On 12 January 2018, the AAT has decided that a DFAT employee’s earnings while working in Pakistan were exempt under s 23AG of the ITAA 1936. This was because there was a Development Agreement, that gave the earnings exemption from Pakistani tax. I will explain why.

Section 23AG(1) exempts, from Australian tax, any foreign earnings derived by a natural person, from foreign service, for a continuous period, of not less than 91 days. The type of earnings eligible for this exemption used to be unrestricted, but it has been limited to overseas aid type work, since a new ss(1AA) was inserted in 2009. It was common ground, though, that the taxpayer’s work (and thus remuneration) fitted within the description.

However, the s23AG exemption, is not available, if these earnings are exempt, from income tax, in the foreign country, only because of one or more reasons specified in s23AG(2). One of those specified reasons, is exemption from Pakistani income tax, under the Vienna Convention on Diplomatic Relations 1961 (“the Vienna Convention”). It was common ground that the Vienna Convention would apply to exempt the taxpayer’s earnings from tax in Pakistan.

But the issue was: whether the Convention was ‘the only‘ reason that the taxpayer’s earnings were exempt from tax in Pakistan.

The taxpayer contended that his earnings, in Pakistan, were also exempt under Article 10 of the Development Agreement and, therefore, he remained entitled to the s 23AG(1) exemption.

This Development Agreement set out various areas, in which Pakistan needed to develop, and then Pakistan did give tax relief as follows:

Article 10


In order to facilitate the engagement of Australian project personnel required to implement the Australian contribution the Government of the Islamic Republic of Pakistan shall in respect of such personnel:

(a) grant exemption from income taxes on salaries and allowances;


It therefore came down to a question of construing the Development Agreement, to see whether it covered the taxpayer’s earnings.

After considering all the relevant provisions and the facts, the AAT did agree, with the taxpayer, that his earnings were also exempt from tax, in Pakistan, because of Art 10 of the Development Agreement. The AAT said that Art 10 applied because the taxpayer fell within the definition of “Australian project personnel” in Art 3 of the Agreement. The reasons for this were:

  1. the taxpayer was involved in the delivery of ‘Official Development Assistance’ (ODA), by DFAT, under the terms of the Agreement because he was performing work (eg involvement in food processing and post-harvest technology) that was reportable as ODA; and
  2. the taxpayer’s earnings were funded from DFAT’s contribution to the ODA activities he performed.

Decision Impact Statement (DIS) -Draft

On 22 March 2018, the ATO issued a draft ‘Decision Impact Statement’ saying that there were ‘Nil’ implications for ATO ‘advice or guidance’. Its view of the decision, is as follows.

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.

(Coventry and FCT [2018] AATA 175, AAT, Lazanas SM, AAT File No: 2017/2593, 12 January 2018.)


[ATO: Draft DIS; FJM; LTN 35, 21/2/18; LTN 56, 22/3/18; Tax Month February 2018]


Study questions (answers below*)

  1. Was the taxpayer’s work, the kind of development work required under ss(1AA), inserted in 2009?
  2. Can the exemption from Australian tax be lost if the foreign country doesn’t tax the earnings?
  3. Was exemption from tax, in Pakistan, under the Vienna Convention on Diplomatic Relations, the only reason for Pakistan not taxing his earnings?
  4. Were the DFAT employee’s earnings found to be exempt from Australian tax under s23AG?







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