Issue
Is the salary and wages income derived by an Australian resident taxpayer while working in Vanuatu, assessable in Australia under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) where the income is exempt from tax in Vanuatu under a Memorandum of Understanding (MOU) between the Australian and Vanuatu governments?
Decision
No. The salary and wages income derived by a resident taxpayer working in Vanuatu 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).
Facts
The taxpayer is an Australian resident for tax purposes.
The taxpayer is a serving member of the Australian Defence Force and has worked on a project in Vanuatu for a period in excess of 90 days.
The taxpayer is receiving salary and wages for service on the project.
The taxpayer will not be taking any breaks in service, other than annual recreational leave.
The Australian and Vanuatu governments have signed an MOU in relation to the project. The salary and wages income derived by the taxpayer is exempt from tax in Vanuatu under the MOU.
There is no personal income tax imposed in Vanuatu.
There is no double tax agreement between the governments of Australia and Vanuatu.
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 of Australia.
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 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 income derived from that service will be exempt. Subsection 23AG(7) defines 'foreign service' and 'foreign earnings'. 'Foreign service' includes service in a foreign country in the capacity of an employee and 'foreign earnings' includes salary and wages income.
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 listed in subsection 23AG(2): • A double tax agreement or a law of a foreign country that gives effect to such an agreement; or • The foreign country exempts income from employment or does not tax employment income generally; or • A law of another country or an international agreement with which Australia is a party dealing with the privileges and immunities of diplomats or consuls, or of persons connected with the international organisations.
Vanuatu does not impose income tax on employment income, but this is not the only reason why the taxpayer's salary and wages income is not subject to income tax in Vanuatu. The Republic of Vanuatu and the Government of Australia have entered into a MOU concerning the conduct of a project by members of the Australian Defence Force. The MOU specifically exempts salary and wages paid in connection with the project from tax in Vanuatu. As a result the taxpayer's salary and wages income is not exempt from tax in Vanuatu only because of one of the reasons listed in subsection 23AG(2) ITAA 1936.
Therefore, the taxpayer's salary and wages income, which is exempt from tax in Vanuatu under an MOU, is not assessable under subsection 6-5(2) of the ITAA 1936 as the income is exempt from tax in Australia under section 23AG of the ITAA 1936.