Edited version of private ruling

Authorisation Number: 1011825766213

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: foreign income

Question

Is the foreign income you derive from your foreign service in Country A exempt from tax pursuant to section 23AG of the Income Tax Assessment Act 1936?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 July 2009

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 Australian for income tax purposes.

You are employed by Company X ("your employer") as an Engineer to work on the Country A Project in Country A.

You will be assisting in major construction in Country A.

You commenced your employment sometime in 200X.

Your employer is based in the foreign country.

According to your employer's website, your employer is an internationally recognised consulting firm that provides engineering and other services.

Your employer has been contracted by the United States Agency for International Development (USAID) to carry out the Country A Project.

You earn daily wages.

You work six days a week.

You take two weeks recreation leave every four months.

The recreation leave is accrued as a result of your foreign service.

Your foreign income is assessed in Country A.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AG,

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 6-15

Income Tax Assessment Act 1997 Section 11-15.

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 allowances 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 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.

Subsection 23AG(1) of the Income Tax Assessment Act (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 this foreign service are exempt from Australian tax. "Foreign service" includes service in a foreign country in the capacity as an employee and "foreign earnings" includes salary and wages income (subsection 23AG(7) of the ITAA 1936).

However, subsection 23AG(1AA) of the ITAA 1936 provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to:

· the delivery of Australian official development assistance by the person's employer; or

· the activities of the person's employer in operating a public fund covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the ITAA 1997; or

· the activities of the person's employer if the employer is exempt from income tax because of paragraph 50-50(c) or (d) of the ITAA 1997; or

· the person's deployment outside Australia as a member of a disciplined force.

The Explanatory Memorandum (EM) which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Act 2009 introducing subsection 23AG(1AA) of the ITAA 1936 provides guidance on subsection 23AG(1AA). The relevant paragraphs are below:

Australian official development assistance

1.19 Australian official development assistance (ODA) is assistance delivered through the Australian Government's overseas aid program, as administered by the Department of Foreign Affairs and Trade and/or the Australian Agency for International Development (AusAID). Australian ODA aims to reduce poverty and achieve sustainable development in developing countries, in line with Australia's national interest.

1.20 In addition to providing Australian ODA directly, AusAID also competitively contracts aid work to Australian and international entities. Thus, in practice, individuals involved in the delivery of Australian ODA can include both Australian Public Service (APS) employees and non-APS employees.

1.21 For the purposes of subsection 23AG(1AA) the delivery of Australian ODA must be undertaken by the person's employer, which includes AusAID and an entity contracted by AusAID to assist in the delivery of Australian ODA.

Employer operating a public fund

1.23 A person's foreign earnings will be eligible for exemption if they are directly attributable to their employer's activities in operating a public fund covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the ITAA 1997.

1.24 Item 9.1.1 of subsection 30-80(1) of the ITAA 1997 applies to a public fund declared by the Treasurer to be a developing country relief fund. Item 9.1.2 of subsection 30-80(1) applies to a public fund operated by a public benevolent institution solely to provide relief to people of a developing country who are in distress as a result of a disaster (a public disaster relief fund). Gifts or donations made to these public funds are tax deductible for income tax purposes to the donor.

1.25 A developing country relief fund is a fund established by an organisation solely for the purpose of providing relief to people of a developing country. The organisation must be an approved organisation as declared by the Minister for Foreign Affairs and the country must be a developing country as declared by the Minister for Foreign Affairs. These conditions are contained in paragraphs 30-85(2)(a) and (b) of the ITAA 1997 respectively.

1.26 A public disaster relief fund is a fund established and operated by a public benevolent institution in response to an event recognised as a disaster by the Minister for Foreign Affairs. The recognition requirement is contained in section 30-86 of the ITAA 1997.

Employer is an exempt institution for income tax purposes

1.28 A person's foreign earnings will be eligible for exemption if the foreign service is directly attributable to their employer's activities as an institution covered by paragraph (c) or (d) of section 50-50 of the ITAA 1997.

1.29 These paragraphs apply to a prescribed charitable or religious institution that is exempt from Australian income tax pursuant to item 1.1 or 1.2 of section 50-5 of the ITAA 1997. Such organisations are either located outside Australia or have a physical presence in Australia but incur their expenditure and pursue their objectives principally outside Australia.

1.30 Paragraph 23AG(1AA)(c) ensures that employees of recognised organisations that undertake aid or charitable activities, that do not form part of Australian ODA, are eligible for exemption on their relevant foreign employment income.

You are a resident of Australian for income tax purposes.

You are employed by your employer to work on the Country A Project in Country A.

You commenced your employment sometime in 200X.

You earn daily wages.

You work six days a week.

You take two weeks recreation leave every four months.

The recreation leave is accrued as a result of your foreign service.

Applying subsection 23AG(1) of the ITAA 1936 to you, you derive foreign earnings from your foreign service in Country A. Your foreign service is for a continuous period of not less than 91 days as you commenced your employment in 200X, have worked six days a week and taken two weeks recreation leave every four months.

Is your foreign service directly attributable to the delivery of Australian official development assistance by your employer?

Your employer is based in the United States.

Your employer has been contracted by USAID to carry out the Country A Project.

Applying the guidance offered by the EM on the interpretation of paragraph 23AG(1AA)(a) of the ITAA 1936, your foreign service is not directly attributable to the delivery of Australian official development assistance undertaken by AusAID or by an entity contracted by AusAID to assist in the delivery of Australian ODA .

Therefore, you do not satisfy paragraph 23AG(1AA)(a) of the ITAA 1936.

Is your foreign service directly attributable to the activities of your employer in operating a public fund covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the ITAA 1997?

A list of deductible gift recipients is available on the Australian Business Register. Your employer and USAID are not listed on the register.

Applying the guidance offered by the EM on the interpretation of paragraph 23AG(1AA)(b) of the ITAA 1936, your foreign earnings are not directly attributable to your employer's activities operating a developing country relief fund pursuant to section 30-85 of the ITAA 1997 or to a public disaster relief fund pursuant to section 30-86 of the ITAA 1997.

Therefore, you do not satisfy paragraph 23AG(1AA)(b) of the ITAA 1936.

Is your foreign service directly attributable to the activities of your employer if the employer is exempt from income tax because of paragraph 50-50(c) or (d) of the ITAA 1997?

Your employer is based in the United States.

According to your employer's website, your employer is an internationally recognised consulting firm that provides engineering and other services.

Applying the guidance offered by the EM on the interpretation of paragraph 23AG(1AA)(c) of the ITAA 1936, your employer is not a prescribed charitable or religious institution.

Therefore, you do not satisfy paragraph 23AG(1AA)(c) of the ITAA 1936.

Is your foreign service directly attributable to your deployment outside Australia as a member of a disciplined force?

You are employed by your employer as an Engineer to work on the Country A Project.

You will be assisting in the construction of a major facility in Country A.

Therefore, as you are not a member of a disciplined force, you do not satisfy paragraph 23AG(1AA)(d) of the ITAA 1936.

Your foreign income is not exempt from tax pursuant to section 23AG of the ITAA 1936

It follows that you do not satisfy any of the conditions in subsection 23AG(1AA) of the 1936. Consequently, your foreign income derived from your foreign service in Country A is not exempt from tax pursuant to section 23AG of the ITAA 1936.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).