Edited version of private ruling

Authorisation Number: 1011707558753

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Ruling

Subject Exempt foreign employment income

Question 1

Is your income derived from another country from the start of your contract to the date of legislative change exempt from income tax in Australia?

Answer:

No

Question 2

Is your income derived from another country from the date of legislative change to the end of your contract exempt from income tax in Australia?

Answer:

No

This ruling applies for the following period

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

01 July 2007

Relevant facts

You are an Australian resident for taxation purposes.

In response to a large natural disaster in another country some years ago, the Australian government launched a huge aid program that included assistance to the tertiary education sector. Within that program a specific institute was established at one of the universities in a region of the other country.

The program is funded by Ausaid and managed by a specific Australian university on behalf of a consortium of other Australian universities. A copy of the agreement from Ausaid to provide support for the institute and the specific Australian university has been provided.

You were appointed by the specific Australian university to your position in the specific institute from the start of your contract to the end of your contract, based in the region of the other country. You will have responsibility for the co-ordination of operational, administrative and reporting functions of the project. Duties will involve supporting the broad educational agenda of the project and liaison with various government bodies of the other country, university groups and other stake holders. You are required to reside in the region of the other country, for the duration of the contract. A copy of your contract has been provided.

You departed Australia on at the start of your contract and remained based in the region of the other country until the end of your contract. You did not accept an offer to extend your contract.

During this time, you returned to Australia on three occasions to attend half yearly meetings at the specific Australian university where you reported to consortium representatives on the progress of the project.

Your first break in Australia was for about three weeks. During this period, you also were able to recruit several Australia academics to provide short term courses at the institute.

Your second break in Australia was also about three weeks. You were also able to speak to several Australian academics about making visits to the institute.

Your third break in Australia was for a further three weeks. You also obtained information about prospects for students from the other country's region receiving scholarships to study in Australia.

You did not work in other countries.

Your work is not of a cyclical nature.

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)

Income Tax Assessment Act 1936 Subsection 23AG(2)

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

Income Tax Assessment Act 1936 Subsection 23AG(7)

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

Income Tax Assessment Act 1997 Subsection 6-15(2)

Income Tax Assessment Act 1997 Section 11-15

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Schedule 37

International Tax Agreements Act 1953 Schedule 37 Article 20

Reasons for decision

Question 1

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

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not 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 Income Tax Assessment Act 1936 (ITAA 1936), which deals with overseas employment income.

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 will be exempt from tax in Australia.

Subsection 23AG(7) of the ITAA 1936 defines 'foreign service' as service in a foreign country as the holder of an office or in the capacity of an employee, and 'foreign earnings' include salary, wages, commission, bonuses or allowances.

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 only because of any of the exclusions listed therein.

Under paragraph 23AG(2)(b) of the ITAA 1936, where income is exempt in the foreign country as a result of the operation of a double tax agreement, that income is not exempt under subsection 23AG(1) of the ITAA 1936.

Therefore, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that ACT with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (except in some limited situations).

A Schedule to the Agreements Act contains the double tax agreement between Australia and the other country (the Agreement). The Agreement operates to avoid the double taxation of income received by residents of Australia and the other country.

An Article of the Agreement provides that remuneration derived by an Australian resident individual who, at the invitation of any university, college or school or other recognised educational institution, visits the other country for a period not exceeding two years for the purpose of teaching or research or both at such educational institution, will be taxable only in Australia.

As your salary and wages are exempt from tax in the other country pursuant to the Article of the Agreement, you are not entitled to an exemption from tax in Australia under subsection 23AG(1) of the ITAA 1936.

Therefore, your salary and wage income from teaching in the other country is assessable in Australia under subsection 6-5(2) of the ITAA 1997.

Question 2

Subsection 23AG(1) of the 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 tax in Australia. However, new subsection 23AG(1AA) of the ITAA 1936, which took effect from 01 July 2009, provides those foreign earnings will not be exempt under section 23AG(1) of the ITAA 1936 unless the continuous period of foreign service is directly attributable to, amongst other things, the delivery of Australian official development assistance by the person's employer (paragraph 23AG(1AA)(a)).

In your case, your employer, the specific Australian university, has been contracted directly by AusAID to assist in the delivery of Australian official development assistance. Therefore, you satisfy the requirement of paragraph 23AG(1AA)(a) of the ITAA 1936. However, the introduction of subsection 23AG(1AA) of the ITAA 1936 has not affected the operation of subsection 23AG(2) of the ITAA 1936 as outlined in 'reasons for decision-question 1'.

Although you were engaged in foreign service for a period of not less than 91 days (subsection 23AG(1) of the ITAA 1936) and your employer was contracted by AusAID for the delivery of Australian official development assistance (subsection 23AG(1AA) of the ITAA 1936), your salary and wages derived from the other country are exempt from tax in the other country by the operation of the double tax agreement between Australia and the other country (Subsection 23AG(2) of the ITAA 1936).

As your salary and wages are exempt from tax in the other country pursuant to an Article of the Agreement, the condition of paragraph 23AG(2)(b) of the ITAA 1936 for exemption of income from Australian taxation has not been met. Therefore, you are not entitled to an exemption from tax in Australia under subsection 23AG(1) of the ITAA 1936.

Therefore, your salary and wage income from teaching in the other country is assessable in Australia under subsection 6-5(2) of the ITAA 1936.

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