Decision Impact Statement
Coventry and Commissioner of Taxation
 AATA 175
2018 ATC 10-472
Venue: Administrative Appeals Tribunal
Venue Reference No: 2017/2593
Judge Name: Senior Member Ms G Lazanas
Judgment date: 12 January 2018
Appeals on foot: No
Decision Outcome: Unfavourable to the Commissioner
This decision has no impact on any related advice or guidance.
Outlines the ATO's response to this case which concerns whether foreign employment income of the taxpayer in the year ended 30 June 2015 is exempt from tax in Australia pursuant to section 23AG of the Income Tax Assessment Act 1936.
Brief summary of facts
The taxpayer was an employee of the Australian Department of Foreign Affairs and Trade (DFAT) and was posted to Islamabad in Pakistan for more than 91 continuous days in the income year ended 30 June 2015.
His official title was 'Counsellor Development Cooperation / Head of Aid' and he was responsible for managing the Australian Aid Program in Pakistan. The Australian Aid Program operated in Pakistan under a bilateral agreement on development cooperation. The work undertaken by the taxpayer was related solely to the delivery of that Aid Program and his salary and wages were reported by DFAT as official development assistance while he was working in Pakistan for DFAT.
The taxpayer contended that his salary and wage income was exempt foreign employment income relying on section 23AG of the Income Tax Assessment Act 1936.
The taxpayer's salary and wages from his posting were exempt in Pakistan by reason of the Vienna Convention on Diplomatic Relations 1961. If this was the only reason for the exemption in Pakistan, subsection 23AG(2) would operate to deny the exemption under subsection 23AG(1). The taxpayer contended that his salary and wages were also exempt in Pakistan by reason of the terms of the Agreement Between the Government of Australia and the Government of the Islamic Republic of Pakistan on Development Co-Operation (the Agreement). If the salary and wages are also exempt under the Agreement, they remain exempt under subsection 23AG(1).
The purpose of the Agreement was set out in Article 1 as follows:
Both Governments shall co-operate in a Program in support of the developmental needs of Pakistan while promoting mutual economic links.
Article 2 of the Agreement set out the activities of the program of development co-operation and included 'any other form of assistance reportable as Official Development Assistance'.
Article 10 of the Agreement provided that the Government of the Islamic Republic of Pakistan grants an exemption from income tax on salaries and allowances to 'Australian project personnel'. The term 'Australian project personnel' was defined in Article 3 as:
...Australian nationals or permanent residents or other person who are not national or permanent residents of Pakistan who are working in Pakistan on an activity under this Agreement and whose salaries or other costs are funded from the contribution of the Government of Australia to the activity.
The taxpayer applied to the Administrative Appeals Tribunal for review following his objection being disallowed by the Commissioner.
What was at issue was whether the taxpayer met the requirements to be considered 'Australian project personnel' and in particular whether the taxpayer was working 'on an activity' and whether their salaries and costs were 'funded from the contribution of the Government of Australia to the activity'.
Issues decided by the tribunal
The Tribunal's approach to interpreting the Agreement was to interpret it consistent with Article 31 of the Vienna Convention on the Law of Treaties (1969) - in good faith and in accordance with the ordinary meaning to be given to the terms in light of its object and purpose. The Tribunal held:
- the work performed by the taxpayer satisfied the definition of 'activity' in the Agreement and there was no requirement that a person be working on a single or specific activity
- the fact that the taxpayer's salary and wages were paid from a cost centre referred to as 'departmental' expenditure did not prevent them answering the description of being 'funded from the contribution of the Government of Australia' to the activity, and
- the taxpayer's salary and costs were funded from the contribution of the Government of Australia to the activity.
ATO View of Decision
The Commissioner agrees with the approach taken by the Tribunal to interpreting the Agreement.
The Commissioner accepts the view of the Tribunal that:
- there was no requirement that a person be working on a single or specific activity, and
- the fact that salary and wages are paid from 'departmental' expenses does not mean they cannot be funded from the contribution of the Government of Australia within the meaning of the Agreement.
The Commissioner will apply these principles in determining whether a person is exempt from income tax in another country by reason of a Development Agreement or similar Agreement where the objects, purpose and terminology are not materially different to the Agreement considered in this case.
The Commissioner accepts that on the facts of the matter it was open for the Tribunal to find that the activities of the taxpayer in Pakistan fell within the definition of the relevant terms in the Agreement.
Accordingly the Commissioner has decided not to appeal the decision.
Implications for impacted advice or guidance
Income tax Assessment Act 1936