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Edited version of private ruling

Authorisation Number: 1011570970465

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Ruling

Subject: Foreign employment income

Issue 1

Question 1

Are you an Australian resident for tax purposes?

Answer

Yes.

Issue 2

Question 1

Is your employment income earned in Country Q exempt from income tax in Australia?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You are a citizen of Australia.

Your country of origin is Australia.

You departed Australia.

You have a visa.

The purpose of your visit overseas is for employment.

You are employed in Country Q.

The head contractor is not based in Australia.

You are contracted to work on a six week cycle that is subject to change.

You are currently working eight weeks on and four weeks off.

You are paid only when on duty.

You are not paid while you are on leave in Australia.

You do not intend to reside overseas permanently.

You plan to return to Australia.

You come back to Australia every six weeks for six weeks and have so for the past few years.

You have a permanent place to live overseas.

You do not have any assets overseas.

You have a permanent place to live in Australia. The property is not being let.

You have assets in Australia including investment properties and sundry small share holdings and bank accounts.

Your employment contract is for two years and can be extended for another year.

Your contract of employment provides that 'off duty periods' means the periods when the employee is not required by the Company to report for duty and work under this Contract of Employment. No payment of salary is made for off duty periods.

You do not pay tax in any other country.

Your family did not accompany you overseas.

You do not have social or sporting connections with Australia.

You do not have social or sporting connections overseas.

You and your spouse are not and were not employees of the Commonwealth Government of Australia.

Australia does not have a tax treaty with Country Q.

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(6).

Income Tax Assessment Act 1936 Subsection 23AG(6A).

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

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision

Issue 1

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for tax purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a foreign resident, your assessable income includes only income derived from an Australian source.

An Australian resident is defined in subsection 995-1(1) of the ITAA 1997 to be a person who is resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

The terms resident and resident of Australia, in regard to an individual, are defined in subsection 6(1) of the ITAA 1936. The definition provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. These tests are:

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 an individual does not reside in Australia according to ordinary concepts, they may still be considered to be a resident of Australia for tax purposes if they satisfy the conditions of one of the other three tests.

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.

In your case:

Based on the above facts, you are considered to be residing in Australia and you are considered to be an Australian resident for tax purposes for the period you will be in Country Q.

As you are deemed to be a resident of Australia for tax purposes under the resides test of residency outlined in subsection 6(1) of the ITAA 1936 there is no need to examine the remaining tests.

Issue 2

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 is exempt from tax in Australia.

For the purposes of section 23AG of the ITAA1936, subsection 23AG(7) of the ITAA1936 defines the term 'foreign earnings' to mean income consisting of earnings, salary, wages, commission, bonuses or allowances and the term 'foreign service' to mean service in a foreign country as the holder of an office or in the capacity of an employee.

Subsection 23AG(6) of the ITAA 1936 provides that the period of foreign service will include recreation leave which is accrued as a result of the foreign service, other than long service leave or leave without pay or reduced pay, and will not constitute a break in a period of foreign service.

In your case, your leave was leave without pay. As a result, it is necessary to consider whether these breaks will constitute a break in service.

The test for determining whether breaks in foreign service will affect exemption available in section 23AG is outlined in section 23AG(6A) of the ITAA 1936. In determining whether the continuity of foreign service can be maintained, subsection 23AG(6A) of the ITAA 1936 should be considered. The current rules allow periods of foreign service to be added to together until a time that absence exceeds one-sixth of the days of foreign service.

Your employment periods, and a calculation of your breaks in service are as follows:

As each of your leave periods exceeds the one-sixth rule and breaks your foreign service, you will not have engaged in any continuous period of foreign service of not less than 91 days.

Therefore, your overseas employment income is not exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936.

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