Edited version of private ruling

Authorisation Number: 1011769083028

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Ruling

Subject: Foreign income

Question 1

Are the retention bonus and extra days' payment derived from your foreign service aboard a vessel in the territorial waters of Country A, Country B, Country C and Country D exempt from tax pursuant to section to 23AG of the Income Tax Assessment Act 1936?

Answer

No.

Question 2

Are the retention bonus and extra days' payment derived from your foreign service performed before 1 July 20XX aboard a vessel in the territorial waters of Country E and Country F exempt from tax pursuant to section to 23AG of the Income Tax Assessment Act 1936?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a resident of Australia for income tax purposes.

You are employed as a Chief Mechanic by Company X.

Company X is a company which is based in a country outside Australia.

You are required to work on your employer's vessel and travel through both territorial and international waters.

You performed foreign services from 1 January 20XX to 31 December 20XX on board your employer's vessel in the territorial waters of Country A, Country B, Country C, Country D, Country E and Country F.

From 1 January 20XX to 31 December 20XX, you were on board your employer's vessel which travelled through international waters for periods of time.

From 1 December 20XX to 31 December 20XX, when you were not travelling through territorial or international waters, you were on recreation leave.

Your standard work rotation is five weeks offshore followed by five weeks onshore.

During your rotation offshore, you work 12 hours per day, seven days per week.

You were paid a retention bonus and an extra days payment of in January 20XX.

Your retention bonus was akin to a loyalty bonus and you were paid it because you were employed from the specified period 1 January 20XX to 31 December 20XX in a senior position.

Your annual salary is based on Y days on board plus Z extra days.

Your annual salary is for the calendar year.

Your annual salary is paid in 12 monthly payments.

Any extra days above Y+Z days is calculated at the end of the calendar year and paid in January of the following year.

You were paid the extra days' payment in January 20XX which was for the extra days above the Y+Z days for the year commencing 1 January 20XX and ending on 31 December 20XX.

You were not taxed on your retention bonus and your extra days' payment.

You have stated that your retention bonus and extra days' payment were not deductible in determining the profits for tax purposes of a permanent establishment that your employer may have in Country A.

You have stated that your retention bonus and extra days' payment were not deductible in determining the profits for tax purposes of a permanent establishment that your employer may have in Country B.

You have stated that your retention bonus and extra days' payment were not deductible in determining the profits for tax purposes of a permanent establishment that your employer may have in Country C.

You have stated that your retention bonus and extra days' payment were not deductible in determining the profits for tax purposes of a permanent establishment that your employer may have in Country D.

You have stated that your retention bonus and extra days' payment were not deductible in determining the profits for tax purposes of a permanent establishment that your employer may have in Country F.

Employment income is subject to tax in Country E.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AG
International Agreements Act 1953

Reasons for decision

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.

Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

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 ITAA 1936 which deals with overseas employment income.

Foreign service performed before 1 July 20XX

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 to include service in a foreign country in the capacity of an employee, and foreign earnings to include salary, wages and bonuses.

Subsection 23AG(1AA) of the ITAA 1936 specifies certain conditions of which at least one must be satisfied for the foreign earnings to be exempt from tax.

However, the note to subsection 23AG(1AA) of the ITAA 1936 states in subitem (2)(b) that if the foreign earnings are derived on or after 1 July 20XX from foreign service performed before 1 July 20XX, subitem (3) applies. Subitem (3) states "disregard the amendment made by this Schedule in determining whether the foreign earnings are exempt from tax under subsection 23AG(1) of the ITAA 1936". Thus, the effect of subitem (3) is that subsection 23AG(1AA) does not apply and therefore, none of the certain conditions listed need to be satisfied for the foreign earnings to be exempt from tax.

As you are a resident of Australia for income tax purposes and you are an employee, section 23AG is applicable to you.

You were paid your retention bonus and extra days' payment in January 20XX.

Your retention bonus was paid to you because you were employed from the specified period 1 January 20XX to 31 December 20XX in a senior position.

Your extra days' payment was for the year commencing 1 January 20XX and ending on 31 December 20XX.

Thus, a proportion of your retention bonus and a proportion of your extra days' payment were derived after 1 July 20XX from foreign service performed before 1 July 20XX in accordance with subitem (2)(b) of the note to subsection 23AG(1AA) of the ITAA 1936. Therefore, in accordance subitem (3) of the note to subsection 23AG(1AA), none of the listed conditions in subsection 23AG(1AA) need to be satisfied for the proportion of your retention bonus and the proportion of your extra days' payment for your foreign service performed before 1 July 20XX.

Foreign service not less than 91 days

Subsection 23AG(6) of the ITAA 1936 provides that a person is engaged in foreign service includes any period during which the person is absent on recreation leave in accordance with the terms and conditions of the foreign service.

Paragraph 7 of Taxation Ruling IT 2441 states that where an Australian resident taxpayer is employed in a project in a foreign country, leave taken in circumstances similar to those mentioned in Taxation Ruling IT 2015 would be treated as recreation leave forming part of a period of foreign service under subsection 23AG(6) of the ITAA 1936. Taxation Ruling IT 2015 refers to the application of paragraph 23AF(3)(d) of the ITAA 1936 where employees are engaged in uninterrupted cycles of 5 weeks on site on an onshore oil drilling project and 5 weeks' leave in Australia. IT 2015 states that the employees will be taken to have been engaged on an approved project for a period of qualifying service equal to the total number of days they are engaged under the 5 weekly cyclical arrangements.

Paragraph 19 of Taxation Ruling TR 96/15 states that the for the purposes of subsection 23AG(1) of the ITAA 1936, service on a foreign ship in international waters does not constitute foreign service as it is not performed in a foreign country.

Your standard work rotation is five weeks offshore followed by five weeks onshore. During your rotation offshore, you work 12 hours per day, seven days per week.

As your circumstances are similar to that in Taxation Ruling IT 2015, your five weeks onshore is considered recreation leave that forms part of your foreign service period.

However, applying Taxation Ruling TR 96/15, the periods you spend travelling in international waters does not constitute foreign service for the purposes of subsection 23AG(1) of the ITAA 1936 as it is not performed in a foreign country.

Taking into account your work offshore and your recreation leave onshore, you have engaged in foreign service for a continuous period of not less than 91 days before 1 July 20XX.

Double tax agreements

Subsection 23AG(2) of the ITAA 1936 provides that foreign earnings will not be exempt from tax under subsection 23AG(1) of the ITAA 1936 if the amount is exempt from income tax in the foreign country for any of the reasons 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.

Foreign service performed in territorial waters of Country A

Australia has a double tax agreement with Country A (the Country A Agreement). The Country A Agreement and Country A Protocols operate to avoid the double taxation of income received by Australian and Country A residents.

An article of the Country A Agreement provides that remuneration derived by an Australian resident in respect of personal services will be taxable only in Australia unless the services are performed or exercised in Country A. If the services are performed or exercised in Country A, the remuneration may be taxed in Country A.

However, another article of the Country A Agreement provides that remuneration derived by a Australian resident in respect of personal services performed or exercised in Country A will be taxable only in Australia if:

· the taxpayer is present in Country A for a period or periods not exceeding in the aggregate 183 days in the Country A basis year or year of income;

· the remuneration is paid by or on behalf of a person who is not a resident of Country A; and

· the remuneration is not deductible in determining the profits for Country A tax purposes of a permanent establishment in Country A of that person.

You were present in Country A for a period or periods not exceeding the aggregate 183 days in the Country A basis year or year of income.

Paragraph 24 of Taxation Ruling TR 2001/13 states that in relation to double tax treaties "the phrase 'shall be taxable only' limits the exercise of a domestic law taxing power to the country concerned - that country has an exclusive taxing right".

Company X is a company which is based in a country outside Australia.

As Company X is not a resident of Country A, your foreign remuneration was paid by a person who is not a resident of Country A.

You have stated that your retention bonus and extra days' payment were not deductible in determining the profits for tax purposes of a permanent establishment that your employer may have in Country A.

Thus, you satisfy all the conditions of the said article of the Country A Agreement. Consequently, your foreign remuneration is exempt from tax in Country A.

Thus, the proportion of your retention bonus and the proportion of your extra days' payment which were derived from foreign service performed in Country A are not exempt from tax pursuant to section 23AG of the ITAA 1936.

Foreign service performed in territorial waters of Country B

Australia has a double tax agreement with Country B (the Country B Agreement). The Country B Agreement operates to avoid the double taxation of income received by Australian and Country B residents.

An article of the Country B Agreement provides that remuneration derived by an Australian resident in respect of dependent personal services will be taxable only in Australia unless the services are performed or exercised in Country B. If the services are performed or exercised in Country B, the remuneration may be taxed in Country B.

However, another article of the Country B Agreement provides that remuneration derived by a Australian resident in respect of personal services performed or exercised in Country B will be taxable only in Australia if:

· the taxpayer is present in Country B for a period or periods not exceeding in the aggregate 183 days in the Country B year of income;

· the remuneration is paid by or on behalf of an employer who is not a resident of Country B; and

· the remuneration is not deductible in determining the profits for Country B tax purposes of a permanent establishment in Country B of that employer.

You were present in Country B for a period or periods not exceeding the aggregate 183 days in the Country B year of income.

As Company X is not a resident of Country B, your foreign remuneration was paid by an employer who is not a resident of Country B.

You have stated that your retention bonus and extra days' payment were not deductible in determining the profits for tax purposes of a permanent establishment that your employer may have in Country B.

Thus, you satisfy all the conditions of the specific article of the Country B Agreement. Consequently, your foreign remuneration is exempt from tax in Country B.

Thus, the proportion of your retention bonus and the proportion of your extra days' payment which were derived from foreign service performed in Country B are not exempt from tax pursuant to section 23AG of the ITAA 1936.

Foreign service performed in territorial waters of Country C

Australia has a double tax agreement with Country C (the Country C Agreement). The Country C Agreement operates to avoid the double taxation of income received by Australian and Country C residents.

An article of the Country C Agreement provides that remuneration derived by an Australian resident in respect of dependent personal services will be taxable only in Australia unless the services are performed or exercised in Country C. If the services are performed or exercised in Country C, the remuneration may be taxed in Country C.

However, another article of the Country C Agreement provides that remuneration derived by a Australian resident in respect of personal services performed or exercised in Country C will be taxable only in Australia if:

· the taxpayer is present in Country C for a period or periods not exceeding in the aggregate 183 days in the Country C year of income;

· the remuneration is paid by or on behalf of an employer who is not a resident of Country C; and

· the remuneration is not deductible in determining the profits for Country C tax purposes of a permanent establishment in Country C of that employer.

You were present in Country C for a period or periods not exceeding the aggregate 183 days in the Country C year of income.

As Company X is not a resident of Country C, your foreign remuneration was paid by an employer who is not a resident of Country C.

You have stated that your retention bonus and extra days' payment were not deductible in determining the profits for tax purposes of a permanent establishment that your employer may have in Country C.

Thus, you satisfy all the conditions of that article of the Country C Agreement. Consequently, your foreign remuneration is exempt from tax in Country C.

Thus, the proportion of your retention bonus and the proportion of your extra days' payment which were derived from foreign service performed in Country C are not exempt from tax pursuant to section 23AG of the ITAA 1936.

Foreign service performed in territorial waters of Country D

Australia has a double tax agreement with Country D (the Country D Agreement). The Country D Agreement operates to avoid the double taxation of income received by Australian and Country D residents.

An article of the Country D Agreement provides that remuneration derived by an Australian resident in respect of dependent personal services will be taxable only in Australia unless the services are performed or exercised in Country D. If the services are performed or exercised in Country D, the remuneration may be taxed in Country D.

However, another article 15(2) of the Country D Agreement provides that remuneration derived by a Australian resident in respect of personal services performed or exercised in Country D will be taxable only in Australia if:

the taxpayer is present in Country D for a period or periods not exceeding in the aggregate 120 days in any period of 12 months;

· the remuneration is paid by or on behalf of an employer who is not a resident of Country D;

· the remuneration is not deductible in determining the profits for Country D tax purposes of a permanent establishment in Country D of that employer; and

· the remuneration is, or upon the application of this Article will be, subject to tax in Australia.

You were present in Country D for a period or periods not exceeding the aggregate 120 days in any period of 12 months.

As Company X is not a resident of Country D, your foreign remuneration was paid by an employer who is not a resident of Country D.

You have stated that your retention bonus and extra days' payment were not deductible in determining the profits for tax purposes of a permanent establishment that your employer may have in Country D.

As a result, you will be subject to tax in Australia and you satisfy all the conditions of an article of the Country D Agreement. Consequently, your foreign remuneration is exempt from tax in Country D.

Thus, the proportion of your retention bonus and the proportion of your extra days' payment which were derived from foreign service performed in Country D are not exempt from tax pursuant to section 23AG of the ITAA 1936.

Foreign service performed in territorial waters of Country E

There is no double tax agreement between Australia and Country E.

Employment income is subject to tax in Country E.

Thus, the proportion of your retention bonus and the proportion of your extra days' payment which were derived from foreign service performed before 1 July 20XX in Country E are not exempt from tax in Country E.

Therefore, the proportion of your retention bonus and the proportion of your extra days' payment which were derived from foreign service performed in Country E before 1 July 20XX are exempt from tax pursuant to section 23AG of the ITAA 1936.

Foreign service performed in territorial waters of Country F

Australia has a double tax agreement with Country F (the Country F Agreement). The Country F Agreement and Country F Protocol operate to avoid the double taxation of income received by Australian and Country F residents.

An article of the Country F Agreement provides that remuneration derived by an Australian resident in respect of personal services will be taxable only in Australia unless the services are performed or exercised in Country F. If the services are performed or exercised in Country F, the remuneration may be taxed in Country F.

However, another article of the Country F Agreement provides that remuneration derived by an Australian resident in respect of personal services performed or exercised in Country F will be taxable only in Australia if:

· the taxpayer is present in Country F for a period or periods not exceeding in the aggregate 183 days in the Country F year of income or in the basis period for the year of assessment;

· the services are performed or exercised for or on behalf of a person who is a resident of Australia; and

· the remuneration is not deductible in determining the profits for Country F tax purposes of a permanent establishment in Country F of that person.

As Company X is not a resident of Australia, your foreign service was not performed for person who is a resident of Australia. Thus, you do not satisfy all the conditions of the article of the Country F Agreement. Consequently, your foreign remuneration is not exempt from tax in Country F.

Thus, the proportion of your retention bonus and the proportion of your extra days' payment which were derived from foreign service performed in Country F before 1 July 20XX are exempt from tax pursuant to section 23AG of the ITAA 1936.

Note:

For example, if during 1 January 20XX to 1 July 20XX the total period spent in international waters was 45 days, you would have performed 138 days of foreign service. If in this period, you worked in Country F and Country E for 8 days, the proportion of your extra days' payment which is exempt from tax pursuant to section 23AG of the ITAA 1936 is 8/138 of your extra days' payment.

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