Edited version of private ruling

Authorisation Number: 1011616400977

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Ruling

Subject: Pay As You Go Withholding and section 23AG of the ITAA 1936

For the purposes of determining whether the exemption provided for in section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) applies, and thus whether an employee's earnings are covered by section 12-1(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA):

Question 1

Is an employer required to withhold tax under Subdivision 12-B of Schedule 1 to the TAA from an employee's wages when they are repatriated to Australia for medical reasons unrelated to their deployment, for example, cancer, terminal illness, heart condition?

Answer

Subject to the 1/6^th legislative rule provided in subsection 23AG(6A) of the ITAA 1936, the employer is required to deduct PAYG withholding tax from an employee's wages paid if they utilise personal (sick) leave that accrued from service in Australia when they are repatriated to Australia for medical reasons unrelated to their deployment e.g. cancer, terminal illness, heart conditions etc.

Question 2

If the answer to Question 1 is no, and PAYG is covered by section 12-1(1) of Schedule 1 to the TAA, at what point is the employer required to resume PAYG withholding? Is it either:

(a) upon the employee's suspension from foreign service, or

(b) upon the completion of the employee's original nominated deployment end date?

Answer

Subject to the 1/6^th legislative rule provided in subsection 23AG(6A) of the ITAA 1936, the employer is required to deduct PAYG withholding tax from an employee's wages paid when they are repatriated to Australia for medical reasons unrelated to their deployment e.g. cancer, terminal illness, heart condition, from the point of time that the employee utilises personal (sick) leave that accrued from service in Australia.

Question 3

If the employer is required to resume PAYG withholding upon the employee's suspension from

foreign service (Question 2.a) is the 1/6th legislative rule provided in subsection 23AG(6A) of the ITAA 1936 able to apply if the employee was suspended from mission before completing 91 days continuous foreign service and then later returned to mission (i.e. can the two periods of foreign service be taken to form a continuous period of foreign service if the suspension period is less than 1/6 of the time already served as foreign service)?

Answer

The 1/6th legislative rule is able to apply if the employee takes personal (sick) leave that accrued from service in Australia before completing 91 days continuous foreign service and then later returned to mission (i.e. the two periods of foreign service can be taken to form a continuous period of foreign service if the personal leave that accrued from service in Australia is less than 1/6th of the time already served as foreign service).

Question 4

If the employer is required to resume PAYG withholding upon the completion of the employee's original deployment end date (Question 2.b), is it assumed that all leave accrued from foreign service would have been utilised if not for the illness, i.e. does the employer stop withholding at the original nominated end deployment date i.e. utilised all leave during the deployment or does the employer stop withholding at the day in which the leave relating to the deployment would have expired assuming the employee saved all their leave till after the deployment?

Answer

Not relevant

Question 5

Is the answer to Question 1 dependent on the employee providing any documentary evidence?

Answer

The answer to Question 1 is not dependent on the employee providing any documentary evidence, such as, a medical certificate.

Question 6

Do the answers to above questions change if the reasons for the medical repatriation are related to the deployment, for example, if an employee is injured whilst on duty and is repatriated to Australia?

Answer

The answers to above questions will change if the reasons for the medical repatriation are related to the deployment, such that workers' compensation is paid.

This ruling applies for the following period

1 July 2009 to 30 June 2013

The scheme commenced on

1 July 2009

Relevant facts and circumstances

Relevant facts

Certain employees of an employer are assigned to perform duties in various overseas locations. In some instances, an employee may be repatriated to Australia for medical reasons.

The employees' conditions of employment in the foreign countries are governed by deployment Determinations in conjunction with a Workplace Agreement.

The Determinations provide that unless varied by the Determinations, leave entitlements will be provided for in the Workplace Agreement. The Workplace Agreement provides for an entitlement to 'personal leave' for personal illness or injury which accrues at a fixed rate of hours.

The Determinations do not vary personal leave entitlements provided for in the Workplace Agreement.

Where an employee is repatriated to Australia due to illness, the employee is granted personal leave during the period of illness, in accordance with the Determinations and the Workplace Agreement.

The period of personal leave granted may be greater than the personal leave that accrued to the employee while they were deployed to the foreign country. The employee may be required to utilise personal leave entitlements accrued from service in Australia.

Where an employee is injured during deployment and lodges a claim to obtain workers' compensation payments, the employee may be able to use their personal (sick) leave whilst the claim is being determined.

In the event that the employee's claim for workers compensation is accepted, the employee is entitled to incapacity payments. The personal (sick) leave utilised by the employee whilst the claim was being determined will be re-credited to the employee.

The scheme that is the subject of this Private Ruling also incorporates the information, documents and agreements received with the application for the Private Ruling and in response to requests for additional information.

Assumptions

For the purposes of this ruling it is assumed that all the other relevant provisions of section 23AG of the ITAA 1936 are met by the employees.

In particular, it is assumed that:

· the deployed employees are 'employees' in terms of subsection 23AG(7) of the ITAA 1936;

· the deployed employees are 'residents of Australia' in terms of subsection 6(1) of the ITAA 1936;

· the income derived by the deployed employees is 'foreign earnings' in terms of subsection 23AG(7) of the ITAA 1936;

· the foreign earnings of the deployed employees are not exempt from foreign tax for any of the reasons referred to in subsection 23AG(2) of the ITAA 1936; and

· the relevant deployed employees will be 'absent from work because of accident or illness' within the meaning of subparagraph 23AG(6)(b) of the ITAA 1936.

In the case of Questions 1, 2, 4 and 5, it is assumed that the deployed employees carry out duties

in a foreign country for a continuous period of not less than 91 days as part of their foreign service.

In the case of Question 3, it is assumed that the deployed employees carry out duties in a foreign country for a continuous period of less than 91 days and that their deployment is then reinstated.

Question 6 relates to a number of questions. To the extent that Question 6 relates to Questions 1, 2, 4 and 5, the facts and assumptions for Question 6 are the same as the facts and assumptions which have been made in respect of Questions 1, 2, 4 and 5. To the extent that Question 6 relates to Question 3, the facts and assumptions for Question 6 are the same as the facts and assumptions which have been made in respect of Question 3.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6-15(2)

Income Tax Assessment Act 1936section 23AG

Income Tax Assessment Act 1936subsection 23AG(1)

Income Tax Assessment Act 1936subsection 23AG(2)

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

Income Tax Assessment Act 1936subsection 23AG(6)

Income Tax Assessment Act 1936paragraph 23AG(6)(a)

Income Tax Assessment Act 1936paragraph 23AG(6)(b)

Income Tax Assessment Act 1936subsection 23AG(6A)

Income Tax Assessment Act 1936subsection 23AG(7)

Income Tax Assessment Act 1997 Section 11-15

Taxation Administration Act 1953 Schedule 1 Subdivision 12-B

Taxation Administration Act 1953Schedule 1 section 12-1(1)

Taxation Administration Act 1953Schedule 1 section 12-35

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Question 1

Summary

Subject to the 1/6^th legislative rule provided in subsection 23AG(6A) of the ITAA 1936, the employer is required to deduct PAYG withholding tax from an employee's wages paid while on personal leave that accrued from service in Australia when they are repatriated to Australia for medical reasons unrelated to their deployment e.g. cancer, terminal illness, heart conditions etc.

Detailed reasoning

Section 12-35 of subdivision 12-B of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that under the PAYG system an entity must withhold amounts from salary, wages, commission, bonuses or allowances it pays to an individual as an employee.

Subsection 12-1(1) of Schedule 1 of the TAA however, provides that 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 recipient.

Subsection 6-15(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that if an amount is exempt income it is not included in assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the ITAA 1936 which deals with overseas employment income.

Section 23AG of the ITAA 1936

Subsection 23AG(1) of the ITAA 1936 provides that, where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived from foreign service will be exempt from tax in Australia.

Subsection 23AG(7) of the ITAA 1936 provides that the term 'foreign service' means '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 an extended meaning for the term 'engaged in foreign service' for the purposes of section 23AG of the ITAA 1936 to include periods during which the person is, in accordance with the terms and conditions of their foreign service, absent from work due to the reasons and restrictions set out in paragraph (a) or (b) of subsection 23AG(6).

Under paragraph 23AG(6)(b) of the ITAA 1936, a period during which a person is engaged in foreign service for the purpose of subsection 23AG(1) of the ITAA 1936 includes any period during which the person is, in accordance with the terms and conditions of that service, absent from work due to illness. However, subsection 23AG(6) of the ITAA 1936 requires that the period during which the person is absent is 'in accordance with the terms and conditions of that service'.

The phrase 'in accordance with' is not defined and therefore takes its ordinary meaning.

The Macquarie Dictionary defines the word 'accordance' as follows:

· agreement; conformity.

· the act of according.

Applying the ordinary meaning of the word 'accordance' in the context of the phrase 'in accordance with the terms and conditions of that service' in the present case means 'in agreement or

conformity' with the terms and conditions of the taxpayer's foreign service. The term 'that service' in subsection 23AG(6) of the ITAA 1936 is used in the context of the 'foreign service'.

In the present case, the employee accrues personal (sick) leave under the terms and conditions of the Workplace Agreement, while they are deployed overseas under the Determinations.

An employee who is repatriated to Australia for medical reasons and absent from work because of illness unrelated to their deployment may be on personal (sick) leave accrued to the employee from service in Australia or personal leave accrued while the employee was engaged in foreign service.

The employee's period of absence from work on personal (sick) leave accrued while deployed to the foreign country is considered to be 'in accordance with the terms and conditions of that foreign service' and, therefore, comes within the extended meaning of the term 'engaged in foreign service' under subsection 23AG(6) of the ITAA 1936.

However, the period of absence from work on personal (sick) leave accrued from service in Australia is not in accordance with the terms and conditions of the foreign service as it relates to a period of service other than the 'foreign service'.

Accordingly, the employee is not 'engaged in foreign service' for the purposes of subsection 23AG(6) of the ITAA 1936 during the period where the employee is absent for work on personal (sick) leave, the entitlement to which did not accrue from that foreign service, as it was not in accordance with the terms and conditions of the 'foreign service'.

As subsection 23AG(6) of the ITAA 1936 does not apply, the absence from work because of illness while on personal (sick) leave accrued from service in Australia is considered to be a break in a continuous period of foreign service. The 1/6^th rule as contained in subsection 23AG(6A) of the ITAA 1936 may apply to deem the foreign service as continuous, however, its application will need to be determined in light of the specific circumstances of each case.

PAYG (Withholding)

Where the employee who is repatriated to Australia for medical reasons unrelated to their deployment is absent from work on personal (sick) leave and the entitlement to the personal (sick) leave did not accrue from that foreign service, the employer is required to withhold tax under Subdivision 12-B of Schedule 1 to the TAA.

Question 2

Summary

Subject to the 1/6^th legislative rule provided in subsection 23AG(6A) of the ITAA 1936, the employer is required to deduct PAYG withholding tax from an employee's wages paid when they are repatriated to Australia for medical reasons unrelated to their deployment e.g. cancer, terminal illness, heart condition, from the point of time that the employee utilises personal leave that accrued from service in Australia.

Detailed reasoning

As provided under Question 1, subject to the 1/6^th legislative rule provided in subsection 23AG(6A) of the ITAA 1936, the employer is required to deduct PAYG withholding tax from an employee's wages paid while on personal (sick) leave that accrued from service in Australia when they are repatriated to Australia for medical reasons unrelated to their deployment e.g. cancer, terminal illness, heart condition etc.

The employer is required to deduct PAYG Withholding amounts from the point of time when the employee utilises personal (sick) that accrued from their service in Australia.

Question 3

Summary

The 1/6th legislative rule is able to apply if the employee took personal (sick) leave that accrued from service in Australia before completing 91 days continuous foreign service and then later returned to the mission (i.e. the two periods of foreign service can be taken to form a continuous period of foreign service if the personal (sick) leave that accrued from service in Australia is less than 1/6th of the time already served as foreign service).

Detailed reasoning

To be eligible for an exemption under section 23AG of the ITAA 1936, an employee must be engaged in foreign service for a continuous period of 91 days or more. However, the continuity of the 91-day period is not broken by certain kinds of temporary absence from the foreign service.

Section 23AG(6A) of the ITAA 1936 provides that the 91-day period is not broken by other types of temporary absence, provided that the time away does not exceed one-sixth of the total number of days of foreign service (the 1/6^th legislative rule).

The 1/6^th legislative rule allows two or more continuous periods of foreign service to be joined as a total period of foreign service, unless, at any time, the total period of absence (in days) from foreign service between the continuous periods of foreign service exceeds 1/6^th of the number of days of the total period of foreign service.

Where the employee utilises personal (sick) leave which accrued from service in Australia, before completing 91 days continuous foreign service at the time of suspension from the deployment and then later returned to mission, the two periods of foreign service can be taken to form a continuous period of foreign service. This is so if the period of absence is less than 1/6th of the time already served as foreign service.

If the period of absence exceeds 1/6 of the total period of foreign service at any time, continuity of foreign service is broken. The employee will begin a new period of foreign service when he or she next engages in foreign service and must determine whether that period of foreign service lasts for at least 91 continuous days (subsections 23AG(6A) of the ITAA 1936).

Question 4

Detailed reasoning

As the employer is required to deduct PAYG Withholding amounts from the point of time when the employee utilises personal (sick) leave that accrued from their service in Australia, this question is not relevant.

Question 5

Detailed reasoning

The answer to Question 1 is not dependent on the employee providing any documentary evidence, such as, a medical certificate.

Question 6

Summary

The answers to above questions will change if the reasons for the medical repatriation are related to the deployment, such that workers' compensation is paid.

Detailed reasoning

Where an employee is repatriated to Australia due to an injury sustained whilst on duty overseas and the employee takes personal (sick) leave (for example, during the period when the claim for workers' compensation is determined), the obligation of the employer to withhold tax from the employee's earnings is dependent on whether the personal (sick) leave accrued from service in Australia.

As with the situation outlined in Question 1, subject to the 1/6^th legislative rule, the employer is required to withhold tax under Subdivision 12-B of Schedule 1 to the TAA where the employee who is repatriated to Australia is absent for work on personal (sick) leave which accrued from service in Australia.

Where the employee's claim for workers' compensation is subsequently accepted and the personal (sick) leave is re-credited to the employee, the workers' compensation payments received by the employee are exempt from tax under subsection 23AG(1) of the ITAA 1936.

ATO Interpretative Decision 2006/173 explains that the case law on workers' compensation payments suggests that payments are assessable income as they are directly related to the amount of earnings which the employee would have been entitled to receive if the employee had been earning it in the form of wages. Where the payments are made under the relevant compensation legislation, the payments are not discretionary payments as the employer is under a statutory liability to make such payments ( Case X21 , 90 ATC 239; AAT Case 5617 (1990) 21 ATR 3157 and Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142; (1989) 20 ATR 1516).

In accordance with ATO Interpretative Decisions 2005/304 and 2006/173, the workers' compensation payments received by the employee deployed overseas in substitution for salary and allowances are exempt from tax under subsection 23AG(1) of the ITAA 1936.

The workers' compensation payments are 'foreign earnings' under subsection 23AG(7) of the ITAA 1936. Therefore, the workers' compensation payments are not subject to PAYG Withholding by the payee.

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