Assessability of employment income received by an Australian Federal Police member while serving in the Solomon Islands

Are the salary and wages and Worker's Compensation payments received by the taxpayer, a member of the Australian Federal Police (AFP) who returned to Australia on Worker's Compensation during a deployment in the Solomon Islands, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The salary and wages and Worker's Compensation payments received by the taxpayer, a member of the AFP who returned to Australia on Worker's Compensation during a deployment in the Solomon Islands, are not assessable under subsection 6-5(2) of the ITAA 1997 as the income is exempt under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is a resident of Australia for income tax purposes.

The taxpayer is a member of the AFP.

The taxpayer was deployed to the Solomon Islands for a continuous period of not less than 91 days. The taxpayer signed on for a set period of deployment which included working time on and off in a cyclical nature. The taxpayer receives salary and wages in relation to the Solomon Islands service.

The taxpayer returned to Australia prior to the completion of the deployment period as a result of an illness which occurred while serving in the Solomon Islands. They then commenced to receive Worker's Compensation payments.

There is no double tax agreement between Australia and the Solomon Islands.

The law of the Solomon Islands provides for the imposition of income tax on employment income and does not generally exempt such income from income tax.

The salary and wages and Worker's Compensation payments received by the taxpayer are not exempt in the Solomon Islands because of a law (or regulations) corresponding to the International Organisations (Privileges and Immunities) Act 1963 or under an international agreement to which Australia is a party that deals with privileges and immunities relating to diplomatic or consular matters or of persons connected with international organisations.

The taxpayer's salary and wages and Worker's Compensation payments were exempt from income tax in the Solomon Islands under the terms of a Memorandum of Understanding (MoU) between the Governments of Australia and the Solomon Islands.

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.

Worker's Compensation payments are salary and wages and 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 it is not included in 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 from foreign service 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).

Paragraph 23AG(6)(b) of the ITAA 1936 provides that the period during which a person is engaged in foreign service includes any period during which the person is, in accordance with the terms and conditions of that service, absent from work because of accident or illness.

The period during which the taxpayer is engaged in foreign service includes the period in which the taxpayer is absent from the Solomon Islands due to illness under paragraph 23AG(6)(b) of the ITAA 1936. Therefore, income received during the period of the taxpayer's deployment, including the period spent in Australia, is foreign service for the purposes of paragraph 23AG(6)(b).

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).

There is no double tax agreement between Australia and the Solomon Islands. Therefore, paragraphs 23AG(2)(a) and (b) of the ITAA 1936 do not apply.

Paragraphs 23AG(2)(c) and (d) of the ITAA 1936 do not apply as the law of the Solomon Islands 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 were not exempt in the Solomon Islands because of a law (or regulations) of the Solomon Islands corresponding to the International Organisations (Privileges and Immunities) Act 1963 and as such paragraph 23AG(2)(e) of the ITAA 1936 does not apply.

In circumstances where the foreign earnings are exempt from tax in the foreign country because of another reason (for example, a 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) of the ITAA 1936. 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) of the ITAA 1936.

Accordingly, as none of the reasons listed in subsection 23AG(2) of the ITAA 1936 apply, the salary and wages received by an AFP member from serving in the Solomon Islands, including the worker's compensation payments received during the period of deployment, will be exempt from income tax under subsection 23AG(1) of the ITAA 1936 and will not be assessable income under subsection 6-5(2) of the ITAA 1997. Note: If the taxpayer continues to receive Worker's Compensation payments after the date of their original deployment, the exemption under subsection 23AG(1) of the ITAA 1936 ceases on the date when the taxpayer's total period of deployment ceased.