ATO ID 2003/907: Exempt Foreign Employment Income: meaning of 'foreign service' where employment exercised on an oil rig 40 nautical miles from foreign country but within that country's exclusive economic zone (EEZ)
Date of decision: 26 June 2003
Year of income: Year ended 30 June 2002 Year ended 30 June 2003 Year ended 30 June 2004 Year ended 30 June 2005 Year ended 30 June 2006
Business line: Public Groups and International

Issue
Is a taxpayer engaged in 'foreign service' for the purposes of subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) where the taxpayer works as an employee on an oil rig that is 40 nautical miles offshore from a foreign country but within that country's exclusive economic zone (EEZ)?

Decision
Yes. A taxpayer who is employed on an oil rig that is 40 nautical miles offshore from a foreign country but within that country's claimed EEZ is engaged in 'foreign service' for the purposes of subsection 23AG(1) of the ITAA 1936 as it is service in a foreign country as an employee.

Facts
The taxpayer is a resident of Australia for income tax purposes. The taxpayer is employed on an oil rig that is 40 nautical miles from the coastline of a foreign country. The foreign country has claimed a 200 nautical mile EEZ from the low water mark of its coastline.

Reasons for decision
Summary: For a resident taxpayer to be entitled to an exemption under subsection 23AG(1) of the ITAA 1936 they must, amongst other things, be engaged in foreign service. 'Foreign service' is defined under subsection 23AG(7) of the ITAA 1936 and includes service in a foreign country in the capacity of an employee. The taxpayer is working in an EEZ that is claimed by the foreign country. The question is whether that EEZ forms part of a foreign country for the purposes of the definition of 'foreign service'. The expression 'foreign country' is not defined in either sections 6 or 23AG of the ITAA 1936. However, paragraph 22(1)(f) of the Acts Interpretation Act 1901 defines the expression as follows: 22 Meaning of Words In any Act, unless the contrary intention appears: ... (f) Foreign country means any country (whether or not an independent sovereign state) outside Australia and the external Territories Because the word 'country' is not further defined, its meaning is determined on the basis of ordinary principles of statutory interpretation. The ordinary meaning of the word 'country' means the territory over which a political entity exercises its sovereign rights. Under international law, this undisputedly includes the land mass and associated territorial sea of 12 nautical miles from the coastline over which the entity has full sovereign rights. The position is less clear with offshore areas such as an EEZ. Under international law, a political entity that claims an EEZ exercises sovereign rights in relation to specific activities carried on within that zone, most particularly activities that relate to the exploration and exploitation, conservation and management of natural resources (see Article 56 of the United Nations Convention of the Law of the Sea 1982). The meaning of 'country' for the purposes of the definition of 'foreign service' in subsection 23AG(7) of the ITAA 1936 includes service carried out by a person in an EEZ in relation to activities that involve the exercise of sovereign rights by the relevant foreign country. The work performed by the taxpayer as an employee on an oil rig is an activity carried on within the EEZ that involves the exercise of sovereign rights by the relevant foreign country. As such, the taxpayer is engaged in 'foreign service' for the purposes of subsection 23AG(1) of the ITAA 1936. The taxpayer must satisfy all other requirements of section 23AG of the ITAA 1936 before income earned in overseas employment will be exempt from tax in Australia.

Legislative references: Income Tax Assessment Act 1936 section 6 section 23AG subsection 23AG(1) subsection 23AG(7)
Other references: The United Nations Convention on the Law of the Sea 1982
Subject references: Foreign income Foreign salary & wages International tax