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Ruling

Subject: Assessability of foreign earnings

Questions and answers

Will the income you derive in Country X be exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

No.

Will the income you derive in Country X be exempt from income tax in Australia under section 23AF of the ITAA 1936?

No.

This ruling applies for the following periods:

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You have been offered a contract for services to act as an advisor to Organisation Y in Country X in relation to Project Z for a period greater than three months.

The contract for services states that you will be an independent contractor.

Project Z has not been given approved project status by the Trade Minister for the purposes of section 23AF of the ITAA 1936.

Relevant legislative provisions:

Income Tax Assessment Act 1936 Section 23AF.

Income Tax Assessment Act 1936 Section 23AG.

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 purpose 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 included in assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in this list are sections 23AF and 23AG of the Income Tax Assessment Act (ITAA 1936), which deal with overseas employment income.

Section 23AG of the ITAA 1936

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.

In your case, you are an Australian resident individual and you intend to be engaged in foreign service for a continuous period of not less than 91 days. Therefore, your foreign earnings will be exempt under section 23AG of the ITAA 1936, provided that all of the conditions in that section are met.

Subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, 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 any of the following:

· delivery of Australian official development assistance by your employer;

· activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund);

· activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia; or

· deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force.

In your case, you will be an independent contractor, not an employee. Therefore, conditions (a) (b) and (c) do not apply to you as you do not have an employer and condition (d) does not apply to you as you are not a member of a disciplined force.

As your foreign service is not directly attributable to any of the conditions set out in subsection 23AG(1AA) of the ITAA 1936, your foreign earnings will not be exempt from income tax in Australia under section 23AG of the ITAA 1936.

Section 23AF of the ITAA 1936

According to section 23AF of the ITAA 1936, where a taxpayer, being a natural person, has been engaged on qualifying service on a particular approved project for a continuous period of not less than 91 days, any eligible foreign remuneration derived by the person that is attributable to that qualifying service is exempt from tax.

In relation to the meaning of 'approved project', subsection 23AF(11) of the ITAA 1936 states that where the Trade Minister is satisfied that the undertaking of an eligible project that was commenced, or is proposed to be commenced, after 19 August 1980 is, or will be, in the national interest, that Minister may, by writing signed by that Minister, approve that eligible project for the purposes of this section.

In your case, you have been offered a contract for services to act as an advisor to Organisation Y in Country X in relation to Project Z. Project Z has not been given approved project status by the Trade Minister for the purposes of section 23AF of the ITAA 1936.

As your contract for services does not relate to an approved project, your foreign earnings will not be exempt from income tax in Australia under section 23AF of the ITAA 1936.

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