Edited version of private ruling

Authorisation Number: 1011447297346

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Ruling

Subject: Foreign employment income

Is the foreign employment income you earn in Country X assessable in Australia under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

This ruling applies for the following period

Year ending 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian resident for income tax purposes.

You are a civilian employee of Australian government agency.

You are deployed as an advisor on a development cooperation program to Country X.

Your deployment is for not less than 91 days.

The program is an official Australian Government overseas development assistance program conducted by your department.

For the duration of your deployment in Country X, you are subject to the Australian Defence Force (ADF) command and control.

You will only take recreation leave that is accrued during your service in Country X.

You will not be performing any work-related duties during breaks taken in Australia.

Country X taxes employment income under its domestic law.

There is no tax treaty between Australia and Country X.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1936 Subsection 23AG(1)

Income Tax Assessment Act 1936 Subsection 23AG(7)

Income Tax Assessment Act 1936 Subsection 23AG(6)

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Subsection 23AG(1AA)

Income Tax Assessment Act 1936 Subsection 23AG(2)

Income Tax Assessment Act 1936 Paragraph 23AG(2)(a)

Income Tax Assessment Act 1936 Paragraph 23AG(2)(b)

Income Tax Assessment Act 1936 Paragraph 23AG(2)(c)

Income Tax Assessment Act 1936 Paragraph 23AG(2)(d)

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Employment income is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that foreign earnings of an Australian resident derived during a continuous period of foreign service of not less than 91 days employment in a foreign country are exempt from income tax in Australia. However, new subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the following:

· the delivery of Australian official development assistance by the taxpayer's employer (generally provided by AusAID or the Department of Foreign Affairs and Trade)

· the activities of the taxpayer's employer in operating a public fund covered by the deductible gift recipient categories overseas aid fund and developed country disaster relief fund

· the activities of the taxpayer's employer where they are a charitable institution or religious institution which is income tax exempt because they are a prescribed institution located outside Australia or pursuing objectives principally outside Australia

· the taxpayer's deployment outside Australia as a member of a disciplined force by:

o the Commonwealth, a State or a Territory, or

o an authority of the Commonwealth, a State or a Territory

· an activity of a kind specified in the regulations.

The expression 'disciplined force' is not defined in the ITAA 1936 or in the ITAA 1997. However, the Explanatory Memorandum (EM) which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 introducing paragraph 23AG(1AA)(d) of the ITAA 1936 provides some guidance on this (see subparagraph 15AB(1)(b)(i) and paragraph 15AB(2)(e) of the Acts Interpretation Act 1901). It relevantly states:

Foreign deployment as a member of a disciplined force

1.31 A person's foreign earnings will be eligible for exemption if the foreign service is directly attributable to that person's deployment outside Australia as a member of a disciplined force by an Australian government, or an authority thereof. A disciplined force is intended to refer to a defence force, including a peacekeeping force, and a police force.

1.32 In a defence force context, the exemption would apply to a person's deployment outside Australia as part of a non-warlike operation. In a police force context, the exemption would apply to Australian Federal Police employees deployed on an International Deployment Group mission who are subject to Commander's Orders to achieve operational policing outcomes. [Schedule 1, item 1, paragraph 23AG(1AA)(d)]

The Second Reading Speech to Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 in the House of Representatives provides some additional guidance (see subparagraph 15AB(1)(b)(i) and paragraph 15AB(2)(f) of the Acts Interpretation Act 1901). In this speech, the Treasurer relevantly stated:

From 1 July 2009, an exemption will apply to income earned as an aid worker, a charitable worker or under certain types of government employment such as a defence or police deployment. It will also apply to income earned as prescribed under regulations.

Some assistance is also afforded by The Macquarie Dictionary, which relevantly defines the word 'discipline' as follows:

1. training to act in accordance with rules; drill: military discipline.

…

5. subjection to rules of conduct of behaviour; a state of order maintained by training and control: good disciplined in an army.

…

6. a set or system of rules and regulations.

Further assistance is provided by the broader statutory context (see Cooper Brookes (Wollongong) Pty Ltd v. Federal Commissioner of Taxation (1981) 147 CLR 297; 81 ATC 4792; (1981) 11 ATR 949). Specifically, subject to certain conditions, section 23AD of the ITAA 1936 exempts the pay and allowances earned on overseas duty of a person serving as a 'member of the Defence Force'. The use of capitals in this cognate provision reveals that the words 'Defence Force' do not bear their ordinary meaning but one coming from the Defence Act 1903. It indicates that the exemption in section 23AD of the ITAA 1936 is confined to persons appointed or enlisted as members of the Australian Navy, Army and Air Forces within section 30 of the Defence Act 1903 (see Case T39 86 ATC 330; (1986) 29 CTBR (NS) Case 51). Accordingly, the use of a different phrase in lower case in paragraph 23AG(1AA)(d) of the ITAA 1936 - 'disciplined force' - suggests that it has a broader meaning. It suggests that exemption pursuant to paragraph 23AG(1AA)(d) of the ITAA 1936 is not confined to Defence Force members. Otherwise, paragraph 23AG(1AA)(d) of the ITAA 1936 would unnecessarily cover the same ground as section 23AD of the ITAA 1936 or have no work to do, something the legislature is unlikely to have intended (see Minister for Resources v. Dover Fisheries Pty Ltd (1993) 43 FCR 565). This is confirmed in the second sentence of paragraph 1.31 of the EM by the use of the words 'defence', 'peacekeeping' and 'police' - all in lower case - to describe the particular force to which paragraph 23AG(1AA)(d) of the ITAA 1936 is intended to apply.

The language used in the provision, the EM, Second Reading Speech, and statutory context of paragraph 23AG(1AA)(d) of the ITAA 1936 therefore reveals that a 'disciplined force' within paragraph 23AG(1AA)(d) of the ITAA 1936 is an organisationally coherent and identifiable body of persons forming a defence, peacekeeping or police force. Such a force may or may not be multilateral and is tasked with the maintenance or establishment of law and order, stability and/or security.

The members of such a force will commonly, but not necessarily, be subjected to a common command structure and rules of conduct. Such a force will generally include persons who perform adjunctive roles relating to the overseas deployment. A 'disciplined force' will thus comprise persons specifically performing the defence, policing and peacekeeping functions of the deployment but will also include those accompanying and providing assistance and support to those so engaged. Persons providing such ancillary support will be considered part of the 'disciplined force' provided they are effectively integrated into the force performing the primary functions of defence, peacekeeping and policing.

These people will be so integrated into the primary force where they are subject to the same or similar command structure and rules of conduct as those performing the primary functions of that 'disciplined force'.

In your case, you have been appointed to undertake a deployment to Country X as an advisor on the defence cooperation program and you are subject to the ADF command and control for the duration of your deployment. As an employee of the Australian government agency who is providing auxiliary support to those performing the primary defence functions of the deployment and who is integrated into this force, you are a member of a 'disciplined force' within paragraph 23AG(1AA)(d) of the ITAA 1936.

As your foreign service is directly attributable to your deployment in Country X as a member of a disciplined force through the Australian government agency, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

Foreign earnings relating to the foreign service

Foreign earnings includes income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).

To qualify for the exemption the foreign earnings must be derived from the foreign service. That does not mean that the foreign earnings need to be derived at the time of engaging in foreign service. The important test is that the foreign earnings, when derived, need to be derived as result of the undertaking of that foreign service.

Under subsection 23AG(6) of the ITAA 1936 certain temporary absences form part of a period of foreign service, such as recreation leave which is accrued as a result of the foreign service, other than long service leave and leave without pay.

In your case, you intend not to take any breaks in your employment other than leave which will accrue during your service in Country X. This leave will form part of your foreign service, and accordingly the payments for the leave will qualify as foreign earnings.

Subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country only because of any of the reasons listed in that subsection.

One of the reasons listed is where the income is exempt in the foreign country because of a tax treaty (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936).

There is no tax treaty between Australia and Country X. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply.

As the laws of Country X provide for the imposition of income tax and do not generally exempt employment income from income tax, paragraphs 23AG(2)(c) and (d) of the ITAA 1936 will not apply.

None of the other reasons in subsection 23AG(2) of the ITAA 1936 apply to your situation.

In your case, you are engaged in employment overseas for a continuous period of not less than 91 days, and none of the reasons listed in subsection 23AG(2) of the ITAA 1936 apply in your situation.

Consequently, the foreign employment income you earn in Country X is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936, and is therefore not assessable in Australia under subsection 6-5(2) of the ITAA 1997.

Note

Foreign earnings exempt under section 23AG of the ITAA 1936 are taken into account in calculating the tax payable on other income derived by a taxpayer. This method of calculation referred to as exemption with progression prevents the exempt income from reducing the Australian tax payable on the other income. This income needs to be included as exempt foreign employment income in your Australian tax return.

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