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COVENTRY v FC of T

Members:
G Lazanas SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2018] AATA 175

Decision date: 12 January 2018

G Lazanas (Senior Member)

1. Mr Peter Coventry was at all relevant times an employee working with the Australian Department of Foreign Affairs and Trade ("DFAT"). He is in dispute with the Commissioner of Taxation with respect to whether the income he earned from his posting in Pakistan, where he was the Head of Aid for DFAT, is exempt from tax pursuant to s 23AG of the Income Tax Assessment Act 1936 (Cth) ("ITAA 1936") in the year ended 30 June 2015 ("the relevant year").

2. Section 23AG(1) of the ITAA 1936 exempts from tax any foreign earnings derived by a natural person from foreign service for a continuous period of not less than 91 days. However, s 23AG(2) broadly provides that such foreign earnings are not exempt from income tax if the amount was exempt from income tax in the foreign country only because of any of a number of specified reasons. It is common ground that Mr Coventry was exempt from income tax in Pakistan under the Vienna Convention on Diplomatic Relations 1961 ("the Vienna Convention").

3. The Commissioner accepts that if Mr Coventry falls within the definition of "Australian project personnel" in the Agreement between the Government of Australia and the Government of the Islamic Republic of Pakistan on Development Co-Operation ("the Development Agreement"), then he is also exempt from income tax in Pakistan under that Agreement and, therefore, exempt from Australian income tax under s 23AG(1). Therefore, the sole issue in this proceeding is whether Mr Coventry's foreign employment income in the relevant year was exempt from tax in Pakistan under the Development Agreement. Mr Coventry, as the taxpayer, has the burden of proving that the assessment is excessive and what the assessment should have been: s 14ZZK(b)(i) of the Taxation Administration Act 1953 (Cth).

4. I have concluded that Mr Coventry is exempt from income tax in Australia on the basis that he was posted to Pakistan under the terms of the Development Agreement and covered by the definition of "Australian project personnel" in the Development Agreement.

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FACTUAL BACKGROUND AND EVIDENCE

5. The following findings of fact are based on the T-Documents and the evidence of Mr Coventry, namely, his affidavit sworn on 31 August 2017, as well as documents tendered by the Commissioner at the hearing. There was no dispute about the facts nor was Mr Coventry cross-examined by counsel for the Commissioner.

6. [Omitted in accordance with confidentiality orders made by the Tribunal.]

7. [Omitted in accordance with confidentiality orders made by the Tribunal.]

8. As noted above at [1], Mr Coventry was at all relevant times employed by DFAT. Mr Coventry was also an Australian resident at all relevant times.

9. Mr Coventry was posted by DFAT to Islamabad in Pakistan on 16 April 2014. His official title was "Counsellor Development Cooperation / Head of Aid" and he was responsible for managing the Australian Aid Program in Pakistan. His job was detailed in a Performance Agreement for the relevant year, to which I will come shortly. He stated, and I accept, that his job did not change during his posting to Islamabad between the period 16 April 2014 to 15 May 2015.

10. Since 13 July 1991, the Australian Aid Program has operated in Pakistan under the Development Agreement. Therefore, all Australian Government Aid spending is subject to the Development Agreement. As the terms of that Agreement are key to the determination of this dispute, I have extracted below the relevant terms as well as some additional terms that provide context.

AGREEMENT BETWEEN THE GOVERNMENT OF AUSTRALIA AND THE GOVERNMENT OF THE ISLAMIC REPUBLIC OF PAKISTAN ON DEVELOPMENT CO-OPERATION

THE GOVERNMENT OF AUSTRALIA AND THE GOVERNMENT OF THE ISLAMIC REPUBLIC OF PAKISTAN,

DESIRING to strengthen the existing cordial relations between the two countries,

HAVE AGREED as follows

Article 1

Purpose

Both Governments shall co-operate in a Program in support of the developmental needs of Pakistan while promoting mutual economic links.

Article 2

Activities of the program of development co-operation.

  • 1 The Program shall be directed to assisting those sectors of the economy of Pakistan to which the Government of the Islamic Republic of Pakistan accords greatest priority and in which the Government of Australia has expertise and comparative advantage. The following sectors have been targetted (sic) for possible activities.
    • (a) Mining and mineral exploration technology and relevant infrastructure;
    • (b) Telecommunications;
    • (c) Beef/dairy cattle;
    • (d) Food processing and post-harvest technology;
    • (e) Port development.
  • 2 The Program undertaken by the Government of Australia pursuant to this Agreement shall be in support of specific projects and related activities undertaken within such sectors.
  • 3 The Program may include the following forms of assistance:
    • (a) the sending of missions to Pakistan to study and analyse opportunities for Australian assistance;
    • (b) the granting of scholarships to nationals of Pakistan for studies in Australia, Pakistan or a third country;
    • (c) the assignment of Australian experts, advisers and other specialists to Pakistan in connection with project activities;
    • (d) the provision of equipment, materials, goods and services required for the successful execution of development projects in Pakistan;

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    • (e) any other form of assistance, reportable as Official Development Assistance (ODA) under the OECD Development Assistance Committee (DAC) guidelines as may be determined by the two Governments.

Article 3

Definitions

In this Agreement:

  • (a) "activity" means any discrete unit of development assistance which may include any one or more of the forms of assistance described in Article 2;
  • (b) "Australian project personnel" means Australian nationals or permanent residents or other persons who are not nationals 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;
  • …

Article 7

Specific activities

  • (1) In order to give effect to the Program the two parties to this Agreement may enter into arrangements in writing for the purpose of carrying out specific activities.
  • (2) Such arrangements shall make particular reference to this Agreement and the terms of this Agreement and shall, unless otherwise stated, apply to such arrangements. Wherever possible, such arrangements shall set out:
    • (a) the name and duration of the activity;
    • (b) the project locations;
    • (c) a description and statement of objectives of the activity;
    • (d) the nominated implementing agencies in both countries;
    • (e) details of the contributions to the activity by the two Governments including:
      • (i) financial contributions;
      • (ii) materials, services and equipment to be supplied;
      • (iii) the numbers and areas of expertise of Australian and other personnel to be engaged;
      • (iv) counterpart staff of the Government of the Islamic Republic of Pakistan; and
      • (v) estimated annual budgets;
    • (f) timetable for implementation; and
    • (g) monitoring, review and evaluation arrangements.
  • 3 The parties to this Agreement may consent to amend and supplement the arrangements for each activity.

    …

Article 10

Personnel

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;
  • (b) grant exemption upon import or export from customs duties, other duties, taxes, levies and other charges of similar nature on personal and household effects of themselves and their dependents declared at their first entry to Pakistan;
  • (c) assist in clearance through Customs and other import or export controls of the goods mentioned in sub-paragraph (b);
  • (d) grant all rights and entitlements accorded to the aid personnel of any other donor country or organisation; and
  • (e) expedite the issue of all documentation required for the entry and exit of Australian project personnel and their dependents to and from Pakistan and the performance of the work of Australian project personnel.

    …

Article 18

Amendments

The Agreement may be amended and supplemented by agreement in writing between the two Governments.

11.

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As noted above, Mr Coventry was posted to Pakistan under the Development Agreement and operated under its terms. The Development Agreement did not change throughout Mr Coventry's posting. As Head of Aid in Pakistan, Mr Coventry worked on many Australian Aid Program activities including agriculture (dairy, food processing, post-harvest technology), scholarships, and the sending of missions and assignment of experts and advisors. Mr Coventry stated, and I find, that his work was purely aid related and that that he "did not work on the economic, political or intelligence issues that the diplomatic cadre of DFAT officers worked on." Mr Coventry pointed to his Performance Agreement 2014/15 which listed the following job specific objectives and performance indicators, amongst many others, and which corroborated the fact of him holding a leadership role:
  • • Drive the aid program's strategic engagement in Pakistan, based on sound analysis of development issues and political economy.
  • • Extract key information from the key development partners such as World Bank, DFID and Government of Pakistan to make strategic recommendations to Canberra via cables.
  • • In response to the Government's new aid agenda, commission and drive the development of an economic growth program in Pakistan with a particular focus on trade, agriculture and post-secondary education.
  • • Commission and distil analytical work to inform the aid program and maximise Australia's interests in Pakistan.
  • • Effectively manage all Pakistan aid program risks, finances, staff and operations.

12. Mr Coventry stated and I find that the activities which he worked on were reported by DFAT as Official Development Assistance ("ODA"). Mr Coventry also stated the activities he worked on were canvassed in DFAT's Aid Program Performance Report 2014-15 for Pakistan which was published by DFAT in or about November 2015 ("the DFAT Report"). Starting at page 4 of the DFAT Report, there is a summary of Australia's ODA shown in two tables, the relevant parts of which are extracted below:

The 2014-15 development assistance budget: a summary

1. 2014-15 development assistance budget: a summary

In 2014-15, Australia will provide an estimated $5,013.9 million in Official Development Assistance (ODA).

Table 1:

This table shows allocations to DFAT country, regional and global programs.

DFAT country, regional and global programs 2013-14 Estimated Outcome ($m) 2014-15 Budget Estimate ($m)
Country and Regional Programs    
Pakistan 64.0 65.6
…    
DFAT ODA - Departmental 373.6 251.3
Other Government Departments 748.5 392.0
Adjustments (73.2) (61.8)
Total Australian ODA 5,031.7 5,031.9

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Table 2: Total Australian ODA by partner country and region

This table shows total Australian ODA from all agencies and programs attributable to partner countries and regions. This includes DFAT country program allocations, flows from DFAT regional and global programs, and Other Government Departments expenditure.

Total Australian ODA by partner country and region 2013-14 Estimated Outcome ($m) 2014-15 Budget Estimate ($m)
Pakistan 78.3 79.0
…    
Total Estimated ODA 5,031.7 5,031.9

For Australia, the Administration Costs of Donors equates to what is reported as ' DFAT ODA - Departmental ' in the Australian Aid Budget Summary and reflects the costs of administering the aid such as salaries, allowances, computer, publication printing, etc.

13. Mr Coventry stated and I find that his salary and allowances were officially reported by DFAT as ODA while he was working in Pakistan for DFAT. In this regard, I note that counsel for the Commissioner accepted that the DFAT Report was an appropriate working document for determining funding reported by DFAT as ODA, however, the Commissioner emphasised different aspects in the DFAT Report. Specifically, the Commissioner's counsel referred me to the lines in the DFAT Report with the description "DFAT ODA - Departmental" in Table 1 above and submitted that Mr Coventry's salary and allowances were treated as an ODA "departmental expense" by DFAT. I will consider this issue and its significance to the dispute below.

14. Throughout Mr Coventry's posting to Pakistan, s 23AG of the ITAA did not change. In the year ended 30 June 2014, being the first year of his posting to Pakistan, the Commissioner regarded his salary and allowances to be exempt from income tax under s 23AG. However, Mr Coventry says the Commissioner took a different view about s 23AG in the following year, being the relevant year, the subject of this dispute.

15. Mr Coventry explained that this change of view about the application of s 23AG was brought about by DFAT's concerted efforts to remove the tax exemption that was available to some DFAT employees so that there would be no disparity in remuneration between overseas-based staff and other staff. Amongst the documents filed by Mr Coventry as part of his evidence was various correspondence, besides media articles, which supported this position.

16. It suffices to note that one email, undated, from an officer in DFAT's Remuneration, Conditions and Post Management Branch, relevantly stated as follows in relation to the change in the taxation position:

Subject : Withdrawal - ATO Class ruling [SEC=IN-CONFIDENCE:STAFF]

Dear Colleague

As part of the alignment of conditions of service of all staff, the Department has been considering issues related to the tax exemption under Section 23AG of the Income Tax Assessment Act 1936 available to some staff on posting.

As a general principle, public servants should pay income tax. For this reason, and to redress the inequity resulting from the eligibility of some staff to claim a tax exemption, the Department is pursuing legislative change to exclude staff employed under the Public Service Act 1999 from the exemption. This is being done in consultation with relevant departments.

While pursuing legislative change, the Department has also been reviewing a number of Australian Tax Office (ATO) Rulings with a view to having those Rulings withdrawn, along with their associated tax exemptions.

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In case it is relevant to your circumstances, I am writing to advise that on 9 October 2014, the ATO issued a Private Ruling that applies to staff posted to some 21 countries (listed) below to provide official development assistance and that were previously considered to be covered by specified Development Agreements. The Ruling clarifies that, as of 1 July 2014, the tax exemption in Section 23AG does not apply to such DFAT employees on foreign service (i.e. where accredited as diplomatic or consular agents) in those countries. These countries include …Pakistan …

The effect is that from 1 July 2014, no DFAT employee on a diplomatic posting to these countries is eligible for tax exemption.

17. The private ruling that is referred to in the above extract was also amongst the evidence filed by Mr Coventry. It was issued by the Commissioner to DFAT on 9 October 2014 and relevantly states, as follows:

Notice of private ruling

This ruling applies to:

Client name

DEPT OF FOREIGN AFFAIRS & TRADE ABN 47065634525

Issue 1

Whether the Department of Foreign Affairs and Trade (DFAT) is subject to Pay As You Go Withholding (PAYG(W)) obligations for employees who are assigned to work at any of the following countries on activities or programs in respect of which funding is reportable to the Development Assistance Committee (DAC) of the Organisation for Economic Co-operation and Development (OECD) as Australian Official Development Assistance (ODA):

Bangladesh Nauru Sri Lanka
Cambodia Nepal Thailand
Fiji Pakistan Timor-Leste
India Papua New Guinea Tonga
Indonesia Philippines Vanuatu
Kiribati Samoa Vietnam
Laos Solomon Islands  
Myanmar South Africa  

These countries are collectively referred to as the 'specified countries' in this ruling.

Question 1

Is DFAT required to withhold an amount, under any PAYG(W) rules from the following payments made to DFAT employees accredited as diplomatic or consular agents under the Vienna Convention on Diplomatic Relations 1961 or Vienna Convention on Consular Relations 1963, assigned to work at any of the specified countries on activities or programs in respect of which funding is reportable to the OECD DAC as ODA:

  • - salary, wages and allowances, including:
    • - transfer allowance BREAK(apart from in circumstances covered by question2);
    • - cost of posting allowance;
    • - hardship allowance;
    • - hardship post child allowance;
    • - special location supplement; and
    • - additional household allowance?

Answer

Yes.

Question 2

Is DFAT required to withhold an amount under the PAYG(W) rules from the following payments made to employees accredited as diplomatic or consular agents under the Vienna Convention on Diplomatic Relations 1961 or Vienna Convention on Consular Relations 1963, assigned to work at any of the specified countries on activities or programs in respect of which funding is reportable to the OECD DAC as ODA:

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  • - transfer allowance that is in respect of expenses that are attributable to the period prior to the commencement or after the completion of a period of foreign service, and
  • - excess baggage allowance?

Answer

Yes.

18. In the "relevant facts and circumstances" set out in the abovementioned private ruling, the following "facts" appear, amongst others. It can be inferred these were the "facts" described by DFAT to the Commissioner in the application for the private ruling, as is the usual process for private rulings and, as stated in the private ruling, are the "facts" upon which the private ruling is based.

DFAT is the key Australian Government agency responsible for delivering Australian official development assistance (ODA).

…

The employees ('DFAT employees') are Australian public servants employed by DFAT. They are directly involved in the delivery of ODA, or in the management and corporate services in connection to the delivery of ODA in the various specified countries.

…

While assigned to one of the specified countries, the DFAT employees are accredited as diplomatic or consular agents under the Vienna Convention on Diplomatic Relations 1961 or Vienna Convention on Consular Relations 1963.

The remuneration for DFAT employees takes the form of an annual salary entitlement and the payment of various allowances.

…

These benefits are provided to DFAT employees in respect of their foreign service and only provided while they are accredited as diplomatic or consular agents under the Vienna Convention on Diplomatic Relations 1961 or Vienna Convention on Consular Relations 1963, assigned to work at any of the specified countries on activities or programs in respect of which funding is reportable to the OECD DAC as Official Development Assistance.

…

In relation to the specified countries, Australia has entered into either a Memorandum of Understanding (MOU) or a Co-operation Development Agreement or Treaty (CDA).

…

The Development Agreements provide for 'Australian project personnel' to be exempt from taxation by the relevant Government on their salary and allowances.

DFAT has advised that, as confirmed by Third Person Notes to the Governments of specified countries, from 1 July 2014 DFAT staff accredited as diplomatic or consular agents under the Vienna Convention on Diplomatic Relations 1961 or Vienna Convention on Consular Relations 1963 in the respective countries are not covered by the Development Agreements.

19. [Omitted in accordance with confidentiality orders made by the Tribunal.]

PROCEDURAL HISTORY

20. It is necessary to briefly record the procedural history of the dispute before examining the relevant law and principles and their application in the present case.

21. Mr Coventry was audited by the Commissioner shortly after he lodged his income tax return for the relevant year. After the audit, the Commissioner adjusted Mr Coventry's tax return to include in his assessable income his foreign service income and, on 29 March 2016, issued to him a notice of assessment in respect of that amount as well as a notice of assessment of penalty. The assessment of administrative penalty was no longer in dispute by the time of the hearing.

22. On 7 November 2016, Mr Coventry lodged an objection against the assessments.

23.

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On 4 April 2017, the Commissioner issued to Mr Coventry a notice of objection decision disallowing the objection in full.

24. On 4 May 2017, Mr Coventry lodged an application for review of the Commissioner's objection decision with the Tribunal.

RELEVANT LAW AND PRINCIPLES

25. Section 6-15 of the Income Tax Assessment Act 1997 (Cth) provides that if an amount is exempt income then it is not assessable income.

26. Section 23AG of the ITAA 1936 which is the key taxation provision in this case relevantly stated, as regards the year ended 30 June 2015, as follows:

23AG Exemption of income earned in overseas employment

  • (1) Where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the person from that foreign service are exempt from tax.
  • (1AA) However, those foreign earnings are not exempt from tax under this section unless the continuous period of foreign service is directly attributable to any of the following:
    • (a) the delivery of Australian official development assistance by the person's employer;
  • …
  • (2) An amount of foreign earnings derived in a foreign country is not exempt from tax under this section if the amount is exempt from income tax in the foreign country only because of any of the following:
    • (a) a law of the foreign country giving effect to a double tax agreement;
    • (b) a double tax agreement;
    • (c) provisions of a law of the foreign country under which income covered by any of the following categories is generally exempt from income tax:
      • (i) income derived in the capacity of an employee;
      • (ii) income from personal services;
      • (iii) similar income;
    • (d) the law of the foreign country does not provide for the imposition of income tax on one or more of the categories of income mentioned in paragraph (c);
    • (e) a law of the foreign country corresponding to the International Organisations (Privileges and Immunities) Act 1963 or to the regulations under that Act;
    • (f) an international agreement to which Australia is a party and that deals with:
      • (i) diplomatic or consular privileges and immunities; or
      • (ii) privileges and immunities in relation to persons connected with international organisations;
    • (g) a law of the foreign country giving effect to an agreement covered by paragraph (f).

27. Section 23AG of the ITAA 1936 was amended by the Tax and Superannuation Laws Amendment (2015 Measures No. 4) Act 2015 to insert the following words "(except if that employer is an Australian government agency (within the meaning of the Income Tax Assessment Act 1997))" after the word "employer" in s 23AG(1AA)(a). In the Explanatory Memorandum accompanying the relevant Bill, the government explained "[t]he changes will mean employees of an Australian government agency who are undertaking ODA in overseas employment for a period of not less than 91 days are no longer exempt from payment of income tax." The changes were made effective 1 July 2016 and applicable to the 2016-17 year of income and later years of income.

28. Mr Coventry brought the abovementioned legislative change to my attention to support his contention that no law change impacted him in the relevant year. The legislative change was not the subject of any argument at the hearing and, accordingly, I do not separately address it, especially as this is not a case where determining the meaning to be given to s 23AG in its unamended form is assisted by looking at subsequent legislation; there is no ambiguity in the terms of s 23AG(1) and (2), that are the subject of this dispute. This approach is in accordance with that adopted by the Full Federal Court in
Allina Pty Ltd v Federal Commissioner of Taxation (1991) 28 FCR 203 at 212 where their Honours declined to interpret a provision in the income tax legislation by reference to the amending words as there was no ambiguity in the words in question.

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29. Neither of the parties referred me to any interpretive rules or principles for determining the meaning of Articles and definitions in the Development Agreement nor was I referred to any travaux preparatoires. Accordingly, my approach was informed by interpreting the Development Agreement in good faith in accordance with the ordinary meaning to be given to its terms in their context and in the light of its object and purpose. This approach is consistent with Article 31 of the Vienna Convention on the Law of Treaties (1969) although it is acknowledged that the Government of the Islamic Republic of Pakistan has not ratified that treaty.

ARE MR COVENTRY'S SALARY AND ALLOWANCES EXEMPT FROM AUSTRALIAN INCOME TAX?

30. It is common ground between the parties that Mr Coventry satisfied the threshold elements of s 23AG(1). That is, he was a resident, being a natural person, who was engaged in 'foreign service' in the relevant year for a continuous period of not less than 91 days and he derived 'foreign earnings' from that foreign service. The term 'foreign service' means service in a foreign country as the holder of an office or in the capacity of an employee and the term 'foreign earnings' includes income consisting of salary and wages and allowances: s 23AG(7).

31. The Commissioner also accepts that Mr Coventry's income from the performance of his duties as a DFAT officer posted to Pakistan in the 2015 income year was directly attributable to the delivery of Australian ODA by his employer, DFAT: s 23AG(1AA)(a). Additionally, the Commissioner accepted that Mr Coventry's income was exempt from income tax imposed by Pakistan pursuant to the Vienna Convention, for the purposes of s 23AG(2). However, the Commissioner says that Mr Coventry's income was not exempt under any other agreement such as to fall outside the carve out in s 23AG(2).

32. As evident from the relevant extracts of s 23AG above, s 23AG(1) is subject to s 23AG(2) so that the exemption from tax in s 23AG(1) does not apply if the income is exempt from taxation in the foreign country "only because of any of" the reasons set out in s 23AG(2). Therefore, if a reason for exempting the foreign earnings from tax in the foreign country is not one of the reasons listed in s 23AG(2), the exemption in s 23AG(1) continues to apply. Mr Coventry contends that the income from the performance of his duties as a DFAT officer posted to Pakistan in the 2015 income year was also exempt from income tax imposed by Pakistan pursuant to Article 10 of the Development Agreement and, therefore, he is entitled to the s 23AG(1) exemption. That is, Mr Coventry says there was a reason additional to those listed in s 23AG(2).

33. The Commissioner contends that Mr Coventry was not within the terms of Article 10 because he did not satisfy the definition of "Australian project personnel" in Article 3 of the Development Agreement in the relevant year. As evident from the definition extracted above (see [10]), "Australian project personnel" requires, firstly, the person to be working in Pakistan on an activity under the Development Agreement and, secondly, their salary and allowances must be funded from the contribution of the Government of Australia to the activity. This is where "activity" is defined in Article 3 to mean "any discrete unit of development assistance which may include any one or more of the forms of development assistance described in Article 2".

34. The Commissioner's first argument as to why Mr Coventry was not covered by the definition of "Australian project personnel" was that he did not undertake any specific activity, and that this was required because of the reference to the "discrete unit of development assistance" in the definition of "activity".

35. The Commissioner's second argument was that Mr Coventry's salary and allowances were funded from DFAT's budget as ODA departmental expenses and, therefore, not funded by reference to the activity, as required by the definition of "Australian project personnel". The

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Commissioner supported his second argument by pointing to copies of screen shots of DFAT's personnel records for Mr Coventry for the period he was in Islamabad which described his "cost centre" as being "departmental" (the only other option displayed being "administered") and, additionally, focusing on the line item in table 1 of the DFAT Report with respect to "DFAT ODA - Departmental" expenses (see [12] above). The Commissioner submitted that this demonstrated Mr Coventry's salary and other allowances were not funded from the contribution of the Australian government to the activity, for the purposes of the definition of "Australian project personnel".

36. [Omitted in accordance with confidentiality orders made by the Tribunal.]

37. I agree with Mr Coventry that Article 10 of the Development Agreement, read together with the definitions of "Australian project personnel" and "activity" in Article 3, and the activities of the program set out in Article 2 lead to the conclusion that he was exempt from income tax on his salary and allowances in Pakistan. That is, Mr Coventry was covered by the terms of the definition of "Australian project personnel" in Article 3 of the Development Agreement and exempt from Pakistan income tax under Article 10 of the Development Agreement. It follows, that Mr Coventry is exempt from Australian income tax under s 23AG(1) of the ITAA 1936 in respect of his salary and allowances earned in the year ended 30 June 2015.

38. Specifically, Mr Coventry persuaded me that he was involved in the delivery of ODA by his employer, DFAT, to Pakistan under the terms of the Agreement and that the work he performed satisfied the definition of "activity" in Article 3. This is because Mr Coventry was performing work for his employer that was reportable as ODA which on its face satisfied the terms of Article 2.3(e). That work entailed him being involved in activities for sectors listed in Article 2.1(d) such as food processing and post-harvest technology, as well as engaged in the forms of assistance included under Article 2.3(a), (b) and (c) relating to the sending of missions, the granting of scholarships, and the assignment of Australian experts, advisers and other specialists. The definition of "activity" in the Development Agreement expressly states that it "may include any or more of the forms of assistance described in Article 2". In the circumstances, it is clear that it does not have to be an activity in the sense of a specific or single activity and the Commissioner's first argument, therefore, fails. In reaching this conclusion, I have also had regard to the terms of Article 2 which is concerned with "Activities of the program of development co-operation" as per the title to that Article and the fact it is expressed in general terms. This is to be contrasted with Article 7 of the Development Agreement (extracted at [10] above) which is separately concerned with "Specific activities" and sets out the criteria for such arrangements, including listing the name and duration of the activity, a description and statement of objectives of the activity and the details of the financial contributions to the activity by the two Governments.

39. With reference to the Commissioner's second argument that Mr Coventry's salary and allowances were not funded by reference to "the activity", as required by the definition of "Australian project personnel", my view is that the Commissioner's argument also fails. A reading of the definition of "Australian project personnel" in its entirety and in context means, in my view, that "the activity" referred to at the end of that definition is the activity earlier referenced as being worked on under the Development Agreement. That is, in the present case, "the activity" ties back to the activities contemplated under Article 2 of the Development Agreement and it does not require funding to be enumerated for a specific activity. Furthermore, I am satisfied that, as Mr Coventry's salaries and allowances were officially reported by DFAT as ODA for Pakistan, he is covered by the definition of "Australian project personnel" in Article 3. This, in my view, follows because of my conclusion that his work was reportable as ODA under the terms of Article 2.3.

40.

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I had considerable difficulty with the Commissioner's argument with respect to the fact of the "cost centre" for Mr Coventry being a "departmental" expense and therefore, his salary and costs not being funding for the activity under the Development Agreement. In particular, the Commissioner did not take me to any independent document showing the significance of the category of "departmental" in terms of ODA reporting. Also, while the Commissioner relied on Table 1 in the DFAT Report (in combination with DFAT's personnel records about Mr Coventry), there was, of course, also Table 2 in the DFAT Report which showed a different picture, namely, the "total Australian ODA by partner country" and which obviously included ODA departmental expenses. (This was evident from the fact that the sums total for Tables 1 and 2 were identical). It was not clear to me why I was to prefer and focus on the information in Table 1 over Table 2 as the Commissioner urged me to do.

41. I found some limited assistance about the "ODA departmental expense" categorisation in correspondence between Mr Coventry and others, which was contained in Mr Coventry's evidence. In particular, in response to a query sent by Mr Coventry to a research officer at The Australian National University Crawford School of Public Policy, the research officer relevantly states in an email dated 18 July 2017, as follows:

DFAT aid program staff costs are reported as ODA. It would be captured in the budget papers and DFAT Annual report as 'departmental expenses' under the Official Development Assistance program.

42. In another email response to Mr Coventry from a DFAT employee working in the ODA Statistics Reporting Section dated 16 August 2017, the DFAT employee relevantly and somewhat helpfully states, as follows:

Administrative costs that form an integral part of the costs in the direct delivery of the program are reported as part of the respective country program. Administrative costs not already include (sic) under other ODA items are reported under the DAC category of development assistance programs not already included under category 'Administration Costs of Donors'.

For Australia, the Administration Costs of Donors equates to what is reported as ' DFAT ODA - Departmental ' in the Australian Aid Budget Summary and reflects the costs of administering the aid such as salaries, allowances, computer, publication printing, etc (bolding in original)

43. A problem that presents from the Commissioner's submissions and following the explanations about "DFAT ODA - Departmental" referred to above is, if Mr Coventry's salary and allowances (as DFAT's Head of Aid) are not funded from the contribution of the Government of Australia to activities under the Development Agreement, whether any DFAT employee posted overseas and working on ODA activities was covered by the definition of "Australian project personnel". My conclusion is that even if Mr Coventry was sitting in a DFAT "cost centre" earmarked as a "departmental" expense and his salary and allowances reported as "DFAT ODA - Departmental", there was nothing before me to suggest that that of itself took him outside the meaning of "Australian project personnel" in the Development Agreement especially in the light of the object and purpose of the Development Agreement, as revealed from Article 1 (see [10] above). His salary and allowances were, after all, officially reported as ODA for Pakistan as per Table 2 in the DFAT Report. This was in accordance with the emails referenced in [41] and [42] above. [Omitted in accordance with confidentiality orders made by the Tribunal.] As already noted above, there were no amendments agreed to in writing by the parties to the Development Agreement pursuant to Article 18.

44. [Omitted in accordance with confidentiality orders made by the Tribunal.]

45.

ATC 7667

Finally, I also considered the fact that Article 10 titled "Personnel" deals with the rights and entitlements of "Australian project personnel" in Pakistan, in broad terms. I note that the Commissioner's submission which was concerned only with paragraph (a) of Article 10 dealing with income taxes in Pakistan, if adopted, would mean that DFAT staff sent to Pakistan under the Development Agreement would not have any rights and entitlements under the balance of Article 10 and, therefore, not be covered by the Development Agreement. That does not cohere with the Commissioner's acceptance that Mr Coventry was posted to Islamabad under the Development Agreement. Accordingly, on balance, I am satisfied that Mr Coventry's salary and allowances were funded from the contribution of the Australian Government to the activity, namely, the ODA activities he performed. Therefore, Mr Coventry has discharged the burden of proving that the assessment issued to him by the Commissioner is excessive and what the assessment should have been.

CONCLUSION

46. For the reasons set out above, I have decided that the Commissioner's objection decision is incorrect and should be set aside and substituted with the decision to allow Mr Coventry's objection in full. Accordingly, Mr Coventry is exempt from Australian income tax under s 23AG(1) of the ITAA 1936 in respect of his salary and allowances earned in the year ended 30 June 2015.

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