a resident taxpayer from an international organisation for services performed in Indonesia, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The income received by a resident taxpayer from an international organisation for services performed in Indonesia, is not assessable under subsection 6-5(2) of the ITAA 1997 as it is exempt from tax under section under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is an Australian resident for tax purposes.

The taxpayer entered into an employment contract to provide consulting services for an International Organisation (IO).

The contract was for not less than 91 days.

The taxpayer is an employee of the IO and receives a salary and wages for the services provided.

The taxpayer provides the service in Indonesia.

The taxpayer's income is exempt from tax in Indonesia because of a Memorandum of Understanding (MOU) between the Government of Indonesia and the IO.

The MOU grants to staff of IO the same status as that granted to agencies of the United Nations.

There is a tax system in place in Indonesia.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident will include ordinary income derived 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 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 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 (subsections 23AG(6) and 23AG(7) of the ITAA 1936).

Subsection 23AG(2) of the ITAA 1936 provides that foreign earnings will not be exempt from tax under subsection 23AG(1) of the ITAA 1936 if the amount is exempt from income tax in the foreign country for any of the reasons listed therein.

The salary and wages received by the taxpayer is exempt in Indonesia because of the MOU between Indonesia and IO. None of the reasons listed under subsection 23AG(2) of the ITAA 1936 apply. Therefore, the income is exempt under subsection 23AG(1) of the ITAA 1936.

In determining liability to Australian tax on foreign sourced income received by a resident, it is necessary to consider not only the income tax laws but also any applicable tax treaties contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one.

Schedule 37 to the Agreements Act contains the tax treaty between Australia and the Republic of Indonesia (the Indonesian Agreement). The Indonesian Agreement operates to avoid double taxation of income received by Australian and Indonesian residents.

Article 15(1) of the Indonesian Agreement provides that salary and wages derived by an individual who is a resident of Australia, in respect of employment, shall be taxable in Australia unless the employment is exercised in Indonesia. If the employment is exercised in Indonesia, the salary and wages may be taxed in Indonesia. Hence Australia and Indonesia may tax the salary and wages.

Accordingly, the income received by a resident taxpayer from an IO for services performed in Indonesia, is not assessable under subsection 6-5(2) of the ITAA 1997 as it is exempt from tax under section under subsection 23AG(1) of the ITAA 1936.