Edited version of private ruling

Authorisation Number: 1011481275948

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Ruling

Subject: Foreign employment income

Question

Are the foreign earnings you derived in Country X as an employee engaged in foreign service for an employer subcontracted by a company which is contracted by the Australian Agency for International Development (AusAID) exempt from income tax in Australia under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer: No.

This ruling applies for the following period

Year ending 30 June 2010

Year ending 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You are an Australian resident for income tax purposes.

You are working on a program as part of a regional assistance mission to Country X.

You are employed for a period of not less than 91 days.

You are employed by an Australian resident consulting company.

The Commonwealth of Australia acting through Australian Agency for International Development (AusAID) contracted the implementation of the program to a head contractor.

The head contractor subcontracted an activity relating to this program to your employer, the Australian resident consulting company.

You are employed by the consulting company to carry out services in relation to this activity under the subcontractor agreement between the consulting company and the head contractor.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23AG

Income Tax Assessment Act 1936 subsection 23AG(1)

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

Income Tax Assessment Act 1936 paragraph 23AG(1AA)(a)

Reasons for decision

Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from income tax in Australia.

However, subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides 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, among other things, the delivery of Australian official development assistance by the person's employer (paragraph 23AG(1AA)(a) of the ITAA 1936).

Delivery of Australian official development assistance by the person's employer

The term 'Australian official development assistance' is not defined for the purposes of section 23AG of the ITAA 1936. However, the Explanatory Memorandum (EM) which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 introducing subsection 23AG(1AA) of the ITAA 1936 provides guidance on the meaning of the phrase. The relevant paragraphs are below:

Australian official development assistance

1.19 Australian official development assistance (ODA) is assistance delivered through the Australian Government's overseas aid program, as administered by the Department of Foreign Affairs and Trade and/or the Australian Agency for International Development (AusAID). Australian ODA aims to reduce poverty and achieve sustainable development in developing countries, in line with Australia's national interest.

1.20 In addition to providing Australian ODA directly, AusAID also competitively contracts aid work to Australian and international entities. Thus, in practice, individuals involved in the delivery of Australian ODA can include both Australian Public Service (APS) employees and non-APS employees.

1.21 For the purposes of subsection 23AG(1AA) the delivery of Australian ODA must be undertaken by the person's employer, which includes AusAID and an entity contracted by AusAID to assist in the delivery of Australian ODA.

Example 1.1

Colin is an APS employee employed by AusAID. He is posted to the Cook Islands, for 120 continuous days, as a project advisor on an Australian ODA project aimed at improving the quality of early childhood education.

Colin's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

Example 1.2

Robert is an APS employee employed by the Commonwealth Department of Climate Change. He is posted to Tokelau for 150 continuous days, to work on a project aimed at minimising the impacts of rising sea levels in Tokelau.

Robert is not an AusAID employee but the project is classified as Australian ODA by AusAID. Robert's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

Example 1.3

Eli is a motor mechanic employed by Emu Engineering Pty Ltd, a private company contracted by AusAID to provide vocational training in Vanuatu. He is posted to Vanuatu for 180 continuous days.

Eli's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

1.22 Foreign service directly attributable to the delivery of Australian ODA does not include diplomatic or consular duties carried out by Australian residents.

(Emphasis added.)

The EM and the examples in the EM reveal that paragraph 23AG(1AA)(a) is intended to restrict the section 23AG of the ITAA 1936 exemption to foreign earnings derived by:

· Australian Public Service (APS) employees providing assistance that is classified as Australian official development assistance and is delivered through the Australian Government's aid program which is administered by AusAID or the Department of Foreign Affairs and Trade (DFAT); or

· other employees delivering Australian official development assistance on behalf of their employers who in turn have been contracted by the Australian Government to assist in the delivery of Australian official development assistance under the aid program that is administered by AusAID or DFAT.

Accordingly, for non-APS employees to be eligible for exemption pursuant to paragraph 23AG(1AA)(a) of the ITAA 1936, their employer must have been contracted directly by the Australian Government to assist in the delivery of Australian official development assistance under the overseas aid program that is administered by AusAID or DFAT.

In your case, your employer has not been contracted directly by AusAID or the Australian Government to assist in the delivery of Australian official development assistance. Rather, your employer has been contracted by the head contractor under a separate subcontractor agreement.

Therefore, as an employee engaged by a consulting company to carry out services in relation to the activity under the subcontractor agreement between the consulting company and the head contractor, you are not entitled to claim an exemption for your foreign earnings derived from your foreign service in Country X under subsection 23AG(1) of the ITAA 1936.

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