ATO ID 2004/288: Assessability of income derived from services in the Joint Petroleum Development Area
Date of decision: 19 February 2004
Year of income: Year ended 30 June 2003
Business line: Public Groups and International

Issue
Is income earned by an Australian resident taxpayer derived from service in the Joint Petroleum Development Area (JPDA) assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. Income earned by an Australian resident taxpayer derived from service in the JPDA is assessable under subsection 6-5(2) of the ITAA 1997 and is not exempt from tax under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Facts
The taxpayer is an Australian resident for tax purposes. The taxpayer is employed in the JPDA for a continuous period of more than 90 days.

Reasons for decision
Summary: The Timor Sea between northern Australia and East Timor contains proven petroleum resources in the seabed. Australia and East Timor have competing claims to the resources of this seabed. The Timor Sea Treaty (Treaty) enables Australia and East Timor to jointly develop the petroleum resources of a major part of the seabed of the Timor Sea, defined in Article 3 of the Treaty as the JPDA, pending agreement to a seabed boundary with East Timor. The Treaty was signed between the Government of East Timor and the Government of Australia on 20 May 2002. The Treaty entered into force on 2 April 2003 but is taken to have effect and all of the provisions will apply and be taken to have applied on and from the date of signature, 20 May 2002. Both Australia and East Timor continue to have sovereignty over the area and therefore, for the purposes of Australian law, the area is considered part of Australian territory. Article 2 of the Treaty recognises that the treaty is without prejudice to both Australia's and East Timor's legal claims to the seabed in the Timor Sea. Further, Article 13 of the Treaty provides that the JPDA shall be deemed to be, and treated by Australia as part of Australia (and by East Timor as part of East Timor) for the purposes of taxation law related directly or indirectly to: These terms have been incorporated into Australia's domestic tax legislation via subsection 6AA(1) of the ITAA 1936. Subsection 6AA(1) of the ITAA 1936 relevantly states: For all purposes of this Act related directly or indirectly to: (a) the exploration for minerals in, or the exploitation of the natural resources (being minerals) of: (i) ... (ii) a Petroleum Act offshore area; or ... Subparagraph 6AA(4)(e)(ii) of the ITAA 1936 defines 'Petroleum Act offshore area' to include the JPDA, therefore, the JPDA is to be treated as part of Australia for the purposes of the ITAA 1936. 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. 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. Subsection 23AG(7) of the ITAA 1936 defines 'foreign service' as service in a foreign country as the holder of an office or in the capacity of an employee, and 'foreign earnings' include salary, wages, commission, bonuses or allowances. Section 23AG of the ITAA 1936 is only available to resident taxpayers who derive foreign earnings from service in a foreign country. The area can only be treated as part of a 'foreign country' where it is clearly deemed to be a 'foreign country' for the purposes of section 23AG of the ITAA 1936. As the JPDA is considered to be part of Australia for the purposes of the ITAA 1936 and therefore not a 'foreign country', exemption under section 23AG of the ITAA 1936 cannot apply to earnings derived from service in the JPDA. Accordingly, the income earned by the taxpayer from service in the JPDA is assessable under subsection 6-5(2) of the ITAA 1997 and is not exempt from tax under section 23AG of the ITAA 1936.

Legislative references: Income Tax Assessment Act 1936 section 23AG subsection 23AG(1) subsection 23AG(7) subsection 6AA(1) subparagraph 6AA(4)(e)(ii)
Other references: Timor Sea Treaty between the Government of Australia and the Government of East Timor, Dili, 20 May 2002.
Subject references: Double tax agreements Exempt income Foreign income Foreign salary & wages International law International tax Timor Sea Zone of Cooperation Treaties