OVERSEAS AIRCREW BASING LTD v FC of T

Judges:
Graham J

Court:
Federal Court, Sydney

MEDIA NEUTRAL CITATION: [2009] FCA 7

Judgment date: 15 January 2009

Graham J

Background

1. On 30 May 2007 the applicant, Overseas Aircrew Basing Limited, lodged a Fringe benefits tax (FBT) return for the period 1 April 2006 to 31 March 2007 with the Australian Taxation Office.

2. Under s 72(c)-(e) of the Fringe Benefits Tax Assessment Act 1986 (Cth) ("the FBT


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Act"), the furnishing of that return had the following effect:
  • "72. ...
    • (c) the Commissioner shall be deemed at that time to have made an assessment (in this section referred to as the deemed assessment ) of:
      • (i) the fringe benefits taxable amount (including a nil amount) of the employer of the year of tax; and
      • (ii) the amount (including a nil amount) of tax payable on that fringe benefits taxable amount;

        being those respective amounts as specified in the return referred to in paragraph (a);

    • (d) the return referred to in paragraph (a) shall be deemed to be a notice of the deemed assessment and to be under the hand of the Commissioner;
    • (e) the notice referred to in paragraph (d) shall be deemed to have been served at that time on the person liable to pay the tax."

3. The amount specified in the return as the "Fringe benefits taxable amount" was $548,116 and the "Amount of tax payable" on that Fringe benefits taxable amount was $254,873.94.

4. By an objection dated 4 October 2007 which was apparently lodged with the Australian Taxation Office on 5 October 2007 the applicant objected against the assessment of the fringe benefits taxable amount and the amount of tax payable thereon under the FBT Act, the relevant grounds being recorded as follows:

  • "(a) the Assessment is excessive and should now be set aside or altered by:
    • (i) excising the amount of Fringe Benefits Tax ('FBT') assessed to the applicant; and
    • (ii) re-calculating the FBT payable for the relevant period, accordingly.

      The taxpayer relies upon the following grounds (none of which are to be taken as limiting any of the grounds in support of this objection):

  • 1. The applicant taxpayer is not liable to make withholding payments in connection with salary and wages because the salary and wages paid by the applicant are exempt income under s.23AG of ITAA36.
  • 2. No part of the said assessed amount was an amount which should have been included in the Fringe Benefits Taxable Amount of the taxpayer for the purposes of s.66 of the FBT Act because:
    • a) The applicant makes payments of salary and wages to its employees in connection with contracts of employment but the applicant is not an employer for the purposes of s.136(1) of the FBT Act because:
    • b) The payments of salary or wages made by the applicant are not 'salary or wages' for the purposes of s.136(1) of the FBT Act because the payments are exempt income of the employees by operation of s.23AG of ITAA36, and accordingly, the payment of salary or wages are not payments from which the taxpayer is required to withhold amounts under the Pay-As-You-Go ('PAYG') withholding tax system in accordance with s.12-1 of Schedule 1 Part 2-5 of the TAA
    • c) Payments made by the applicant to its employees are exempt income by operation of s.23AG of ITAA36 insofar as the payments constitute remuneration in connection with contracts of employment which were performed by the applicant's employees who at all times in the relevant income year satisfied the requirement of a continuous period of not less than 91 days in foreign service for the purposes of ss.23AG(1), (6) and (6A).
    • d) In the alternative, any days the employees are not considered to be engaged in foreign service within the meaning of s.23AG of ITAA36 should constitute recreation leave or sick leave for the purposes of s.23AG(6), and therefore should fall within the extended meaning of 'engaged in foreign service'. Accordingly, the requirement of 91 days continuous period of foreign service should still be satisfied.

      ATC 9289

  • 3. Further and alternatively, and without in any way limiting any of the grounds in this objection, if the Commissioner purported to have formed any opinion or to be satisfied or to have failed to be satisfied as to any matter or to have exercised any discretion or power or to have failed to exercise any discretion or power under the FBT Act or the TAA as a basis of, or as justifying the Assessment, including any assessment of additional tax and of exercising any discretion to remit additional tax, then the Commissioner took into account an irrelevant consideration or considerations, and/or failed to take into account a relevant consideration or considerations and otherwise acted arbitrarily, capriciously and contrary to law.

    As the Notice contains insufficient particulars of the basis of the Assessment, the taxpayer reserves the right to raise before the Administrative Appeals Tribunal or a Court upon the hearing of any appeal arising here from further grounds or may, before such Tribunal or Court, make an application pursuant to s 14ZZK or s 14ZZO of the TAA, as the case may be, for leave to amend the grounds of this Notice of Objection."

5. By a "NOTICE OF DECISION ON OBJECTION" dated 12 March 2008 the Deputy Commissioner of Taxation disallowed the applicant's objection.

6. Thereupon, the applicant filed an Application on 7 May 2008 appealing to the Court against the relevant appealable objection decision, being the decision of the respondent made on 12 March 2008 to disallow in full the applicant's objection, said to have been dated 5 October 2007, against the Notice of Assessment issued by the respondent on 30 May 2007 of the applicant's Fringe Benefits Taxable Amount for the tax period ending 31 March 2007. The relief sought in the Application was that the applicant's objection be allowed in full and the setting aside of the fringe benefits tax assessment.

7. The applicant, a company incorporated in the Hong Kong Special Administrative Region of the People's Republic of China, is a wholly owned subsidiary of Cathay Pacific Airways Limited ("Cathay Pacific").

8. The applicant retains the services of air crew around the world who are made available to serve as air crew for Cathay Pacific under a service agreement between the applicant and Cathay Pacific.

Employment contracts

9. A typical employment contract between an individual aircrew member and the applicant took the form of a letter from the applicant to the potential aircrew member inviting acceptance by the potential aircrew member at the foot thereof and the insertion of the appropriate date, thereby creating the contractual relationship. The form of the offer of employment was expressed to be subject to the "Overseas Aircrew Basing Limited Conditions of Service (2002)", a copy of which was attached to the form of letter. That document comprised some 90 odd pages. In turn, it provided for it to be "read in conjunction with the Operations Manual, Volume 1, as the same may be amended from time to time, subject to the provisions of Section 21" (Volume 1 of Cathay Pacific's Operations Manual comprised some 390 odd pages). It also provided for the Conditions of Service to "be interpreted in accordance with the law as set out in the various applicable Ordinances of the Hong Kong Special Administrative Region".

10. The form of letter offering employment was as follows:


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" OVERSEAS AIRCREW BASING LIMITED
      A wholly owned subsidiary of Cathay Pacific Airways Limited      
Overseas Aircrew Basing Limited
3/F, Central Tower
Cathay Pacific City
8 Scenic Road
Hong Kong International Airport
Lantau
Hong Kong
Dear
We are pleased to offer you employment with our company as a __________ on the Airbus with effect from __________ This offer is subject to the Overseas Aircrew Basing Limited Conditions of Service (2002) a copy of which is attached hereto.
This employment contract is governed by and shall be construed in accordance with the laws of Hong Kong and the parties hereto shall submit to the non-exclusive jurisdiction of the courts of Hong Kong.
If you agree to accept the terms of our offer, kindly sign the duplicate of this letter and return the same to us.
Yours faithfully,
For and on behalf of
OVERSEAS AIRCREW BASING LIMITED
Andrea Lucas
Manager Overseas Aircrew Basing Limited
Accepted: ________________________________ Date: ________________________________
..."

11. The determination of the "Home Base" and/or "Preferred Port" of an aircrew member would appear to be addressed in an 11 page 'Permanent Basings Policy Agreement 2006' or a 10 page "Freighter Aircraft Basings Policy 2000", which form part of the "Overseas Aircrew Basing Limited Conditions of Service (2002)" as amended.

12. The former agreement would appear to have been reached between the Hong Kong Aircrew Officers' Association on behalf of its members of the one part and Cathay Pacific, the applicant, New Zealand Basing Limited, USA Basing Limited and Veta Limited (collectively referred to as "the company") of the other part.

13. Clause 16 of the Permanent Basings Policy Agreement 2006 provided as follows:

  • "16. ADMINISTRATION
    • 16.1. The Base Administrative Centres are:
      • a. Sydney for the Australian and New Zealand Base Areas;
      • b. London for the European Base Area; and

      • ATC 9291

        c. Vancouver for the Canadian and USA Base Areas.

        These centres will handle specific duties for Based Officers as directed, and on behalf of, the Basing Company Headquarters in Hong Kong.

    • 16.2 Officers will be required to commence and finish a duty cycle at their HB [Home Base] and, if applicable, their PP [Preferred Port]. Travel between the Officer's residence and HB or PP and any accommodation and expenses at the HB or PP are for the Officers' own account.
    • 16.3 Positioning from other than the Officer's HB or PP at the commencement or completion of a scheduled duty will be in accordance with Company Policy.
    • 16.4 Any personal taxation or personal social security liability resulting from an Officer's choice of residence will be for his/her own account.
    • 16.5 Based Officers will be responsible for ensuring that they comply with any immigration and/or visa requirements of the relevant authorities in the Officers choice of residence although the Company will render Officers reasonable assistance wherever possible.
    • 16.6 The Basing Companies will render reasonable assistance to an Officer taking up a base appointment in obtaining such professional advice as the Officer may require provided that the Company shall not incur any financial or other liability in so doing.
    • 16.7. The Basing Company will satisfy all reporting and income tax withholding requirements on behalf of any of its employees who are subject to such requirements.
    • 16.8. Protection given to Officers, in accordance with the 'Responsibility of the Company' Section of the Conditions of Service, in the event of incident or accident, shall be no less than that provided by CPA [Cathay Pacific]."

14. Clause 4 of the Permanent Basings Policy Agreement 2006 included the following definitions:

  • "4.2 Base Area

    A defined area within which the Home Base and/or Preferred Port is situated. Current Base Areas are Asia, Australia, Canada, Europe, New Zealand and the USA.

  • ...
  • 4.8 Home Base (HB)

    The port mutually agreed by both the Company and the Officer from where the Officer normally starts and ends a Duty Cycle.

  • ...
  • 4.10 Preferred Port (PP) [TI]

    The CPA [Cathay Pacific] passenger on-line port mutually agreed by both the Company and the Officer which is not the Officer's HB but from where the Company may schedule the Officer to start and/or end a Duty Cycle. An Officer's Preferred Port must be located within the Officer's Base Area"

15. According to Captain Philip Richard Walker, General Manager, Aircrew of Cathay Pacific, there are four Home Bases within the Australian Base Area being Brisbane, Sydney, Melbourne and Perth.

16. As indicated in clause 16.1 of the Permanent Basings Policy Agreement 2006, Sydney is the Base Administrative Centre for the Australian and New Zealand Base Areas.

17. Clause 6.9 of the Permanent Basings Policy Agreement 2006 provided for the crew establishment in each Home Base to be determined by Cathay Pacific.

18. A number of provisions within the Overseas Aircrew Basing Limited Conditions of Service 2002 make reference to aircrew with a Home Base in Hong Kong and aircrew with Home Bases elsewhere (see for example clauses 38 and 39).

19. Clauses 44 and 45 contemplate applications by aircrew to be temporarily based in ports other than their Home Base or to be permanently based in such ports. Clause 50 deals with the situation which arises where a Home Base is closed in which case an


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opportunity is afforded to the relevant aircrew to relocate to another Home Base within the relevant Base Area or to Hong Kong.

20. Clause 51.1 dealt with the possibility of the applicant being "wound up" or otherwise ceasing to operate, in which case aircrew were to "rejoin" Cathay Pacific in their existing rank and grade on Cathay Pacific Conditions of Service, Veta on Veta Conditions of Service or USAB on USAB Conditions of Service. Alternatively, they could apply to join NZBL on NZBL Conditions of Service.

21. Matters dealt with by the Overseas Aircrew Basing Limited Conditions of Service 2002 included Terms of Employment (clause 3), Salary (clause 7, when taken with Schedule 1), Rostering (clause 21), Crew Positioning (clause 22), Annual Leave (clause 25), Guaranteed Days Off (clause 26), Statutory Holidays (clause 27), Sickness Allowance (clause 28), Compassionate Leave (clause 29), Maternity Leave (clause 30), Redundancy (clause 31), Discipline and Grievance (clause 32), Suspension of Employment (clause 33), Termination of Employment (clause 34) and Retirement (clause 35).

22. Clauses 3 and 7 relevantly provided:

  • "3. TERMS OF EMPLOYMENT
    • 3.1. An Officer will serve the Company by operating any aircraft as defined in the Cathay Pacific Airways Limited ('CPA') Air Operator's Certificate in any part of the world and on any of the routes served by the Company, including the operation of special or chartered flights as required by the Company, and perform such other duties in the air and/or on the ground that relate to the Company's flight operations.
    • ...
    • 3.4. In addition to the duties defined in 3.1, 3.2 & 3.3, an Officer, subject to mutual agreement between the Company and the Officer, will perform such other duties in the air and/or on the ground that the Company may require.
    • 3.5. Officers who are unfit to exercise the privileges of their Aircrew Licence for medical reasons may be assigned ground duties by the Company in accordance with recommendations of the Company's Aeromedical specialists.
    • ...
  • 7. SALARY
    • 7.1. Salary will be paid monthly in arrears. Salary will be credited to an Officer's bank account in Hong Kong nominated in writing by the Officer.
    • 7.2. The Salary scale is specified in Schedule 1 of these Conditions of Service and will be reviewed annually. For the avoidance of doubt, the specified Salary scale may not be reduced without the individual Officer's written consent.
    • ..."

23. Schedule 1 to the Conditions contained various salary scales. One such scale was headed:

"Australian Base - AUD Salary

Applicable to Officers whose Base Administration Centre is Sydney"

Another was headed:

"Australian Base - AUD Salary

Applicable to Officers whose Base Administration Centre is Sydney who were employed by CPA prior to 1st April 1993"

and a third was headed:

"AUSTRALIAN BASED FREIGHTER AIRCREW ANNUAL BASIC SALARY 2006"

A separate question

24. In opening the applicant's case, senior counsel for the applicant, Mr A H Slater QC said:

"The issue which divides the parties is whether the income of pilots employed by the applicant is exempt from tax under section 23AG [of the Income Tax Assessment Act 1936 (Cth) ('the 1936 Act')]. If the income is wholly exempt then there is no fringe benefits tax payable in respect of benefits provided to the pilots. If the income is partly exempt then there'll be consequences which the parties are agreed should not tax your Honour but rather, if your Honour can decide the extent to which the income is exempt or the criteria by reference to which it is exempt in your


ATC 9293

Honour's reasons and then stand the matter over, the parties will do the calculations and resolve the differences. In other words, we're not going to ask your Honour to do elaborate calculations of the amount of fringe benefits tax."

25. The Court's response to this approach was to suggest that an order should be made in accordance with Order 29 rule 2 of the Federal Court Rules ("the Rules") for the decision of a defined question separately from other questions and before any further trial in the proceedings. This suggestion was soundly rejected by senior counsel for the applicant because, firstly, he said that a separate question had not been formulated and, secondly, "formulating separate questions generally involves more controversy than simply dealing with the matter".

26. In the circumstances, senior counsel for the applicant proposed that the Court should, without formally ordering the decision of a separate question in accordance with Order 29 rule 2 of the Rules, decide the following question namely:

"Whether the income derived by the seven pilots, whose rosters are tendered in evidence, from the services they provide to the applicant, is exempt from tax and, if partly, to what extent?"

27. The reference to "the seven pilots (whose rosters are tendered in evidence)" is a reference to seven individual pilots out of 116 who have been selected for the purposes of these proceedings as typical, being the pilots who are the subject of Pilot Rosters 2, 43, 58, 71, 75, 82 and 104. The rosters themselves are seven pages in length for each of pilots 2, 43, 58, 71, 75 and 104, the roster for pilot 82 being six pages in length. They each cover the period 1 April 2006 to 31 March 2007, although the last entry for pilot 43 is shown as 30 March 2007.

28. These pilot rosters were selected by the parties as illustrative of the various combinations and permutations, sufficient to enable the matters of principle to be determined, without the necessity of exploring the detail of each and every member of the applicant's aircrew's circumstances.

29. Mr Slater has invited the Court to address the question as formulated by him in paragraph 26 above on the basis that, once it has been decided, the matter should be stood over for a period of three months to allow the parties to bring in short minutes to give effect to the Court's reasons for judgment.

30. Senior counsel for the respondent, Mr B J Sullivan SC, invited the Court to proceed generally along the lines that Mr Slater proposed.

31. I note that for the purposes of Order 29 of the Rules, 'question' includes any question or issue in any proceeding, whether of fact or law or partly of fact and partly of law, and whether raised by pleadings, agreement of parties or otherwise.

32. In the foregoing circumstances, I will proceed to address the question as formulated by Mr Slater on the basis that a precise formulation of it and the Court's decision thereon will be settled at the conclusion of this part of the appeal. I must say that I would have preferred a greater degree of formality.

The tortuous path leading to s 23AG of the 1936 Act

33. In explaining why liability for fringe benefits tax is to be determined, in this case, by the true meaning of s 23AG of the 1936 Act, senior counsel for the applicant was less than complimentary about the drafting of the relevant legislation. His criticism appears to be well founded.

34. To enable the question as agreed between the parties to be determined it is necessary to turn to, firstly the FBT Act, secondly the Taxation Administration Act 1953 (Cth) ("the Administration Act") and Schedule 1 thereto, thirdly the Income Tax Assessment Act 1997 (Cth) ("the 1997 Act") and, fourthly, the 1936 Act. At times one senses that one is caught in a maze, where there is no way out.

35. The path that one must follow is as follows:

  • (a) Section 136 of the FBT Act contains a number of definitions under the heading "Interpretation". Relevantly, the important definitions for present purposes, not necessarily recorded in strict alphabetical order, are as follows:
    • "136(1) In this Act, unless the contrary intention appears:

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      ...
    • ' fringe benefit ', in relation to an employee, in relation to the employer of the employee, in relation to a year of tax, means a benefit:
      • (a) provided at any time during the year of tax; or
      • (b) provided in respect of the year of tax;
    • being a benefit provided to the employee or to an associate of the employee by:
      • (c) the employer; ...
      • ...
    • in respect of the employment of the employee...
      • ...
    • ' employee ', means:
      • (a) a current employee;
      • ...; or
      • (c) a former employee
      • ...
    • current employee means a person who receives, or is entitled to receive, salary or wages.
    • ...
    • ' former employee ' means a person who has been a current employee.
    • ...
    • ' employer ' means:
      • (a) a current employer;
      • ...; or
      • (c) a former employer
      • ...
    • ...
    • current employer means a person ... who pays, or is liable to pay, salary or wages...
    • ...
    • former employer ' means a person who has been a current employer.
    • ...
    • salary or wages means:
      • (a) a payment from which an amount must be withheld (even if the amount is not withheld) under a provision in Schedule 1 of the Taxation Administration Act 1953 listed in the table, to the extent that the payment is assessable income; ...
      • ...
      • [At the conclusion of the definition of salary or wages a table appeared which included under the heading ' Withholding payments covered ' a reference to s 12-35 of the Administration Act in relation to 'Payment to employee']".

    I should digress to indicate that the applicant submits that if payments to the selected aircrew members are not payments to employees within the meaning of s 12-35 of Schedule 1 to the Administration Act, then such payments are not 'salary or wages' with the consequence that the relevant recipient is not a 'current employee' and therefore not an 'employee' and, consequentially, the amount paid in respect of the recipient is not a fringe benefit.

  • (b) In relation to the withholding of amounts from payments to employees s 12-35 of Schedule 1 to the Administration Act provided as follows:
    • "12-35 An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whther of that or another entity)."

    Section 12-35 was itself subject to the exceptions which are to be found in s 12-1 of Schedule 1 to the Administration Act.

  • (c) Section 12-1(1) of Schedule 1 to the Administration Act relevantly provided:
    • "12-1(1) An entity need not withhold an amount under section 12-35 ... from a payment if the whole of the payment is exempt income of the entity receiving the payment."
  • As an aside, I should indicate that the respondent places emphasis on "if the whole of the payment".
  • (d) By virtue of s 3AA(2) of the Administration Act expressions used in Schedule 1 to the Administration Act have the same meanings as they have in the 1997 Act. The definitions in the 1997 Act are to be found in s 995-1 which spans some 180 pages. BREAKApart from the definitions contained in s 995-1 of the 1997 Act there are expressions that are defined elsewhere in the 1997 Act, which supplement those definitions eg the definition of 'entity' in s 960-100 of the 1997 Act.

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    (e) One added complication lies in the fact that in s 995-1(1) of the 1997 Act 'this Act' is defined to include:
    • "(a) the Income Tax Assessment Act 1936; and
    • (b) Part IVC of the Taxation Administration Act 1953, so far as that Part relates to:
      • (i) this Act or the Income Tax Assessment Act 1936; or
      • (ii) Schedule 1 to the Taxation Administration Act 1953; and
    • (c) Schedule 1 to the Taxation Administration Act 1953;
    • except in Division 950 (Rules for interpreting this Act)"
  • (f) In this context, the expression 'exempt income' as used in s 12-1(1) of Schedule 1 to the Administration Act is defined by s 995-1(1) of the 1997 Act as follows:
    • "995-1(1) In this Act [an expression having the expanded meaning referred to above], except so far as the contrary intention appears:
    • ...
    • exempt income has the meaning given by section 6-20"
  • (g) In s 6-20 of the 1997 Act 'exempt income' was defined, inter alia, as follows:
    • "6-20(1) An amount of ordinary income or statutory income is exempt income if it is made exempt from income tax by a provision of this Act [which has the extended meaning referred to above] or another Commonwealth law."

    [Section 6-5(1) and 6-10(2) of the 1997 Act provided as follows:

    • "6-5(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income .

      ...

    • 6-10(2) Amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income ."]

    It is common ground between the parties that wages and salary are ordinary income within the meaning of s 6-20(1) of the 1997 Act.

  • (h) "Entity" where used in s 12-1(1) of the Administration Act is defined in s 995-1(1) of the 1997 Act, subject to the preamble (see (f) above), as follows:
    • "995-1(1) ...
    • entity has the meaning given by section 960-100"
  • (i) Section 960-100 of the 1997 Act provided, inter alia as follows:
    • "960-100(1) Entity means any of the following:
      • (a) an individual;
      • (b) a body corporate;
      • (c) a body politic;
      • (d) a partnership;
      • (e) any other unincorporated association or body of persons;
      • (f) a trust;
      • (g) a superannuation fund;
      • ..."

    At the foot of s 960-100(1) a "Note" appears which provided:

  • " Note: the term entity is used in a number of different but related senses. It covers all kinds of legal person. It also covers groups of legal persons, and other things, that in practice are treated as having a separate identity in the same way as a legal person does."
  • Thankfully, I need go no further, in this case, than focussing my attention upon subparagraphs (a) and (b).
  • (j) Another complication which arises from the legislative path that one must follow to try and make sense of the FBT Act is posed by s 3AA(3) of the Administration Act which provided:
    • "3AA(3) Division 950 of the Income Tax Assessment Act 1997 (which contains rules for interpreting that Act) applies to Schedule 1 to this Act as if the provisions in that Schedule were provisions of that Act"

    Division 950 of the 1997 Act contained 'Rules for interpreting this Act' [where 'this Act' does not have the extended meaning for which s 995-1(1) provided]. Sections 950-100 and 950-105 of the 1997 Act provided as follows:


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    "950-100(1) These all form part of this Act:
    • • the headings of the Chapters, Parts, Divisions and Subdivisions of this Act;
    • • Guides;
    • • the headings of the sections and subsections of this Act;
    • • the headings for groups of sections of this Act (group headings);
    • • the notes and examples (however described) that follow provisions of this Act.

      ...

    SECTION 950-105 What does not form part of this Act

  • 950-105 These do not form part of this Act:
    • • footnotes and endnotes;
    • • Tables of Subdivisions;
    • • Tables of sections."
  • (k) The next step along the way is to determine whether amounts of ordinary income were exempt from income tax by a provision of, relevantly for present purposes, the 1936 Act.
  • (l) Section 23AG of the 1936 Act dealt with the exemption of income earned in overseas employment. It provided:
    • "23AG(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 is exempt from tax.
    • (1A) A person is taken, for the purposes of subsection (1), to have been engaged in foreign service for a continuous period of 91 days if:
      • (a) the person died at a time when he or she was engaged in foreign service for a continuous period of less than 91 days; and
      • (b) he or she would have otherwise continued to be engaged in the foreign service; and
      • (c) his or her continuous period of engagement in the foreign service would have otherwise been a period of at least 91 days.
    • (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;

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      • (g) a law of the foreign country giving effect to an agreement covered by paragraph (f).
    • (2A) Subsection (2) does not apply in relation to foreign earnings to the extent that the person derived them from foreign service in Iraq after 31 December 2002 but before 1 May 2004.
    • (3) If the income of a taxpayer of a year of income consists of an amount that is exempt from tax under this section (in this section called the 'exempt amount') and other income, the amount of tax (if any) payable in respect of the other income is calculated using the formula:
        Notional gross tax  
      Notional gross tax able income
      × Other tax able income

      where

    • 'Notional gross tax' means the number of whole dollars in the amount of income tax that would be assessed under this Act in respect of the taxpayer's taxable income of the year of income if:
      • (a) the exempt amount were not exempt income; and
      • (aa) if the exempt amount is a payment covered by section 83-240 or 305-65 of the Income Tax Assessment Act 1997 - the exempt amount (excluding any part of that amount that represented contributions made by the taxpayer) were assessable income of that taxpayer; and
      • (b) the taxpayer were not entitled to any rebate of tax.
    • 'Notional gross taxable income' means the number of whole dollars in the amount that would have been the taxpayer's taxable income of the year of income if the exempt amount were not exempt income;
    • 'Other taxable income' means the amount (if any) remaining after deducting from so much of the other income as is assessable income:
      • (d) any deductions allowable to the taxpayer in relation to the year of income that relate exclusively to that assessable income; and
      • (e) so much of any other deductions (other than apportionable deductions) allowable to the taxpayer in relation to the year of income as, in the opinion of the Commissioner, may appropriately be related to that assessable income; and
      • (f) the amount calculated using the formula in subsection (4).
    • (4) The formula referred to in paragraph (3)(f) is:
      formula

    • where:
    • 'Apportionable deductions' means the number of whole dollars in the apportionable deductions allowable to the taxpayer in relation to the year of income;
    • 'Other taxable income' means the amount that, apart from paragraph (3)(f), would be represented by the component "Other taxable income" in subsection (3);
    • 'Notional gross taxable income' means the number of whole dollars in the amount that would have been the taxpayer's taxable income of the year of income if the exempt amount were not exempt income.

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      (5) Subsection (3) applies to a taxpayer in respect of income of a year of income as if any payment covered by section 83-240 or 305-65 of the Income Tax Assessment Act 1997 that related to the termination of employment that was made in respect of the taxpayer during that year of income were income of the taxpayer of that year of income that is exempt from tax under this section.
    • (6) For the purposes of this section, a period during which a person is engaged in foreign service includes any period during which the person is, in accordance with the terms and conditions of that service:
      • (a) absent on recreation leave, other than:
        • (i) leave wholly or partly attributable to a period of service or employment other than that foreign service;
        • (ii) long service leave, furlough, extended leave or leave of a similar kind (however described); or
        • (iii) leave without pay or on reduced pay; or
      • (b) absent from work because of accident or illness.
    • (6A) 2 or more periods in which a person has been engaged in foreign service are together taken to constitute a continuous period of foreign service until:
      • (a) the end of the last of the 2 or more periods; or
      • (b) a time (if any), since the start of the first of the 2 or more periods, when the person's total period of absence exceeds 1/6 of the person's total period of foreign service;

      whichever happens sooner.

    • Example:
    • Kate is engaged in foreign service for 20 days, is absent for 2 days and is then engaged in foreign service for 10 days. These 2 periods of foreign service constitute a continuous period of foreign service, because the total period of absence is never more than 1/10 of the total period of foreign service.
    • Kate is then absent for 5 days before commencing a further period of foreign service. No matter how long the further period lasts, it can never constitute a continuous period of foreign service with the first 2 periods of foreign service, because on the fourth day of the second absence the total period of absence is 1/5 of the total period of foreign service.

    • (6B) In subsection (6A):
    • total period of absence , in relation to a particular time, means the number of days, in the period starting at the start of the first of the 2 or more periods and ending at that time, for which the person was not engaged in foreign service.
    • total period of foreign service , in relation to a particular time, means the number of days, in the period starting at the start of the first of the 2 or more periods and ending at that time, for which the person was engaged in foreign service.
    • (6F) Where:
      • (a) a person has derived foreign earnings during a year of income; and
      • (b) at the time of making an assessment in respect of income of the person of the year of income, the Commissioner is of the opinion that, at a later time, circumstances will exist because of which those foreign earnings will be exempted from tax by this section;

      the Commissioner may apply the provisions of this section as if those circumstances existed at the time of making the assessment.

    • (6G) Where:
      • (a) in the making of an assessment, this section has been applied on the basis that a circumstance that did not exist at the time of making the assessment would exist at a later time; and

      • ATC 9299

        (b) the Commissioner, after making the assessment, becomes satisfied that the circumstance will not exist;

      then, notwithstanding anything contained in section 170, the Commissioner may amend the assessment at any time for the purposes of ensuring that this section shall be taken always to have applied on the basis that the circumstance did not exist.

    • (7) In this section:
    • double tax agreement means:
      • (a) double tax agreement within the meaning of Part X; or
      • (b) the Timor Sea Treaty.

      employee includes:

      • (a) a person employed by a government or an authority of a government or by an international organisation; or
      • (b) a member of a disciplined force.

    • foreign earnings means income consisting of earnings, salary, wages, commission, bonuses or allowances, or of amounts included in a person's assessable income under Division 13A, but does not include any payment, consideration or amount that:
      • (a) is included in assessable income under Division 82 or Subdivision 83-295 or Division 301, 302, 304 or 305 of the Income Tax Assessment Act 1997; or
      • (b) is included in assessable income under Division 82 of the Income Tax (Transitional Provisions) Act 1997; or
      • (c) is mentioned in paragraph 82-135(e), (f), (g), (i) or (j) of the Income Tax Assessment Act 1997; or
      • (d) is an amount transferred to a fund, if the amount is included in the assessable income of the fund under section 295-200 of the Income Tax Assessment Act 1997.

      foreign service means service in a foreign country as the holder of an office or in the capacity of an employee.

    • income tax , in relation to a foreign country:
      • (a) in all cases - does not include a municipal income tax; and
      • (b) in the case of a federal foreign country - does not include a State income tax".

36. In s 6(1) of the 1936 Act " resident or resident of Australia " was relevantly defined as follows:

  • "6(1) In this Act, unless the contrary intention appears:
  • ...
  • resident or resident of Australia means:
    • (a) a person ... who resides in Australia and includes a person:
      • (i) whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside Australia;
      • (ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence in Australia; or

      ..."

37. The parties are of the opinion that the provisions of s 23AG of the 1936 Act which are of most significance in this case are s 23AG(1), (6), (6A), (6B) and (7).

The history of section 23AG

38. As will be apparent from the numbering of the subsections within s 23AG of the 1936 Act, it has been the subject of amendment from time to time.

39. Section 23AG was inserted into the 1936 Act by the Taxation Laws Amendment (Foreign Tax Credits) Act 1986 (Cth) (Act No. 51 of 1986). That Act also inserted a new s 6AB which relevantly provided:

  • "6AB(1) A reference in this Act to foreign income is a reference to income derived from sources in a foreign country or foreign countries.
  • (2) A reference in this Act to foreign tax is a reference to tax imposed by a law of a foreign country, being-
  • ..."

40.


ATC 9300

In addition it provided for the omission of paragraphs (q) and (qa) of s 23 of the 1936 Act. Prior to that omission those paragraphs relevantly provided:
  • "23 The following income shall be exempt from income tax:-
    • ...
    • (q) income ... derived by a resident from sources out of Australia and Papua New Guinea, where that income is not exempt from income tax in the country where it is derived ...
    • (qa) income ... from sources in Papua New Guinea from any office or employment ... where the income is not exempt from income tax under the income tax laws of Papua New Guinea ..."

41. The concept of the 1936 Act is that all income is derived from some source having a geographical location or, at any rate, that it is possible to predicate of all income that it is so derived. This relation of income to a geographically located source has provided its problems in the past and no doubt will do so in the future. (per Barwick C.J. in
Esquire Nominees Limited v The Commissioner of Taxation of the Commonwealth of Australia 73 ATC 4114; (1973) 129 CLR 177 at 211).

42. The ascertainment of the actual source of a given income is a practical, hard matter of fact (per Isaacs, Gavan Duffy and Rich JJ in
Nathan v The Federal Commissioner of Taxation (1918) 25 CLR 183 at 190).

In each case, the relevant weight to be given to the various factors which can be taken into consideration is to be determined by the tribunal entitled to draw the ultimate conclusion as to source (per Barwick CJ in
Commissioner of Taxation of the Commonwealth of Australia v Mitchum (1965) 113 CLR 401 at 407. This was a case concerning income derived by the actor, Robert Mitchum, a non-resident of Australia, who had entered into a contract with a Swiss company under which he agreed to provide services as a consultant and to act in certain motion pictures. The Swiss company had agreed to make Mr Mitchum's services available to Warner Bros. Pictures Inc. to appear in a film entitled "The Sundowners" which it was contemplated would be produced partly in Australia and partly in England. The Income Tax Board of Review found that no part of the sum payable to Mr Mitchum by the Swiss company was derived from a source in Australia. That finding of fact was not the subject of consideration by the Full High Court).

43. An ordinary artisan earns his pay where he does his work (per Dixon C.J. in
Federal Commissioner of Taxation v French (1957) 98 CLR 398 at 405).

A person who worked his way up to become an engineer in a sugar refining company after serving his apprenticeship with that company and who served it mainly in the State of New South Wales but also was assigned to perform services as an inspecting engineer in the company's business in New Zealand, was held to have derived his income from a source out of Australia in respect of the period during which he performed services for the company in New Zealand. Dixon CJ was of the opinion (at 405) that Mr French's position was no different from that of the ordinary artisan.

44. When originally enacted in 1986 s 23AG(1) provided:

  • "23AG(1) Where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 365 days, any foreign earnings derived by the person from that foreign service is exempt from tax."

45. In the original s 23AG subsection (3) performed the same general function as the current subsection (2) which was inserted into s 23AG by the Taxation Laws Amendment Act (No 2) 1991 (Cth) (Act No. 100 of 1991). The original s 23AG(3) which was repealed by Act No. 100 of 1991 provided as follows:

  • "23AG(3) An amount of foreign earnings derived in a foreign country is not exempt from tax under this section unless -
    • (a) the amount is not exempt from income tax in that country; and
    • (b) if there is a liability for payment of income tax in that country in respect of that amount - the Commissioner is satisfied that the tax has been or will be paid."

46.


ATC 9301

Whilst the parties did not direct attention to s 23AG(2) as a significant subsection in this case, it seems to me that that subsection is also important. Both s 23AG(2) and its predecessor s 23AG(3) each commenced with the expression "An amount of foreign earnings derived in a foreign country is not exempt from tax under this section...". The former s 23AG(3) then proceeded to focus on "that country", being the foreign country in which foreign earnings were derived. S 23AG(2) proceeded to focus on the tax treatment given in "the" foreign country to the amount of foreign earnings derived in it.

47. Whilst the definition of "foreign earnings" in subsection (7) has been amended, the essential wording at the commencement of the definition has remained unchanged. The definition of "foreign service" has not changed at all.

In addition, subsection (6) remains essentially as it was when first enacted.

48. Subsequent to the introduction of s 23AG into the 1936 Act by Act No. 51 of 1986, it has been amended by the following Acts:

Taxation Laws Amendment Act (No. 2) 1988 (Cth) (Act No. 78 of 1988)

Taxation Laws Amendment Act (No. 2) 1991 (Cth) (Act No. 100 of 1991)

Taxation Laws Amendment Act (No. 3) 1991 (Cth) (Act No. 216 of 1991)

Taxation Laws Amendment Act (No. 4) 1994 (Cth) (Act No. 181 of 1994)

Taxation Laws Amendment Act (No. 3) 1997 (Cth) (Act No. 147 of 1997)

Foreign Affairs and Trade Legislation Amendment Act 1997 (Cth) (Act No 150 of 1997)

A New Tax System (Personal Income Tax Cuts) Act 1999 (Cth) (Act No. 69 of 1999)

A New Tax System (Family Assistance) (Consequential and Related Measures) Act (No. 2) 1999 (Cth) (Act No. 83 of 1999)

Petroleum (Timor Sea Treaty) (Consequential Amendments) Act 2003 (Cth) (Act No. 10 of 2003)

New International Tax Arrangements (Foreign-owned Branches and Other Measures) Act 2005 (Cth) (Act No. 64 of 2005)

Tax Laws Amendment (2005 Measures No. 5) Act 2005 (Cth) (Act No. 162 of 2005)

Superannuation Legislation Amendment (Simplification) Act 2007 (Cth) (Act No. 15 of 2007)

49. Subsections 23AG(6A) and (6B), in their current form, were inserted into the section by Act No. 162 of 2005 and were made applicable in relation to foreign service performed on or after 19 December 2005. When they were inserted the then existing subsections (6A), (6B), (6C), (6D) and (6E) were repealed along with subsection (6J). Subsections (6F) (which had itself been amended by Act No. 216 of 1991) and (6G) survived. Subsection (6H) had already been omitted by Act No. 100 of 1991.

50. Each of subsections (6A), (6B), (6C), (6D), (6E), (6F), (6G), (6H) and (6J) had originally been inserted into s 23AG by Act No. 78 of 1988. The several subsections which were inserted at that time and subsequently repealed, omitted, amended or left in place are not without their significance in that they introduced, amongst other things, the concept of a 'whole day' and the manner in which hours should be taken into account. They relevantly provided:

  • "(6A) For the purposes of this section, the absentee credit balance of a person at a particular time is the number of whole days (if any) by which the total of the absentee credits of the person arising before that time exceeds the total of the absentee debits of the person arising before that time.
  • (6B) For the purposes of this section, where a person has been engaged in foreign service for a whole day [meaning one of the 7 days of the week - see (6J)], there arises, at the end of that day, an absentee credit of the number of hours calculated in accordance with the following formula:
    31
    334
    × 24

    unless the absentee credit balance of the person, ascertained immediately after the end of that day, would exceed 31 days.


  • ATC 9302

    (6C) Where:
    • (a) a person has been engaged in foreign service for a continuous period (in this subsection called the 'first foreign service period') (including a period that is applicable because of one or more applications of subsection (6D) or (6E)); and
    • (b) at a time after the end of the first foreign service period, the person becomes engaged in foreign service for a further continuous period (in this subsection called the 'second foreign service period');
  • there arises, at the end of each whole day [meaning one of the 7 days of the week - see (6J)]:
    • (c) during the period commencing immediately after the end of the first foreign service period and ending immediately before the commencement of the second foreign service period; and
    • (d) on which the absentee credit balance of the person, ascertained at the beginning of that day, is not less than 24 hours;

    an absentee debit of 24 hours.

  • (6D) Where:
    • (a) a person has been engaged in foreign service for a continuous period (in this subsection called the 'first foreign service period') (including a period that is applicable because of one or more applications of this subsection or subsection (6E));
    • (b) at a time after the end of the first foreign service period, the person becomes engaged in foreign service for a further continuous period (in this subsection called the 'second foreign service period'); and
    • (c) at the beginning of the day before the commencement of the second foreign service period, the absentee credit balance of the person exceeded nil;

    the first foreign service period and the second foreign service period shall together be taken to constitute a continuous period during which the person was engaged in foreign service.

  • (6E) Where:
    • (a) a person has been engaged in foreign service for a continuous period (in this subsection called the 'first foreign service period') (including a period that is applicable because of one or more applications of this subsection or subsection (6D));
    • (b) at a time after the end of the first foreign service period, the person becomes engaged in foreign service for a further continuous period (in this subsection called the 'second foreign service period'); and
    • (c) the period commencing immediately after the end of the first foreign service period and ending immediately before the commencement of the second foreign service period is less than 24 hours;

    the first foreign service period and the second foreign service period shall together be taken to constitute a continuous period during which the person was engaged in foreign service.

  • ..."

51. The amendments to s 23AG effected by Act No. 15 of 2007 took effect on 15 March 2007. By those amendments subsection (5) was modified and paragraphs (a), (b), (c) and (d) were inserted in the definition of "foreign earnings" in the place of the previous paragraphs (a) and (b). For the purposes of this case, the amendments effected by Act No. 15 of 2007 are without significance.

52. It will be apparent from the history of s 23AG as recited above that, when first enacted, exemption from tax applied where a person had been "engaged in foreign service" for a continuous period of not less than 365 days. Apart from dealing with sick leave and recreation leave attributable to foreign service (see s 23AG(6)), s 23AG, as originally enacted, did not address discontinuity in a person's "engagement in foreign service". However, by Act No. 78 of 1988, discontinuity provisions were inserted into the section. Section 23AG(6D), as introduced by that Act, permitted a "first foreign service period" and a "second foreign service period" to be treated as "a continuous period during which the person was engaged in foreign service" where at the


ATC 9303

beginning of the second foreign service period the person had "absentee credits" referable to the first foreign service period which exceeded the "absentee debits" referable to the period between the first foreign service period and the second foreign service period.

53. In addition, s 23AG(6E), as introduced by Act No. 78 of 1988, provided for a period of discontinuity to be ignored if the period between the first foreign service period and the second foreign service period was less than 24 hours.

54. If (say) a company executive resident in Australia was engaged in foreign service in Hong Kong, that person's foreign service would be treated as continuous if he or she flew back to Australia to visit a relative who was ill, returning within 24 hours. Otherwise, the period of discontinuity would be subjected to the absentee debit regime for which s 23AG(6C) provided and the significance of the absentee debit would fall to be determined by reference to s 23AG(6D), after allowing for absentee credits in accordance with s 23AG(6B).

55. When the original subsections (6A), (6B), (6C), (6D), (6E) and (6J) were repealed, they were replaced by the current subsections (6A) and (6B) to deal with periods of discontinuity in respect of "engagement in foreign service" not covered by sick leave or recreation leave for which s 23AG(6) already provided.

56. The Explanatory Memorandum circulated by authority of the Treasurer in respect of the Bill which became the Taxation Laws Amendment (Foreign Tax Credits) Act 1986 (Cth) (Act No 51 of 1986) included the following:

" Introductory note

The Bill proposes the replacement of the present double taxation relief arrangements of the income tax law with a general foreign tax credit system.

Under the existing income tax law, ex-Australian source income of Australian residents is relieved from double taxation in a variety of ways depending on the type of income concerned and the particular country of source -

Income Tax Assessment Act 1936

  • ...
  • • Paragraph 23(q) exempts foreign source income not otherwise mentioned above or hereunder (including salary and wages) from Australian income tax if tax on it is paid in the country of source;

Income Tax (International Agreements) Act 1953

  • • Section 14 of the Income Tax (International Agreements) Act 1953 - dividends, interest and royalties from other countries on which foreign tax is limited in terms of comprehensive taxation agreements that Australia has with those countries - these are subject to Australian tax and a credit is given for the foreign tax.

...

The Bill will not effect (sic) the existing provisions of the income tax law that exempts, in certain circumstances, remuneration derived by persons working overseas on approved projects. The Bill will also exempt salary or wages earned overseas that is subject to tax in the country of source, where derived by an Australian resident in performing services overseas for a continuous period of at least 12 months - a proportionate exemption will apply where the period is from 3 to 12 months with a credit being allowed for foreign tax paid on any amount not exempted.

However, under the Bill, salary or wages earned overseas that is to be exempt on the foregoing basis will be taken into account in calculating Australian tax on other income, so that exemption of the salary or wages will not also reduce the tax payable on the other income. ...

...

Clause 6 : Exemptions

Clause 6 amends section 23 of the Principal Act by omitting paragraphs 23(q) and 23(qa).

As indicated earlier in these notes, paragraph 23(q) exempts many categories of income derived by a resident of Australia from sources outside Australia and Papua


ATC 9304

New Guinea which would otherwise be assessable by virtue of paragraph 25(1)(a) of the Principal Act where, broadly, the income is not exempt from tax in the country where it is derived.

...

Neither paragraph will be required once the foreign tax credit system commences to apply from the commencement of the 1987-88 income year, and both will, by virtue of clause 32 of the Bill (see notes on that clause), case (sic) to apply from that time. From that time also, new section 23AG will provide an exemption from Australian tax for salaries and wages earned overseas in certain circumstances - see notes on clause 8.

...

Clause 8 : Exemption of income earned in overseas employment

Clause 8 proposes the insertion of a new section section 23AG - into the Principal Act, the purpose of which is to provide an exemption from Australian tax for salary or wages earned overseas by an Australian resident during a continuous period of service of at least 12 months. A proportionate exemption will apply where the period is from 3 to 12 months, provided in either case that the income is not exempt from tax in the country in which it is derived, and any foreign tax due has been, or will be, paid.

...

Sub-section 23AG(6) in effect specifies that, for the purpose of determining the length of a period of foreign service on which entitlement to exemption under the section is based, various periods when the person is not actually on the job are to be taken into account. The periods so specified are those during which the person, as authorised -

  • • is absent on recreation leave, ...

    ...; or

  • • is absent from work because of accident or illness...

    ..."

57. In the Minister's Second Reading Speech in respect of the Bill which became the Taxation Laws Amendment (Foreign Tax Credits) Act 1986 (Cth) (Act No. 51 of 1986) he, relevantly, said:

"Salary and wages earned overseas by an Australian resident and liable to tax in the country of source are to be fully exempt from Australian income tax where derived in performing service overseas for a continuous period of at least 12 months.

A proportionate exemption will apply where the period is from 3 to 12 months, with a credit being allowed for foreign tax paid on any amount not exempted.

..."

58. The Explanatory Memorandum circulated by the authority of the Minister in respect of the Bill which became Act No 78 of 1988, addressed the inclusion of the new subsections (6A), (6B), (6C), (6D), (6E), (6F), (6G), (6H), (6I) and (6J), to which reference has been made above, in relation to periods of discontinuity other than those covered by s 23AG(6) which dealt with recreation leave and sick leave. Relevantly, the Explanatory Memorandum included the following:

"Clause 13: Exemption of income earned in overseas employment

The amendments proposed by clause 13 will amend section 23AG of the Principal Act by inserting new subsections (6A) to (6J). Section 23AG authorises a full or partial exemption from Australian tax, depending on the term of the period of employment, for salary or wages earned overseas by an Australian resident individual that are subject to tax in the country of source. Where the foreign earnings are derived during a continuous period of foreign service of at least 12 months a full exemption is provided. A proportionate exemption applies where the continuous period of foreign service is between 3 and 12 months.

Under the current operation of section 23AG, a continuous period of foreign service ends when the person ceases, either temporarily or permanently, to be engaged in foreign service. As the basic test for determining whether the whole or a proportion of foreign earnings is to be


ATC 9305

exempt relates to a continuous period during which a person is engaged in foreign service, a temporary absence, either within a continuing period of foreign service [sic] or between two or more periods of foreign service, could affect a person's exemption entitlement.

Proposed new subsections (6A) to (6D) will, in certain circumstances, allow two successive continuous periods of foreign service to be taken to constitute one continuous period of foreign service. This will be so where the break between successive periods of foreign service does not exceed a specified number of days.

For each whole day that a person is engaged in foreign service he or she will accrue an 'absentee credit' of 31/334 of a day. A person who has been engaged in a continuous period of foreign service of 334 days or more will have an absentee credit balance of 31 days (31 days is the maximum credit balance that a person can have at any time). Where a person breaks a continuous period of foreign service by, for example, returning to Australia for reasons not directly related to his or her continuing foreign service engagement or by changing jobs overseas, the credit balance will be taken into account. Provided the person is not absent from foreign service for a period in excess of his or her accrued absentee credit balance, the period of foreign service either side of the period of absence will together constitute a continuous period of foreign service.

...

Subsection (6D) sets out the circumstances in which two successive continuous periods of foreign service will be taken together to constitute a single continuous period of foreign service. In broad terms, this will be where the number of days in the break between the two periods does not exceed the accumulated absentee credit balance available at the commencement of the break.

Subsection (6E) enables a break of less than 24 hours between two successive continuous periods of foreign service to be disregarded.

...

Subsection (6J) defines a 'whole day' for the purposes of subsections (6B) and (6C) which respectively provide for absentee credits or debits to arise at the end of each whole day of engagement in foreign service or absence from foreign service. A whole day is the period from midnight to midnight.

..."

59. In the Minister's Second Reading Speech in respect of the Bill which became Act No. 78 of 1988 he said:

"Amendments are being made to the foreign tax credit provisions to modify the practical operation of the system in relation to ... the treatment of overseas employment income of Australian resident individuals."

60. The Explanatory Memorandum circulated by the authority of the Treasurer in respect of the Bill that became Act No. 162 of 2005 relevantly provided:

"Modifications to exemption for foreign earnings

Schedule 1 to this Bill modifies some aspects of the section 23AG of the Income Tax Assessment Act 1936 foreign employment income exemption. It aims to reduce compliance costs for taxpayers, and to address some specific issues that have arisen. The amendments:

  • • provide that a period of foreign service will not end until absences exceed one-sixth of the days of foreign service
  • • allow the exemption to potentially apply where a taxpayer dies during a period of foreign service before reaching the requisite 91 days
  • • reinstate eligibility for the exemption where a taxpayer was employed in Iraq during the suspension of Iraq's income tax system from 1 January 2003 to 30 April 2004.

...

Compliance cost impact : The amendments relating to treatment of absences should reduce compliance costs for taxpayers, since it reduces complexity. ..."

61. In respect of the specific amendments to s 23AG the Explanatory Memorandum provided:


ATC 9306

"Chapter 1 - Modifications to exemption for foreign earnings

Outline of chapter

  • 1.1 Schedule 1 to this Bill modifies some aspects of the operation of the section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) foreign employment income exemption [emphasis added]. The amendments aim to reduce compliance costs for taxpayers and address some specific issues that have arisen.

...

Context of amendments

  • 1.3 Section 23AG exempts foreign employment income of Australian resident individuals engaged in foreign service for a period of 91 continuous days or more (subject to some conditions). Section 23AG was originally introduced as a method of preventing double taxation for individual taxpayers. However, over time as individuals' circumstances and employment conditions have diversified, situations have arisen that were not considered when the legislation was first developed.
  • 1.4 One area of complexity this measure addresses is the 'credits and debits' rule used to allow an individual to be considered to have a continuous period of foreign service despite short absences. This test will be replaced with a simpler and generally more generous rule that allows different foreign service periods to be aggregated, unless the period of absence that separates them exceeds one-sixth of the total number of days of foreign service at any time.
  • 1.5 These amendments also modify section 23AG in two specific situations: where a taxpayer was employed in Iraq during the suspension of the income tax system, and where a taxpayer dies before reaching 91 days of continuous service.

Summary of new law

  • 1.6 These amendments have three components:
    • • Individuals will not break a period of foreign service until the time that absences exceed one-sixth of the days in foreign service. ...

    ...

Comparison of key features of new law and current law

New Law Current Law
Time away from foreign service that does not constitute foreign service, will not break the period of foreign service provided the time away from foreign service is not greater than one-sixth of the number of days of foreign service at any time. Time away from foreign service that does not constitute foreign service will not break the period of foreign service if the individual's absentee credit balance is greater than nil. Absences of less than 24 hours are disregarded for the purposes of calculating the absentee credit balance.
... ...

Detailed explanation of new law

Simplification of section 23AG: the one-sixth rule

  • 1.7 Section 23AG contains rules to allow individuals to take short breaks from foreign service without breaking a continuous period of foreign service. A continuous period of not less than 91 days of foreign service is necessary to claim the exemption.
  • 1.8 Certain types of absences are counted in foreign service under subsection 23AG(6) (eg recreation leave). Other types of absences are not included or not considered to be part of foreign service (eg long service leave). The current rules apply only to absences that are not considered to be part of foreign service.
  • 1.9 The amendments do not change this distinction, but merely substitute a new rule for calculating whether absences that are not included in foreign service break a period of foreign service.
  • 1.10 Under the current rules, absences from work that do not constitute foreign service will not break a foreign service period if the individual's absentee credit balance is greater than nil. Although an individual earns 2.2 hours credit for one day of foreign service the absentee credit balance only counts whole days. An individual can only accumulate a maximum of 31 days credit. For every 24 hour absence the individual incurs a 24 hour debit. Absences from foreign service of less than 24 hours are ignored.

  • ATC 9307

    1.11 The 'credits and debits' system will be replaced by a rule that allows periods of foreign service to be added together until a time that absences exceed one-sixth of the days of foreign service.
  • 1.12 The one-sixth rule is generally more generous than the credits and debits system. It allows for more absences and does not have a 31 days credit limit. It will also reduce compliance costs for taxpayers as the calculations will be simpler.
  • 1.13 The amendments allow two or more continuous periods of foreign service to be combined into a total foreign service period until an individual ceases to be engaged in foreign service, or the one-sixth rule is exceeded, whichever occurs first.
  • 1.14 When applying the one-sixth rule the numerator is the days absent from foreign service that do not constitute foreign service, and the denominator is the total number of days of foreign service. The days included in a total period of foreign service, at a particular time, are the foreign service days from the beginning of the first of the foreign service periods up until that time. The days included in a total period of absence at a particular time are the days of absence from the beginning of the first foreign service period up until that time. [Schedule 1, item 3, subsections 23AG(6A) and (6B)]
  • 1.15 If the total days of absence exceed one-sixth of foreign service days at any time, an individual ceases to be engaged in a period of foreign service for the purposes of subsection 23AG(1). The individual will begin a new period of foreign service when he or she next engages in foreign service and must determine anew whether that foreign service lasts for at least 91 continuous days. [Schedule 1, item 3, subsections 23AG(6A) and (6B)]
  • 1.16 The definitions of 'total period of foreign service' and 'total period of absence' are only relevant for determining whether multiple periods of foreign service may be combined into a continuous period of foreign service. An absence is not considered to be part of a continuous period of foreign service (subject to subsection 23AG(6)).
  • 1.17 The aim of the amendment is to allow taxpayers a similar total period of absence to that allowed by section 23AF, (ie a foreign employment income exemption for individuals working on approved projects). Section 23AF also contains a one-sixth rule.
  • 1.18 However, the rule in section 23AG differs to that in section 23AF, reflecting differences in the basic structure of the two sections. For example, the one-sixth rule in section 23AF applies only to absences in Australia, while the rule in section 23AG does not have this limitation. Also, the one-sixth rule in section 23AF is not applied on an on-going basis, but to an overall period. The one-sixth rule to be inserted into section 23AG will be applied on an on-going basis, in the same way as the current 'credits and debits'. Individuals will effectively calculate daily whether they remain engaged in a continuous period of foreign service or not.

Example 1.1

Jason, an Australian resident, engages in foreign service for 65 days. He takes five days off due to illness which is in accordance with the terms and conditions of that service. This is considered to be foreign service under paragraph 23AG(6)(b). He then takes a further 10 days off that is not considered to be part of foreign service, and re-commences for a further 40 days. In determining whether these two periods of foreign service constitute one continuous period of foreign service for the 91 continuous days test, he must determine whether the total period of absence exceeds one-sixth of his days of foreign service.


ATC 9308

Total period of absence: 10 days

Days of foreign service in first period: 70 days (65 + 5)

10/70 = 1/7 As this is less than one-sixth, the next period of foreign service may be added.

Days of foreign service in second continuous period: 40

Added to foreign service days in the first period: 40 + 70 = 110 10/110 = 1/11

As absences do not exceed one-sixth of the total number of days of foreign service at any time, Jason's two periods of foreign service will be taken to constitute one continuous period of foreign service under subsections 23AG(6A) and (6B). Since he has been engaged in foreign service for 110 days (65 + 5 + 40) he would be entitled to the exemption under section 23AG for earnings from those days.

Example 1.2

Assume the same facts as in Example 1.1, except that instead of 10 days, Jason has 20 days of absence that is not considered to be part of foreign service.

Total period of absence: 20 days

Days of foreign service in first period: 70 days (65 + 5)

20/70 = 2/7 As this is more than one-sixth, the next period of foreign service (ie the further 40 days) may not be added to the first period of 70 days. Jason's total foreign service period was therefore limited to 70 days once his absence exceeded one-sixth of his 70 days in foreign service (ie at day 12 of his total period of absence).

As the first foreign service period was only 70 days, Jason's foreign earnings will not be eligible for the section 23AG exemption. When Jason recommences work for 40 days he will start a completely new period of foreign service and needs 91 days of service before any of his earnings for the period are exempt.

..."

62. Section 23AF of the 1936 Act, to which reference was made in paragraphs 1.17 and 1.18 of the Explanatory Memorandum, relevantly provided:

  • "23AF(1) Where a taxpayer, being a natural person, has been engaged on qualifying service on a particular approved project [an eligible project in the national interest approved as such by the Minister for Trade] for a continuous period of not less than 91 days, any eligible foreign remuneration derived by the person that is attributable to the qualifying service is exempt from tax.
  • ...
  • (3) Subject to subsections (4) and (5), a person shall be taken for the purposes of this section to be engaged on qualifying service on an approved project during any period during which:
    • (a) the person is outside Australia and is engaged in the performance of personal services in connection with the approved project;
    • (b) the person is travelling between Australia and the site of the approved project;
    • (c) by reason of an incapacity for work due to accident or illness occurring while the person was, by virtue of paragraph (a) or (b), to be taken to be engaged on qualifying service on the approved project, the person is absent from work; or
    • (d) the person is on eligible leave, being leave that accrued in respect of a period during which the person was, by virtue of any of the proceeding paragraphs, to be taken to be engaged on qualifying service on the approved project.
  • (4) A person shall not be taken to have been engaged on qualifying service on a particular approved project while the person was travelling between Australia and the site of the approved project unless the Commissioner is satisfied that the time for the journey is reasonable.
  • (5) A person shall not be taken to have been engaged on qualifying service on a particular approved project by virtue of paragraph (3)(c) during a period of incapacity for work unless the person is taken to have been engaged on qualifying service on that approved project by virtue of paragraph (3)(a), (b) or (d) during a period that commenced immediately after the incapacity ceased.

  • ATC 9309

    ...
  • (8) Where -
    • (a) during the period (in this subsection referred to as the total project period ) commencing at the time when a person was first engaged on qualifying service on an approved project and ending at the time when the person was last engaged on qualifying service on that approved project, the person was in Australia during a period or periods (in this subsection referred to as the intervening period or intervening periods) during which the person was not engaged on qualifying service on that approved project;
    • (b) the total number of days in the intervening period or intervening periods does not exceed one-sixth of the total number of days during the total project period during which the person was engaged on qualifying service on the approved project; and
    • (c) at all times during the total project period, the person was engaged on qualifying service on the approved project or was in Australia;

    the periods during the total project period during which the person was engaged on qualifying service on the approved project shall together be taken to constitute a continuous period during which the person was engaged on qualifying service on the approved project.

  • ..."

63. In his Second Reading Speech in respect of the Bill which became Act No. 162 of 2005 the Minister for Revenue and Assistant Treasurer said:

"... this bill modifies some aspects of the foreign employment income exemption. This tax exemption applies to the foreign earnings of Australian residents engaged in foreign service for a continuous period of 91 days. The existing credits and debits rule used in determining whether a taxpayer with breaks in their employment service satisfied the 91-day rule period will be replaced with a simpler and more generous rule. The new rule - the one-sixth rule - states that a period of foreign service will not be considered to have been broken until the point when absences exceed one-sixth of the days in foreign service. This rule allows for more absences and reduces compliance costs for taxpayers.

..."

The relevant facts

64. The evidence before the Court on the hearing of the appeal comprised an affidavit of Andrea Irene Lucas, a Basing Project Manager with Cathay Pacific (and, presumably, the author of the applicant's standard form of employment letter), sworn 13 August 2008, four affidavits of Captain Walker, sworn 18 August 2008, 5 September 2008, 9 October 2008 and 16 October 2008, a four volume Joint Tender Bundle of documents which became Exhibit A comprising Volume 1 (pages 133-379), Volume 2 (pages 380-784), Volume 3 (pages 785-1141) and Volume 4 (pages 1142-1190, 1198-1272 and 1280-1338) and oral evidence given by Captain Walker.

65. In order that one may understand the rosters for the seven individual pilots, whom the parties have agreed are representative of the applicant's 116 pilots (see [27] above) it is necessary to consider, in a little more detail, duty cycles, the function of pilot rosters before and after the event and the avoidance of fatigue in aircrews.

66. As mentioned at [9] above, the applicant's Conditions of Service, which formed part of the relevant contracts of employment between the applicant and the seven individual pilots, were to be read in conjunction with Volume 1 of Cathay Pacific's Operations Manual and interpreted in accordance with the law as set out in the various applicable Ordinances of the Hong Kong Special Administrative Region.

67. Volume 1 of Cathay Pacific's Operations Manual was divided into five separate parts headed "Organization", "Operations", "Flying", "Crew Administration" and "Flight Safety". Section 3 of Part 2 dealt with "APPROVED FLIGHT TIME LIMITATIONS SCHEME" and Section 3 of Part 4 dealt with "ROSTERING PRACTICES FOR FLIGHT


ATC 9310

CREW OPERATING CATHAY PACIFIC AIRWAYS AIRCRAFT EFFECTIVE 1ST JANUARY 2005 [superseding those effective 1st August 2001]".

68. Article 54 of the Air Navigation (Hong Kong) Order 1995 (CAP.448) relevantly provided in respect of "Fatigue of crew - operator's responsibilities":

  • "54 Fatigue of crew- operator's responsibilities
    • (1) The operator of an aircraft to which this Article applies shall not cause or permit that aircraft to make a flight unless:
      • (a) he has established a scheme for the regulation of flight times for every person flying in that aircraft as a member of its crew; and
      • (b) the scheme is approved by the Chief Executive subject to such conditions as he thinks fit; and ...
      • (c) either -
        • (i) the scheme is incorporated in the operations manual required by Article 25 of this Order, or
        • (ii) in a case where an operations manual is not required by that Article the scheme is incorporated in a document, a copy of which has been made available to every person flying in that aircraft as a member of its crew; and
      • (d) he has taken all such steps as are reasonably practicable to ensure that the provisions of the scheme will be complied with in relation to every person flying in that aircraft as a member of its crew.
    • (2) The operator of an aircraft to which this Article applies shall not cause or permit any person to fly therein as a member of its crew if he knows or has reason to believe that that person is suffering from or, having regard to the circumstances of the flight to be undertaken, is likely to suffer from, such fatigue while he is so flying as may endanger the safety of the aircraft or of its occupants.
    • (3) The operator of an aircraft to which this Article applies shall not cause or permit any person to fly therein as a member of its flight crew unless the operator has in his possession an accurate and up-to-date record in respect of that person and in respect of the 28 days immediately preceding the flight showing -
      • (a) all his flight times; and
      • (b) brief particulars of the nature of the functions performed by him in the course of his flight times.
    • (4) The record referred to in paragraph (3) of this Article shall, subject to the provisions of Article 61, be preserved by the operator of the aircraft until a date 12 months after the flight referred to in that paragraph."

69. The Civil Aviation Department of the Government of the Hong Kong Special Administrative Region has published a number of standard provisions in a document of 50 odd pages entitled " The Avoidance of Fatigue in Aircrews " and identified as CAD 371. After referring to, inter-alia, Article 54 of the Air Navigation (Hong Kong) Order 1995, the publication provided under the heading " Legal Background ":

  • "1. LEGAL BACKGROUND
    • ...
    • 1.3 The operator of an aircraft operated for the purposes listed in para 1.2. above must present to the Director-General of Civil Aviation (DGCA), for his approval, a scheme for the regulation of the flight times of his crews (FTL Scheme). When approved by the DGCA the scheme must be published in the Operations Manual, or when an Operations Manual is not required by the Order, incorporated in a separate document. The Operations Manual, or separate document, shall be readily available to every person employed by the operator as a member of an aircraft crew. The Operator is further required to take all reasonable steps to ensure that the provisions of their approved FTL Scheme are complied with."

70.


ATC 9311

The approved scheme for the regulation of the flight times of Cathay Pacific's crews was published in Section 3 of Part 2 of Volume 1 of its Operations Manual. It comprised some 23 pages identified as 2-3-1 to 2-3-23 inclusive under the heading " APPROVED FLIGHT TIME LIMITATIONS SCHEME ". The Scheme provided, inter-alia:

"...

  • 2. OBJECTIVES OF THE SCHEME
    • 2.1 The objectives of the Scheme are to ensure that crew members are adequately rested at the beginning of each Flight Duty Period and that the duration and timing of individual Duty Periods will enable them to operate to a satisfactory level of efficiency and safety in all normal and abnormal situations.
    • 2.2 The provisions set out in the Scheme are therefore concerned solely with the prevention of fatigue and the maintenance of vigilance in flight. They are not intended to take account of commercial circumstances, social considerations and lifestyle.
  • 3 RESPONSIBILITIES OF CATHAY PACIFIC AIRWAYS LIMITED
    • ...
    • 3.2 The Company is required to ensure that all personnel involved in the application of the Scheme appreciate the relationship between the frequency and pattern of FDPs [Flight Duty Periods], Rest Periods and days off, and that due consideration is given to the cumulative effects of working long hours interspersed with minimum Rest Periods.
    • ...
    • 3.4 Factors to be considered when assigning Duties will include:
      • A. The undesirability of alternating day/night duties; and
      • B. Avoiding scheduling Rest Periods of between eighteen (18) and thirty (30) hours duration; and
      • C. The effect of consecutive flights through, or ending within, the Window of Circadian Low; and
      • D. The effect of consecutive transmeridian flights; and
      • E. The notification to crew members well in advance of days off.
    • 3.5 The Company is required to provide all Flight Crew members, on induction, and periodically thereafter, with instruction on sleep strategy, fatigue management and fatigue countermeasures, and, where appropriate, the physiological effects of extensive transmeridian flight and disturbing circadian rhythms. The distinction should be drawn between normal tiredness resulting from the physical and mental efforts of flight, and cumulative fatigue resulting from the interaction of sleep loss and circadian disruption which can lead to significant decreases in operational performance.
    • 3.6 The Company must ensure that planned schedules allow for flights to be completed within the maximum permitted FDP, taking into account the time allowed for pre-flight duties, taxying, the flight and turnaround times. However, it is recognised that on occasions a flight will experience Service Disruption. Under these circumstances the Company may request the aircraft Commander to use Commander's Discretion in accordance with the provisions of this Scheme, or the aircraft Commander may do so at his own initiative.
    • 3.7 The Company is required to prepare duty rosters sufficiently in advance to provide the opportunity for crews to plan adequate pre-duty rest, or where this is not practicable, to establish in advance minimum periods of notification of days off, during which a crew member will not be required for any duties.
    • ...
  • 7. DEFINITIONS

    For the purpose of this scheme various terms have the meanings defined below ascribed to them.

    • 7.1 Acclimatised
      • A. When a crew member finishes a Duty Period at a place where the Local Time differs by more than three hours from his/her Home Base Local Time, straightaway he/she will be considered as Unacclimatised.
      • B. An Unacclimatised Flight Crew member will become Acclimatised again if either:
        • a. He/she ends a Duty Period at Home Base no more than forty eight hours after the start of the Duty Period that resulted in him/her becoming unacclimatised; or
        • b. He/she has completed a Recovery Period.

      ...

    • ...
    • 7.4 Domestic Day Off (DDO)
      • A. A period at Home Base available for leisure and relaxation and free of all Duties. A single DDO will comprise a minimum period of thirty four consecutive hours and will include two Local Nights. Consecutive DDOs will be extensions to a single DDO, will be of at least twenty four hours duration and will include a further Local Night for each additional consecutive DDO. A Rest Period may be included as part of a DDO.
      • B. At the request of the individual crew member, and with the agreement of the Company, a DDO may be taken at other than the crew member's Home Base. In this case the crew member will be considered Acclimatised to the place where the DDOs are taken, provided that the conditions of 7.1 are met.
    • 7.5 Duty
    • Any task associated with the business of the Company. It includes any Flight Duty, Positioning, ground training, ground duties and Reserve Duty.
    • 7.6 Duty Cycle
    • A series of Duty Periods undertaken between DDOs.
    • 7.7 Duty Period
    • Any continuous period during which a crew member is required to carry out Duty. It starts and finishes in accordance with the provision specified in 8.
    • 7.8 Extended Break (EXB)
    • A period away from Home Base, normally in accommodation provided by the Company, during which the crew member is free of all duties. An EXB will comprise a minimum period of thirty consecutive hours during which Suitable Accommodation is available to the crew member. A Rest Period may form part of an EXB.
    • ...
    • 7.10 Flight Duty Period (FDP)
    • Any time during which a crew member operates in an aircraft as a member of its Flight Crew or Cabin Crew. It starts at the Actual Reporting Time specified in 8.2 and finishes at on-chocks, or engines off, whichever is the later, on the final Sector.
    • ...
    • 7.12 Home Base
    • The place nominated by the Company to the crew member, or as otherwise contractually agreed between them, from where the crew member normally starts and ends a Duty Cycle and at which place, under normal conditions, the Company is not responsible for the accommodation of the crew member concerned.
    • 7.13 Late Night Period (LNP)
    • The period 0100 to 0659 hours Local Time of the place to which a crew member is Acclimatised.
    • ...
    • 7.17 Normal Rest
    • A Rest Period required after the completion of a Duty Period where the Local Time difference between the places where the Duty Period started and finished is less than six hours.
    • ...
    • 7.20 Positioning
    • The practice of transferring crew members from place to place as passengers in surface or air transport at the behest of the Company.
    • 7.21 Recovery Period
    • A period free of duty following a Duty Cycle of length greater than forty eight hours on completion of which the crew member is Unacclimatised. A Rest Period may form part of a Recovery Period.
    • ...
    • 7.23 Reporting time
    • The time at which a crew member is required by the Company to report for any duty.
    • 7.24 Reserve Duty
    • A period during which the Company places constraints on a crew member who would otherwise be off Duty.
    • 7.25 Rest
    • The word "Rest" will be taken as meaning repose or sleep.

    • 7.26 Rest Period
    • A period of time before starting a Flight Duty Period which is designed to give crew members adequate opportunity to rest before a flight.
    • 7.27 Roster

    • ATC 9313

      A means by which the Company notifies crew members in advance, of their Duties for the whole of the Roster Period. The Roster will normally be published at least fifteen days in advance of the start of the Roster Period.
    • 7.28 Roster Period
    • The length of each Roster Period will be one calendar month.
    • ...
    • 7.30 Sector/Sector Time
    • The time between when an aircraft first moves from its parking position until it next comes to rest, after landing, on the designated parking position.
    • ...
    • 7.38 Ultra Long Range Operation
    • An operation by a Two Crew Aircraft requiring three or more pilots involving a time difference of six hours or more between the places where the Duty Period starts and finishes.
    • ...

  • ATC 9312

    8. REPORTING & FINISHING TIMES
    • 8.1 For the purpose of calculating a Scheduled FDP or Duty Period, the following Scheduled Reporting Times and Scheduled Finishing Times will be used.
      • A. Scheduled Reporting Times
        • a. For Flight Duty, Scheduled Time of Departure ("STD") minus sixty minutes or such earlier time as may be notified to the crew member.
        • b. For Positioning on international flights, STD minus sixty minutes or such earlier time as may be notified to the crew member.

        ...

      • B. Schedule of Finishing Times
        • a. For Flight Duty, termination of the FDP will be Scheduled Time of Arrival ("STA") of the final Sector of the FDP. Where no other subsequent duty is to be undertaken, termination of the Duty Period and commencement of the Rest Period will be STA plus thirty minutes.
        • b. For Positioning, where no other subsequent duty is to be undertaken, termination of the Duty Period and commencement of the Rest Period will be STA plus thirty minutes.
        • c. For Other Duties, where no other subsequent duty is to be undertaken, termination of the Duty Period and commencement of the Rest Period will be the time at which the duty is Scheduled to end.
    • 8.2 For the purpose of calculating the actual FDP or Duty Period, the following Actual Reporting Times and Actual Finishing Times will apply.
      • A. Actual Reporting Times
        • For all duties, the Scheduled Reporting time or the time at which the crew member actually reports for duty, whichever is the later.

        ...

      • B. Actual Finishing Times.
        • a. For Flight Duty, termination of the FDP will be either as specified in 7.10 or in accordance with 15.5.E, 16.7 or 31.3.D.e. as applicable, whichever is the earlier. When no other duty is subsequently undertaken, termination of the Duty Period and commencement of the Rest Period will be ATA on blocks plus thirty minutes, or such later time as may be required by other than normal post flight duties.
        • b. For Positioning, when no other duty is subsequently undertaken, termination of the Duty Period and commencement of the Rest Period will be ATA on blocks plus thirty minutes, or such later time as my be required by other than normal post flight duties.
        • c. For other duties, when no other duty is subsequently undertaken, termination of the Duty Period and commencement of the Rest Period will be at the time at which the duty ends.

    • ATC 9314

      8.3 Delayed Reporting Time
      • A. When a crew member is informed, before leaving the place of Rest, of a delay to the Reporting Time, the FDP will be calculated as follows:
        • a. The maximum allowable FDP will be determined by the more limiting time band of the original Scheduled Reporting Time and the Actual Reporting Time; and
        • b. When the delay is less than four hours, the actual FDP will start at the Actual Reporting Time; or
        • c. When the delay is four hours or more, the actual FDP will start four hours after the original Scheduled Reporting Time.
    • ...
  • 9. TRAVELLING TIME
    • 9.1. Travelling Time, other than that time spent on Positioning, will not be counted as Duty.
    • 9.2 If the normal Travelling Time from home to the normal departure airport is in excess of one and a half hours, crew members should make arrangements for alternative accommodation nearer to the normal departure airport.
    • 9.3 When crew members are required to travel from their home to an airport other than the normal departure airport, any Travelling Time over and above the normal Travelling Time from home to the normal departure airport will be classed as Positioning.

      ...

  • 23. RECOVERY PERIODS
    • ...
    • 23.1 The minimum required Recovery Periods, in consecutive DDOs, which must be afforded to Flight Crew members who are Unacclimatised after completion of a Duty Cycle of duration greater than forty eight hours are specified in Table 'X'.
    • 23.2 The provisions of the Section are not intended to apply each and every time a Flight Crew member touches his/her Home Base during a Duty Cycle.
    • 23.3 DDOs contained within a Recovery Period will count towards the overall provisions of DDOs specified in 28 provided that, where the Duty Cycle preceding the Recovery Period contained a maximum Local Time difference from Home Base Local Time of six hours or more, then the first DDO within the Recovery Period will not count toward meeting the requirement specified in 28.1.D.
    • 23.4 When a Flight Crew member has one or more Rest Periods between leaving the place of Rest that has the greatest Local Time difference from Home Base Local Time of the Duty Cycle and arriving at Home Base then the Required Recovery Period will be that specified in Table 'X' minus one DDO.

    • ATC 9315

      23.5 Table 'X'
      Duration of completed Duty Cycle in hours Maximum Local Time Difference from Home Base
      Local Time during Preceding Duty Cycle
      more than 3
      but less than 5
      5 or more
      but less than 6
      6 or more
      but less than 7
      7 or more
      Greater than 48 up to 72 2 2 2 2
      Greater than 72 up to 96 3 3 3 3
      Greater than 96 up to 120 3 4 4 4
      Greater than 120 up to 144 3 4 5 5
      Greater than 144 3 4 5 6
    • 23.6 Reduction of Recovery Period
      • A. The provisions of this paragraph may be applied only to preserve the stability of an individual Flight Crew member's notified Roster. They may be exercised only once in any Roster Period and will apply only to a minimum required Recovery Period of duration four or more DDOs.
      • B. When Unforeseen Circumstances delay a Flight Crew member's return to his/her Home Base at the end of a Duty Cycle:
        • a. The Company may reduce the Flight Crew member's minimum required Recovery Period by one DDO; and
        • b. Subject to the agreement of the individual Flight Crew member concerned, the minimum required Recovery Period may be reduced by a further one DDO to a total maximum reduction of two DDOs.
    • ...
  • 26. FLYING HOUR LIMITATIONS
    • ...
    • 26.2 A Flight Crew member will not act as Flight Crew of an aircraft if at the beginning of the flight:
      • A. The total of all previous Sector Times during the period of twenty eight consecutive days expiring at the end of the day on which the flight begins exceeds one hundred hours; or
      • B. The total of all previous Sector Times during the period of twelve calendar months, expiring at the end of the previous month, exceeds nine hundred hours.
    • ...
  • 27 DUTY HOUR LIMITATIONS
    • ...
    • 27.2 The maximum cumulative Duty Hour totals for Flight Crew members will not exceed:
      • A. Fifty five hours in any period of seven consecutive days, but may be increased to sixty hours in the event of Unforeseen Circumstances; and
      • [B. In addition the seven day, fifty five and sixty hour limits may be further exceeded by a maximum of ten hours, to sixty five and seventy hours respectively, provided that this ten hour exceedance is used solely for the purpose of Positioning a Flight Crew member back to his/her Home Base prior to commencing DDOs; and]
      • C. Ninety five hours in any period of fourteen consecutive days; and

      • ATC 9316

        D. One hundred and ninety hours in any period of twenty eight consecutive days; provided that for every FDP where the Local Time difference between the places at which the FDP starts and finishes is six hours or more, the individual Flight Crew member's twenty eight day maximum allowable cumulative total will be reduced by eight hours.
    • ...
  • 28. DOMESTIC DAYS OFF (DDO)
    • ...
    • 28.1 Flight Crew members:
      • A. Will not be Scheduled for duties on more than six consecutive days before being given a DDO or EXB. However, subject to the agreement of the Flight Crew member, the duty may be extended to seven consecutive days; and
      • B. Notwithstanding 28.1.A, on occasion may be Positioned to their Home Base on the seventh consecutive day (eighth consecutive day if the duty is extended to seven days), provided they are then allocated at least two consecutive DDOs; and
      • C. Will have a minimum of two consecutive DDOs in any period of fourteen consecutive days following the previous two consecutive DDOs; and
      • D. Will have a minimum of seven DDOs in any period of four consecutive weeks; and
      • E. Will have an average of at least eight DDOs in each period of four consecutive weeks averaged over three such periods.
  • 29. COURSES OF INSTRUCTION & GROUND DUTIES
    • 29.1 The provisions of this Scheme with respect to Domestic Days Off and Recovery Periods may be varied without reference to CAD [Civil Aviation Department] to the extent necessary to facilitate crew members in attending extended ground courses, or undertaking other duties, away from Home Base.
    • 29.2 After completion of course of instruction or ground duties, and before allocating a flying duty to a crew member, the Company must be satisfied that the crew member is in compliance with this Scheme. In some cases this may require the allocation of a Recovery Period before flying duties may be undertaken.
  • 30 RECORDS TO BE MAINTAINED
    • 30.1 Records for the Duty and Rest Periods of all crew members must be kept. These records will include:
      • A For each crew member
      • The beginning, end and duration of each Duty Period or Flight Duty Period, and function performed during the period, duration of each Rest Period prior to a flight Duty or Reserve Duty period, dates of days off and cumulative totals of Duty.

      • B. For each Flight Crew member
      • Daily, rolling twenty eight day and rolling twelve month totals of flying hours.

    • 30.2 Records will be preserved for at least twelve calendar months from the date of the last relevant entry.
    • 30.3 The Company will retain all Commanders Discretion Reports of extended FDPs and reduced Rest Periods for a period of at least twelve months after the event.
    • ..."

71. It is apparent from the "APPROVED FLIGHT TIME LIMITATIONS SCHEME" that flight crew members have their work obligations determined not by reference to a 9 am to 5 pm five day working week, with which many workers are familiar, but rather by reference to a maximum of 190 duty hours in any period of 28 consecutive days, with corresponding proportionate or generally similar limitations on the number of cumulative duty hours that may be worked in any period of fourteen consecutive days and in any period of seven consecutive days. In addition, such flight crew members have an entitlement to a


ATC 9317

minimum of seven Domestic Days Off in every four week period.

72. It is unnecessary, at the moment, to go into the detail whereby duty hours are calculated. Suffice it to say that different rules are engaged to determine the number of duty hours depending on whether the relevant duty is flight period duty, positioning or other duties (see clauses 7.5 and 8).

73. Plainly, rosters whereby crew members are notified in advance of their duties for the next ensuing month are an essential part of an airline's operations, consistent with the avoidance of fatigue and the maintenance of a healthy alertness. Equally, an after the event diary record of duty hours is necessary to ensure that flying hour limitations and duty hour limitations are not exceeded (see clauses 8, 26, 27 and 30).

74. When a member of flight crew undertakes a series of duty periods, they will together constitute a duty cycle for that member to the extent that they are uninterrupted by a "Domestic Day Off" ie a period at that member's Home Base which is available for leisure and relaxation and free of all duties, such as would be available to many "9 to 5" workers on weekends (see clauses 7.4, 7.6, 7.7 and 7.12). One function of a roster is to identify duty periods, duty cycles and domestic days off.

75. Captain Walker was responsible for the construction of and implementation of pilot rosters for Cathay Pacific. He was responsible for, amongst others, the Crew Patterns Section within Cathay Pacific which determined the content of duty cycles to be used in roster construction. That section was charged with constructing duty cycles to be used on the various rosters to minimise costs and also to give effect to the "APPROVED FLIGHT TIME LIMITATIONS SCHEME" and also a roster practices agreement between Cathay Pacific and the Hong Kong Aircrew Officers' Association. That industrial agreement was itself incorporated in Section 3 of Part 4 of Volume 1 of Cathay Pacific's Operations Manual at pages 4-3-1 to 4-3-13 inclusive under the heading "ROSTERING PRACTICES FOR FLIGHT CREW OPERATING CATHAY PACIFIC AIRWAYS AIRCRAFT EFFECTIVE 1ST JANUARY 2005".

76. The industrial agreement introduced the concept of a "Guaranteed Day Off", the concept of an "O Day" and the concept of an "Available Day", all of which were effectively subsets of a "Domestic Day Off", as defined in the "APPROVED FLIGHT TIME LIMITATIONS SCHEME", with minor modifications. In Clause 4 of the "ROSTERING PRACTICES FOR FLIGHT CREW OPERATING CATHAY PACIFIC AIRWAYS AIRCRAFT EFFECTIVE 1ST JANUARY 2005" the following, inter alia appeared in respect of "Guaranteed Days Off":

  • "4.1 A Guaranteed Day Off (GDO) is a period at Home Base available for leisure and relaxation and free of all Duties. A single Guaranteed Day Off will comprise a minimum period of 36 consecutive hours [34 in the definition of Domestic Day Off] at Home Base and will include 2 Local Nights. Consecutive Guaranteed Days Off will be extensions to a single Guaranteed Day Off, will be of at least 24 hours' duration and will include a further Local Night for each additional consecutive Guaranteed Day Off. A Rest Period may be included as part of a Guaranteed Day Off.
  • 4.2 At the Request of the individual crew member, and with the agreement of Cathay Pacific Airways, a Guaranteed Day Off may be assigned at other than the crew member's Home Base. In this case the crew member will be considered as Acclimatised to the place where the Guaranteed Days Off are taken, provided that the conditions of the Approved Flight Time Limitations Scheme are met.
  • 4.3 A Guaranteed Day off meets the requirements of the Approved Flight Time Limitations Scheme in relation to Domestic Days Off.
  • 4.4 Crew members will be Scheduled for ten GDOs additional to their annual entitlement specified in the appropriate Conditions of Service. Where this annual GDO entitlement is prorated, then the additional GDOs will be prorated in the same proportion.
  • ...

  • ATC 9318

    4.8 A crew member may be contacted on a GDO for the purpose of notification of a Roster change. Other than in abnormal circumstances, this will be between 1100 and 2100 Home Base Local Time.
  • ..."

77. In respect of "O Days" the industrial agreement relevantly provided:

  • "5.1 An O Day (O) is a period at, or away from, Home Base, free of all Duties. A single O Day will comprise a minimum of 34 consecutive hours and will include 2 Local Nights. Consecutive O Days will be extensions to a single O Day, will be of at least 24 hours' duration and will include a further Local Night for each additional consecutive O Day. A Rest Period may be included as part of an O Day.
  • 5.2 A crew member may be assigned a Duty on an O Day at any time provided that the Approved Flight Time Limitations Scheme is satisfied. If the O Day is at Home Base then the crew member must be informed before the actual day and at least 12 hours before the time of start of the Duty. When these conditions cannot be met, the crew member may be Requested to undertake a Duty.
  • 5.3 An O Day at Home Base meets the requirements of the Approved Flight Time Limitations Scheme in relation to Domestic Days Off.
  • 5.4 O Days will not be Scheduled in the following ways:
    • A. Such that GDOs both immediately precede and immediately succeed them; and
    • B. For crew members based outside Hong Kong, such that they are immediately preceded by Reserve Duty and immediately succeeded by a flying Duty except as required by the Domestic Day Off provisions of the Approved Flight Time Limitations Scheme.
  • ..."

78. In respect of "Available Days" the industrial agreement relevantly provided:

  • "15.1 An Available Day is a period at Home Base, free of all Duties, during which a crew member must be contactable for a specified period, and must be able to report for Duty at Home Base 10 hours after notification of a requirement.
  • 15.2 An Available Day, on which a crew member is not required to perform any Duty, that meets the requirements of the Approved Flight Time Limitations Scheme in relation to Domestic Days Off will be deemed to be a Domestic Day Off for the purposes of the Approved Flight Time Limitations Scheme.
  • 15.3 For crew members based outside Hong Kong, Available Days may be Rostered on days that otherwise would be rostered as Reserve Duty, at the discretion of MICM. However, such crew members may elect not to be Rostered for any Available Days.
  • ...
  • 15.5 On an Available Day the crew member must be immediately contactable from 0600 to 1400 Home Base Local Time.
  • 15.6 On the day prior to an Available Day the crew member must contact Crew Control, or check the notified Company system for Roster change notifications between 1200 and 1400 Home Base Local time.
  • ..."

79. Cathay Pacific's normal practice was to publish its rosters for aircrew for the next ensuing month on the fifteenth day of each month.

80. As duties were completed the relevant aircrew rosters were updated to provide a record of the duties as performed, including flight duties, with a notation of the relevant cities of departure and arrival. For each of the seven pilots within the representative sample, the evidence included a cumulative twelve month diary as so maintained.

81. The precise location of the Home Bases of the pilots within the representative sample was not entirely clear from the evidence. However, from the records of their respective service in the twelve month period from 1 April 2006 to 31 March 2007, it would appear that they were based as follows:


ATC 9319


Pilot No. 2 Perth
Pilot No. 43 Sydney
Pilot No. 58 Sydney
Pilot No. 71 Melbourne
Pilot No. 75 Sydney or Brisbane
Pilot No. 82 Sydney
Pilot No. 104 Melbourne

82. In the case of a majority of international flights, the relevant aircraft is, as one might expect, flown through both international airspace and also airspace directly above territorial land and sea.

83. As to where a member of the aircrew performs his or her duties when engaged in the flying of an aircraft in the course of an international flight, the straightforward and obvious answer is, in the cockpit of the aircraft. In a geographical sense it may be said that the duties are performed in the country from which the flight commences, in the relevant airspace which may or may not be airspace in relation to which a country claims sovereignty and the country at which the aircraft lands.

84. Activities are generally speaking defined by duty cycles which begin and end at the relevant aircrew member's Home Base or Preferred Port. The home of such a person will normally be located within one and half hours travelling time from his or her Home Base or Preferred Port being his or her normal departure airport.

85. Whilst a duty cycle may be broken by periods for rest, recovery and relaxation, they begin and end at the relevant Home Base or Preferred Port where time is available for leisure and relaxation, free of all Duties.

86. In
Hinman v Pacific Air Transport (1936) 84 F. (2d) 755 Haney J, with whom Wilbur J agreed, in the Circuit Court of Appeals for the Ninth Circuit in the United States said at 758:

  • "[3] The air, like the sea, is by its nature incapable of private ownership, except in so far as one may actually use it. This principle was announced long ago by Justinian. ...
  • [4] ...The owner of land owns as much of the space above him as he uses, but only so long as he uses it. All that lies beyond belongs to the world."

87. In
United States v Causby (1946) 328 U.S. 256 Douglas J delivering the opinion of the majority of the Supreme Court of the United States said, at 261:

"...that doctrine [cujus est solum ejus est usque ad coelum] has no place in the modern world. The air is a public highway, as Congress has declared. Were that not true, every transcontinental flight would subject the operator to countless trespass suits. Common sense revolts at the idea. To recognise such private claims to the airspace would clog these highways, seriously interfere with their control and development in the public interest, and transfer into private ownership that to which only the public has a just claim."

88. As a party to the Convention on International Civil Aviation done at Chicago on 7 December 1944, which was ratified by section 3A of the Air Navigation Act 1920 (Cth), Australia and the other contracting States recognised that every State had complete and exclusive sovereignty over the air space above its territory, including the land areas and adjacent territorial waters under the sovereignty, suzerainty, protection or mandate of such State.

89. The arrogation of sovereignty by Australia to the airspace over the territory of Australia and the territorial sea of Australia is evident from, inter alia, s 15B of the Acts Interpretation Act 1901 (Cth) and the definition of "Australian Territory" in s 3 of the Air Navigation Act 1920. The airspace above international waters may be taken to be international airspace. When working in international airspace a member of the applicant's aircrew performing service for Cathay Pacific could not be said to be engaged in "service in a foreign country" in the capacity of an employee within the meaning of "foreign service" in s 23AG of the 1936 Act.

90. It is unnecessary at this stage to explore, in great detail, the duty cycles of the individual pilots making up the representative sample, all of whom were residents of Australia. Suffice it to say that a cursory examination of the flight


ATC 9320

diary for pilot 2 indicates the following in respect of the months of April and May 2006:
1-9 April 2006 Recreation leave
10-14 April 2006 Domestic Days Off
15 April 2006 Flight Duty Period
16-17 April 2006 Flight Duty Period
18 April 2006 Flight Duty Period
19 April 2006 Pilot Licence Medical Check
19-20 April 2006 Flight Duty Period
21-24 April 2006 Domestic Days Off
25 April 2006 Flight Duty Period
26 April 2006 Rest Period
27 April 2006 Flight Duty Period
28 April 2006 Flight Duty Period
29 April 2006 Rest Period
30 April 2006 Flight Duty Period
1-6 May 2006 Domestic Days Off
7 May 2006 Flight Duty Period
8-9 May 2006 Flight Duty Period
9-10 May 2006 Flight Duty Period
11 May 2006 Rest Period
12-13 May 2006 Flight Duty Period
14-19 May 2006 Domestic Days Off
20 May 2006 Flight Duty Period
21-22 May 2006 Flight Duty Period
23 May 2006 Flight Duty Period
24-25 May 2006 Flight Duty Period
26-31 May 2006 Domestic Days Off

Conclusions and consideration

91. In my opinion, salaries paid by the applicant 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 foreign earnings of persons engaged in foreign service within the meaning of s 23AG of the 1936 Act.

92. 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 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.

93. Section 23AG 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 was not directed at exempting earnings of international airline aircrew based in Australia from tax.

94. It is 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 s 23AG of the 1936 Act. The section is concerned with persons who are "actually on the job" in the particular overseas country in which their foreign earnings are derived.

The Explanatory Memorandum to the Bill that became the Tax Laws Amendment (2005 Measures No. 5) Act 2005 (Cth) (Act No. 162 of 2005) made it clear that s 23AG(6A) and (6B) were 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.

95. I am unable to conclude that when a member of aircrew employed by the applicant and assigned by it to operate Cathay Pacific aircraft flying into or out of that member's


ATC 9321

Home Base or Preferred Port in Australia, he or she is engaged in service in a foreign country or is taking "time away" from foreign service or a "short break" from foreign service or an "absence". When in Australian airspace or landing at or taking off from an Australian Airport, no question of an engagement in service in a foreign country arises nor does any question of taking a break from such an engagement.

96. Having said that, I should make it clear that engagement in service in a foreign country is not limited to days on which work is undertaken. It includes all days during a period in which work is undertaken on working days for the relevant employee.

97. Furthermore, absences, which may bring about discontinuity in a period of engagement in foreign service are not limited to absences where the relevant employee departs from the foreign country (cf s 23AG and s 23AF in this regard).

98. An absence from work is what breaks a period of foreign service. Taking what is colloquially referred to as a "sickie", which is not occasioned by a genuine illness, would bring a period of engagement in service in a foreign country to an end. Whether it would take a person outside the reach of s 23AG(1) of the 1936 Act or not, would depend upon the effect of the relevant absence under the "one sixth rule" for which s 23AG(6) makes provision.

99. Activities undertaken in a period set aside for recreation and leisure eg a typical weekend for a Monday to Friday worker could take the form of a departure from the relevant foreign country in which foreign earnings are derived without breaking the continuity in the period of engagement in foreign service. For example, if an Australian resident was working in East Timor and he or she chose to fly to Darwin after work on a Friday night, returning on the succeeding Sunday, the continuity of the person's engagement in foreign service would not be broken.

100. If, contrary to my opinion, the representative sample of pilots, or some of them, were engaged in service in a foreign country in the capacity of an employee in the tax year 1 April 2006 to 31 March 2007, one could not determine whether, for the first quarter of the tax year, their respective salaries were exempt from tax without having an understanding of their several employment histories in the period 1 January to 31 March 2006. The applicant's obligation under s 12-35 of Schedule 1 to the Administration Act to withhold amounts from their respective salaries could only be avoided for the period from 1 April to 30 June 2006 if, under s 12-1(1) of Schedule 1 to the Administration Act, there was no obligation to withhold amounts under s 12-35 in respect of the payment of their monthly salaries at the end of April, May and June.

101. If, in the tax year 1 April 2006 to 31 March 2007, there were periods during which the salaries of the representative sample of pilots or some of them were exempt from tax in accordance with s 23AG of the 1936 Act, but such salaries were not exempt from tax for the whole of the year, it would seem to me that benefits could only come within the definition of "fringe benefit" in s 136(1) of the FBT Act if the benefits were provided in respect of a period or periods of employment when the salaries paid were not exempt from tax in accordance with s 23AG of the 1936 Act.

102. In my opinion the first part of the question tendered for determination by the Court and referred to at [26] above should be answered in the negative. In these circumstances, I have not attempted to address any issues going to partial exemption.

103. Having reached the conclusion which I have in relation to the answer to the question as presently formulated I propose to stand the matter over to allow the parties to bring in short minutes to give effect to the Court's reasons for judgment. If less time is required to allow this task to be completed than that for which my order will allow, I would invite the parties to approach my associate with a view to bringing in short minutes at an earlier point in time to enable the matter to be disposed of on a final basis.


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