Edited version of private ruling

Authorisation Number: 1011508676316

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Ruling

Subject: Residency - foreign employment income

1. Are you a resident of Australia for the period you were posted in Country A?

Yes.

2. Is your employment income derived from working in Country A assessable in Australia?

No.

3. Is your employer obliged to take PAYG withholding tax from your employment income derived from working in Country A?

No.

This ruling applies for the following period

Year ended 30 June 2010

Year ending 30 June 2011

The scheme commenced on

1 July 2009

Relevant facts

You are a citizen of Australia.

You are employed by a Company X in Australia.

You are posted to Country A for a period of not less than 91 days on a project.

Your return flight at the end of the contract is not yet determined.

You stated the project in Country A is an AusAID funded development project with Company X as the managing contractor.

Your contract may be extended by mutual agreement, but you are not aware at this stage if there is any possibility of an extension to your employment contract.

You are paid salary including Living Away from home Allowance (LAFHA) and superannuation. The amounts are deposited in your bank account in Australia.

Your travel costs in relation to the duties to be carried out and within the provisions allowed in the program contract is paid by Company X.

You are entitled to several days annual and sick leave per year. Your long service leave (LSL) will continue to accrue as normal.

You are planning to return to Australia on a short trip on annual leave to attend family function.

You stated this leave will be accrued as a result of your services in Country A.

You will not be performing any work related duties during your visits to Australia.

You intend to return to Australia after the completion of your project.

You stated you will not pay any tax on your income that you are deriving in Country A under a Memorandum of Understanding between the Government of Australia and the Government of Country A which exempts Australian Project personnel from the payment of income tax derived from performing services on development project activities.

You are renting a house in Country A and opened a bank account.

Your spouse remains in Australia at this stage.

You have a bank account in Australia.

You cancelled your property lease before moving to Country A.

You have never been a Commonwealth Government of Australia employee.

You are paying taxes on your income in Australia.

Country A generally taxes employment income under its domestic law.

There is no tax treaty between Australia and Country A.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1).

Income Tax Assessment Act 1936 Section 23AG.

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

Income Tax Assessment Act 1936 Subsection 23AG(2).

Income Tax Assessment Act 1936 Subsection 23AG(7).

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

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

Taxation Administration Act 1953 Subsection 12-1(1)

Reasons for decision

Residency

The terms 'resident' and 'resident of Australia', in regard to an individual, are described in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). The definition includes four tests to assist in determining whether you are a resident of Australia for income tax purposes. These tests are:

· The resides test

· The domicile test

· The 183 day test

· The superannuation test

The primary test for deciding the residency status of an individual is whether the individual resides in Australia according to the ordinary meaning of the word resides.

However, where you do not reside in Australia according to ordinary concepts, you may still be considered to be a resident of Australia for tax purposes if you meet the conditions of one of the other three tests.

1. The resides test

The ordinary meaning of the word reside, according to the dictionary definition, is to dwell permanently, or for a considerable time, to have ones settled or usual abode, to live in or at a particular place.

As you are residing in Country A since you left Australia, you are not considered to reside in Australia.

2. The domicile test

In order to show that a new domicile of choice in a country outside Australia has been adopted, you must be able to prove an intention to make your home indefinitely in that country.

A permanent place of abode does not have to be 'everlasting' or 'forever'. It does not mean an abode in which you intend to live for the rest of your life. An intention to return to Australia in the foreseeable future to live does not prevent you in the meantime setting up a permanent place of abode elsewhere.

As there is no evidence of intention to make your home indefinitely outside Australia, you are considered to have maintained your Australian domicile.

In addition, your associations with Australia are considered to be more significant for the following reasons:

· Your spouse stayed back in Australia.

· You have a bank account in Australia.

· You have family and friends in Australia.

· You are planning to return to Australia for a short period to attend to a family function.

· You do not have any other plans to come to Australia during your employment in Country A except for urgent events or emergencies relating to your immediate family.

· You intend to return to Australia after the completion of your project.

· You are employed by Company X in Australia and your employer is deducting taxes from your income in Australia.

· You are renting a house in Country A and your only asset in Country A is a bank account.

Based on these facts, it is considered that you have not established a permanent place of abode in Country A. You are therefore considered to be a resident of Australia for tax purposes under the domicile test.

Your residency status

As you are deemed to be a resident of Australia under the domicile test of residency outlined in subsection 6(1) of the ITAA 1936 there is no need to examine the remaining test. Therefore, you remained an Australian resident for taxation purposes during your employment in Country A.

Foreign salary and allowances

Subsection 23AG(1) of the 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 tax in Australia. Foreign earnings include income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).

The salary you will receive from your foreign employment is considered to be derived from your foreign service.

The LAFHA allowance is paid to cover costs of the foreign service. As the LAFHA is paid to compensate for costs arising from the foreign service attributable to the foreign service, it is considered to be derived from your foreign service.

Therefore, your salary and LAFHA allowance are foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936.

However, 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 because of any of the conditions listed in this section.

In your case:

· you are a citizen of Australia, employed by Company X and posted to Country A on an AusAID funded development project

· your employer in Australia is the managing contractor who is paying you for your services in Country A

· your income is exempt from tax in Country A because of MOU between the Government of Australia and the Government of Country A.

Exemption from tax by virtue of an MOU is not one of the reasons listed within subsection 23AG(2) of the ITAA 1936.

As from 1 July 2009, subsection 23AG(1AA) of the ITAA 1936 provides that foreign earnings derived by an Australian resident from 91 days continuous foreign service will only be exempt if the foreign service is directly attributable to:

a. the delivery of Australian Official Development Assistance (ODA) by the individual's employer

b. the activities of the individual's employer in operating a developing country relief fund or an overseas public disaster relief fund

c. the activities of the individual's employer, being a prescribed institution that is exempt from Australian income tax

d. the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force by

(i) the Commonwealth, a State or a Territory; or

(ii) an authority of the Commonwealth, a State or a Territory;

e. an activity of a kind specified in regulations.

Paragraph 23AG(1AA)(a) of the ITAA 1936 is relevant to your employment. ODA is assistance delivered through the Australian Governments overseas aid program, as administered by the Department of Foreign Affairs and Trade and/or the Australian Agency for International development (AusAID).

As you are employed by AusAID on a development program, your income will fall under paragraph 23AG(1AA)(a) of the ITAA 1936.

Accordingly, as you will be working in Country A for a period of not less than 91 days, on an AusAID development program, your foreign income will be exempt form tax in Australia under subsection 23AG(1) of the ITAA 1936.

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 other income. This income needs to be included as foreign exempt employment income in your Australian tax return.

Pay As You Go (PAYG)

In terms of your employer's PAYG withholding obligations, subsection 12-1(1) of Schedule 1 to the Taxation Administration Act 1953, provides that an entity need not withhold an amount from a payment if the whole of the payment is exempt income of the recipient. As your income is exempt under section 23AG of the ITAA 1936 amounts are not required to be withheld under the PAYG system from those earnings.

However, if you choose to have no PAYG withholdings made from your exempt foreign service income and for the same financial year you have other, non-exempt income, there is the possibility of a substantial PAYG amount shortfall when you lodge your tax return.

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