Court Decisions
International aircrew not engaged in foreign service
15.01.2009
The Federal Court (Graham J) has held that salaries paid by the applicant company (a wholly owned subsidiary of Cathay Pacific Airways Ltd) to aircrew who were residents of Australia, who were obliged to serve the applicant by operating Cathay Pacific Aircraft in any part of the world and on any routes, who had their home bases in Australia and whose salaries were paid into bank accounts in Hong Kong nominated by them, were not exempt from tax under sec 23AG ITAA 1936; the salaries were not foreign earnings of persons engaged in foreign service within the meaning of sec 23AG ITAA 1936 (Overseas Aircrew Basing Ltd v FCT [2009] FCA 7).
Service in a foreign country in the capacity of an employee is not synonymous with service outside Australia in the capacity of an employee. Section 23AG ITAA 1936 is directed at, relevantly, exempting from tax in Australia, salaries derived in a foreign country in which those salaries are taxed. It is not directed at exempting from tax in Australia salaries derived in Australia, in Australian airspace, in international airspace, in the airspace of other countries of the world or in other countries to which and from which their employer directs them to fly aircraft. The applicant’s representative sample of pilots fall into the latter category, not the former.
Section 23AG ITAA 1936 exempts salaries from tax in Australia where they are derived by persons engaged in service in a particular foreign country and the particular foreign country is the base from which they derive those salaries. The section is not directed at exempting from tax earnings of international airline aircrew based in Australia.
It was fallacious to say that a person who is a resident of Australia, whose home is in Australia, whose home base or preferred port is in Australia and whose duty cycles begin and end in Australia is engaged in service in a foreign country in the capacity of an employee within the meaning of sec 23AG ITAA 1936. The section is concerned with persons who are “actually on the job” in the particular overseas country in which their foreign earnings are derived.
Graham J also said that the Explanatory Memorandum relevant to sec 23AG(6A) and (6B) ITAA 1936 makes it clear that those provisions are directed at preserving continuity in respect of a period of engagement in foreign service where the relevant employee took “time away” from his or her foreign service or “short breaks” from his or her foreign service or “absences”, none of which terms sit comfortably with the situation of aircrew who derive their salaries from their service in the cockpits of aircraft and on the ground in numerous countries, including Australia and in international airspace as well.
