Issue
Are the payments received by an Australian resident entity from the Asian Development Bank (ADB) for the services of an expert consultant to perform a mission in overseas countries, assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The payments received by an Australian resident entity from the ADB for the services of an expert consultant to perform a mission in overseas countries are not assessable income under subsection 6-5(2) of the ITAA 1997 as the income is exempt under section 6-20 of the ITAA 1997.
Facts
The taxpayer is an Australian resident entity for income tax purposes.
ADB enters into an agreement with the taxpayer to engage the services of a consultant, who is an expert of a particular field, to perform a mission for the ADB.
ADB agrees to pay the consultant's remuneration to the Australian resident entity.
The consultant performs the mission work in a number of overseas locations.
The taxpayer entity receives the consultant's remuneration payments from the ADB for the mission services provided in overseas countries.
Reasons for Decision
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer will include ordinary income derived from all sources, whether in or out of Australia, during the income year.
Income from consultancy services is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.
However, subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.
Section 6-20 of the ITAA 1997 provides that an amount of ordinary income is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law.
Article 56 of the 'Agreement Establishing the ADB' (the Agreement) provides that no tax will be levied on or in respect of salaries and emoluments paid by the ADB to the directors and officers of ADB, including experts performing missions for the bank, except where a member of the ADB deposits with its instrument of ratification or acceptance a declaration that such a member retains for itself the right to tax salaries and emoluments paid by the ADB to citizens or nationals of such member. Australia is a 'member' under the terms of the Agreement.
The International Organisation (Privileges and Immunities) Act 1963 (IOPIA) is a Commonwealth Act under which an international organisation, and persons engaged by it, may be accorded certain privileges and immunities including an exemption from tax.
Section 3 of the IOPIA defines an international organisation to which the IOPIA applies to mean an organisation that is declared by the regulations to be an international organisation to which IOPIA applies.
Regulation 3 of the Asian Development Bank (Privileges and Immunities) Regulations 1967 (ADB Regulations) provides that the ADB is an international organisation to which IOPIA applies (Regulation 2 of the ADB Regulations).
Paragraph 6(1)(e) of the IOPIA provides that the regulations may confer any or all of the privileges and immunities set out in Part I of the Fifth Schedule upon a person who is serving on a committee of, or participating in the work of, or performing a mission on behalf of, an international organisation.
Paragraph 2A of Part I of the Fifth Schedule to the IOPIA provides an exemption from taxation on salary and emoluments received from the international organisation. Paragraphs 2 and 5 of Part I of the Fifth Schedule to the IOPIA deal with immunity from legal process and exemption from currency or exchange restrictions respectively.
Subregulation 7(1) of the ADB Regulations provides that a person who is performing, whether alone or jointly with other persons, a mission on behalf of the ADB has the privileges and immunities specified in paragraphs 2, 2A and 5 of Part I of the Fifth Schedule to the IOPIA.
As the word 'person' is not defined either in the IOPIA or in the ADB Regulations, the definition of 'person' in the Acts Interpretation Act 1901 (AIA) can be relied on.
Paragraph 22(1)(a) of the AIA provides that unless the contrary intention appears, expressions used to denote persons generally (such as 'person') include a body politic or corporate as well as an individual.
The term 'emoluments' is also not defined either in the IOPIA or in the ADB Regulations. In Andrews and Muir v. Inland Revenue Commissioner (NZ) (1979) 10 ATR 151, the issue was the assessability of payments received from the ADB by a partnership in providing the services of a partner as an expert. Sinclair J held that the term 'emoluments' covers a payment made to an expert in respect of their services which was a remuneration, or at least an 'advantage' obtained a result of giving those services. The court noted that the secondary dictionary meaning of emolument is 'advantage'. The court also accepted as 'sound' the submission by the counsel that the purpose of Article 56 of the Agreement was to encourage experts to go to inhospitable places to discharge New Zealand's duty under the treaty and therefore the income was exempt from tax in New Zealand.
Sinclair J also held that one must pay some attention to the actual wording in Article 56 of the Agreement as it refers to the fact that no tax shall be levied on 'or in respect of' emoluments paid by the bank to specified persons. The court held that words 'or in respect of' require a wider application rather than a narrower one. The true approach to the construction of the Article in relation to experts is that it obviously contemplated to apply to persons who had no connection with the ADB in either a directorate or employment situation.
The Commissioner's views on the application of the IOPIA are set out in Taxation Ruling TR 92/14 (including Addendum). Paragraph 6 of TR 92/14 states that persons engaged by an international organisation including expert or consultant may be accorded privileges and immunities in the nature of exemption from taxation as described in the Second, Third, Fourth and Fifth Schedules to the IOPIA. However, it is necessary to examine the regulations of the particular International Organisation to ascertain a person's entitlement for taxation exemption.
Paragraph 12 of TR 92/14 provides that Australia's general policy is that salaries and emoluments received by experts and consultants engaged by international organisations are not exempt from tax in Australia. However, limited exemption is provided under regulations regarding the ADB.
The taxpayer is entitled to the exemption from tax for the payments received from the ADB for mission work under subregulation 7(1) of the ADB Regulations as the payments are emoluments received while performing a mission on behalf of the ADB in overseas countries.
Accordingly, the payments received by the taxpayer from the ADB for the services of an expert consultant to perform a mission in overseas countries are not assessable income under subsection 6-5(2) of the ITAA 1997 as the income is exempt under section 6-20 of the ITAA 1997.