Edited version of your private ruling

Authorisation Number: 1012528853016

Question 1

Do payments made by Company A to employees in consequence of the termination of their engagement on qualifying service on an approved project within the meaning of section 23AF of the Income Tax Assessment Act 1936 (ITAA 1936) fall within section 83-240 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

If the payments fall within section 83-240 of the ITAA 1997, is Company A required to withhold amounts under Subdivision 12-B of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953), Subdivision 12-C of the TAA 1953, section 12-120 of the TAA 1953 or 12-190 of the TAA 1953 from payments that it makes to employees who:

· are engaged in eligible service on a project which is covered by section 23AF of the ITAA 1936; and

· remain Australian tax residents throughout the time of eligible service; and

· the payments made to the employees relate to the service on the project; and

· the payment is made once the employee has left the foreign country.

Answer

Not answered given the answer to question 1.

Question 3

If the payments do not fall within Subdivision 12-B of the TAA 1953, 12-C of the TAA 1953, section 12-120 of the TAA 1953 or 12-190 of the TAA 1953, do they fall within any of the remaining Subdivisions of Division 12?

Answer

Not answered as the payments will, as appropriate, fall into Subdivision 12-B of the TAA 1953, 12-C of the TAA 1953, section 12-120 of the TAA 1953 or 12-190 of the TAA 1953.

Question 4

If the payments do not fall within any of the remaining Subdivisions of Division 12 of the TAA 1953, is there any obligation on Company A to withhold tax from the payments?

Answer

Not answered as the payments will fall into one of the Subdivisions of Division 12 of the TAA 1953.

This ruling applies for the following periods:

Income year ending 31 December 2012

Income year ending 31 December 2013

Income year ending 31 December 2014

Income year ending 31 December 2015

The scheme commences on:

1 January 2012

Relevant facts and circumstances

Company A has been undertaking activities in country X since 19YY.

The Trade Minister has approved the project as an eligible project under subsection 23AF(11) of the Income Tax Assessment Act 1936 (ITAA 1936) for the purposes of section 23AF of the ITAA 1936.

People employed by Company A on the project are subject to the Conditions of Service for Company A (Conditions of Service) document.

The Conditions of Service states that on the termination of employment a severance payment may be made in accordance with the Conditions of Service.

Relevant legislative provisions

Acts Interpretation Act 1901 section 15AB

Income Tax Assessment Act 1936 paragraph 23(q)

Income Tax Assessment Act 1936 paragraph 23(qa)

Income Tax Assessment Act 1936 section 23AF

Income Tax Assessment Act 1936 subsection 23AF(11)

Income Tax Assessment Act 1936 subsection 23AF(17)

Income Tax Assessment Act 1936 paragraph 23AF(17)(a)

Income Tax Assessment Act 1936 paragraph 23AF(17)(b)

Income Tax Assessment Act 1936 section 23AG

Income Tax Assessment Act 1936 subsection 23AG(1)

Income Tax Assessment Act 1936 subsection 23AG(2)

Income Tax Assessment Act 1936 paragraph 23AG(2)(d)

Income Tax Assessment Act 1936 subsection 23AG(3)

Income Tax Assessment Act 1936 paragraph 23AG(3)(a)

Income Tax Assessment Act 1936 paragraph 23AG(3)(b)

Income Tax Assessment Act 1936 section 27A

Income Tax Assessment Act 1997 section 83-240.

Income Tax Assessment Act 1997 paragraph 83-240(1)(f).

Reasons for decision

Question 1

One of the requirements for a payment received by an Australian resident to satisfy section 83-240 of the Income Tax Assessment Act 1997 (ITAA 1997) is that '…the payment is not exempt from income tax under the law of the foreign country' (refer paragraph 83-240(1)(f) of the ITAA 1997).

The word 'exempt' in the expression 'not exempt from income tax' in paragraph 83-240(1)(f) of the ITAA 1997 is not defined and will therefore take its meaning from the context in which it is used and according to the purpose or object underlying section 83-240 of the ITAA 1997.

The Macquarie Dictionary defines the word 'exempt' as meaning:

verb (t) 1. To free from an obligation or liability to which others are subject; release: to exempt someone from military service; to exempt a student from an examination.

adjective 2. Released from, or not subject to, an obligation, liability, etc.: exempt from taxes.

noun 3. Someone who is exempt from, or not subject to, an obligation, duty, etc.

The dictionary definition would therefore permit the word 'exempt' to be interpreted broadly as meaning to free someone or something from an obligation to which others are subject or as meaning simply that someone or something is not subject to an obligation or liability. In the circumstances of this ruling the interpretation of the word 'exempt' in the expression 'not exempt from income tax' is decisive and application of the dictionary definition introduces ambiguity in the context of paragraph 83-240(1)(f) of the ITAA 1997.

Given inclusion of the word 'exempt' introduces ambiguity and obscurity to the operation of paragraph 83-240(1)(f) of the ITAA 1997 it is appropriate to have regard to extrinsic material which may assist in ascertaining the meaning of the provision (refer section 15AB of the Acts Interpretation Act 1901).

The former section 27A of the ITAA 1936

Section 83-240 was introduced into the ITAA 1997 by the Tax Laws Amendment (Simplified Superannuation) Act 2006. In relation to section 83-240 of the ITAA 1997 the Explanatory Memorandum (EM) to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 (2006 EM) at page 142 provided that:

4.63 Termination payments related exclusively to overseas employment or service are treated differently to employment termination payments resulting from domestic employment.

4.64 The treatment of these payments reflects the existing treatment of exempt non-resident foreign termination payments and exempt resident termination payments as contained in the ITAA 1936. Payments that meet the conditions in sections 83-235 and 83-240 are not subject to tax in the hands of the recipient (ie, they are not assessable). They are, however, not exempt income. [Schedule 2, item 1, Subdivision 83-D]

The 2006 EM evidences an intention that section 83-240 of the ITAA 1997 was designed to retain the existing treatment of exempt resident termination payments under the ITAA 1936. The expression 'exempt resident foreign termination payment' was defined in the former section 27A of the ITAA 1936 which was repealed by the Superannuation Legislation Amendment (Simplification) Act 2007.

Section 27A of the ITAA 1936 previously provided that a payment related to the termination of qualifying service, where the eligible foreign remuneration attributable to the qualifying service was exempt from tax under section 23AF of the ITAA 1936, would only satisfy the definition of 'exempt resident foreign termination payment' if:

…the payment is not exempt from taxation under the law of the country from sources in which the eligible foreign remuneration in relation to the qualifying service was derived. (emphasis added)

Section 27A of the ITAA 1936 also previously provided that a payment related to the termination of employment, where the foreign earnings from the employment were exempt under section 23AG of the ITAA 1936, would only satisfy the definition of 'exempt resident foreign termination payment' if:

…the payment is not exempt from taxation under the law of the foreign country… (emphasis added)

The expressions 'not exempt from taxation under the law of the country' and 'not exempt from taxation under the law of the foreign country' in the former section 27A of the ITAA 1936 are almost identical to the expression 'not exempt from income tax under the law of the foreign country' in paragraph 83-240(1)(f) of the ITAA 1997. As the 2006 EM stated that the intention of section 83-240 of the ITAA 1997 was to retain the existing treatment of exempt resident termination payments it is relevant to consider the interpretation of the expressions within the definition of 'exempt resident foreign termination payment' in the now repealed section 27A of the ITAA 1997.

The definition of 'exempt resident foreign termination payment' was introduced into section 27A of the ITAA 1936 by the Taxation Laws Amendment Act (No. 4) 1994. The EM to the Taxation Laws Amendment Bill (No. 4) 1994 (1994 EM) provides at paragraph 7.146 an indication of what the expressions 'not exempt from taxation under the law of the country' and 'not exempt from taxation under the law of the foreign country' meant in the definition of 'exempt resident foreign termination payment' in the former section 27A of the ITAA 1936:

7.146 The employment must be for service in a foreign country or the qualifying service in respect of an approved project for the purposes of section 23AF and the payment must not be exempt from tax under the law of the foreign country (that is, the payment must be taxed in the foreign country). (emphasis added)

In the context of the former section 27A of the ITAA 1936, the 1994 EM supports an interpretation of the expressions 'not exempt from taxation under the law of the country' and 'not exempt from taxation under the law of the foreign country' in the definition of 'exempt resident foreign termination payment' as effectively meaning 'taxed under the law of the foreign country'.

Given the 2006 EM stated that section 83-240 of the ITAA 1997 was intended to reflect the existing treatment of exempt resident termination payments it is appropriate to adopt an interpretation of paragraph 83-240(1)(f) of the ITAA 1997 which is consistent with that of the former section 27A of the ITAA 1936.

The expression 'not exempt from income tax under the law of the foreign country' in paragraph 83-240(1)(f) of the ITAA 1997 therefore effectively calls for consideration of whether an amount has been 'taxed under the law of the foreign country'. That inquiry does not require consideration of why an amount has or has not been taxed but simply requires an ascertainment as to whether or not an amount has been taxed. Consequently, if an amount is not subject to income tax in a foreign country, such an amount is exempt from income tax in that country for the purpose of section 83-240 of the ITAA 1997.

If 'exempt from income tax under the law of the foreign country' in paragraph 83-240(1)(f) of the ITAA 1997 were to be interpreted as requiring something different, such as that an amount must first be subject to tax before it can be exempt, termination payments would have a different treatment under section 83-240 of the ITAA 1997 from that which they would have had under the former section 27A of the ITAA 1936. That outcome could not have been intended given the express statement in the 2006 EM that the existing treatment of exempt resident termination payments was to be retained with the introduction of section 83-240 of the ITAA 1997.

Section 23AG of the ITAA 1936

Section 23AG of the ITAA 1936 also supports the view that if income is not subject to income tax in a foreign country then the income is exempt from income tax in that country for the purposes of paragraph 83-240(1)(f) of the ITAA 1997.

Section 23AG of the ITAA 1936 was introduced by the Taxation Laws Amendment (Foreign Tax Credits) Act 1986. As originally enacted, subsection 23AG(3) of the ITAA 1936 provided:

(3)An amount of foreign earnings derived in a foreign country is not exempt from tax

under this section unless -

(a) the amount is not exempt from income tax in that country; and

(b) if there is a liability for payment of income tax in that country in respect

of that amount-the Commissioner is satisfied that the tax has been or

will be paid.

Subsection 23AG(3) of the ITAA 1936 and the combined operation of paragraph 23AG(3)(a) of the ITAA 1936 and paragraph 23AG(3)(b) of the ITAA 1936 as originally enacted support the view that the expression 'not exempt from income tax in that country' means that an amount is taxed in that country.

Section 23AG of the ITAA 1936 was subsequently amended by the Taxation Laws Amendment (No 2) Act 1991 (TLAA 1991). The TLAA 1991 repealed subsection 23AG(3) of the ITAA 1936 and replaced it with a new subsection 23AG(2) of the ITAA 1936. The current subsection 23AG(2) of the ITAA 1936 states in part:

An amount of foreign earnings derived in a foreign country is not exempt from tax under this section if the amount is exempt from income tax in the foreign country only because of any of the following:

(a) a law of the foreign country giving effect to a double tax agreement;

(b) a double tax agreement;

(c) provisions of a law of the foreign country under which income covered

by any of the following categories is generally exempt from income tax

(i) income derived in the capacity of an employee;

(ii) income from personal services;

(iii) similar income;

(d) the law of the foreign country does not provide for the imposition of income tax on one or more of the categories of income mentioned in paragraph (c)… (emphasis added)

The inclusion of paragraph 23AG(2)(d) of the ITAA 1936 relevantly means that an amount derived in a foreign country which is exempt from tax in that foreign country because the law of the foreign country does not provide for the imposition of income tax is excluded from the exemption in subsection 23AG(1) of the ITAA 1936.

Hence for the purposes of section 23AG of the ITAA 1936 an amount will be exempt from income tax in a foreign country if, inter alia, that country does not provide for the imposition of income tax on that amount.

Since the expression 'exempt from income tax in the foreign country' in section 23AG of the ITAA 1936 is almost identical to the expression 'exempt from income tax under the law of the foreign country' in paragraph 83-240(1)(f) of the ITAA 1997, we would expect 'exempt' to have a consistent meaning in both expressions.

Other contentions

The applicant contends that the judgment in Australian Mutual Provident Society v Commissioner of Inland Revenue (1962) AC 135 (AMP Society) supports a view that '…a company cannot be exempt, unless, but for the exemption, it would have been liable'.

In AMP Society the Privy Council considered the expression 'exempt from income tax' in paragraph 86(1)(i) of the New Zealand Land and Income Tax Act 1954, which related to 'dividends and other profits derived from shares or other rights of membership in companies, other than companies which are exempt from income tax'.

In Avon Products Pty Limited v Commissioner of Taxation of the Commonwealth of Australia (2006) 230 CLR 356 at page 367 the High Court of Australia in a unanimous judgment commented:

The international authorities relied upon by Avon must be treated with considerable caution. They deal with different statutory regimes. …The United Kingdom authorities may be put to one side because the statutory regime in force is quite different from the scheme of the Act.

As AMP Society relates to a statutory scheme which is quite different from section 83-240 of the ITAA 1997, our view is that it is not helpful or relevant in determining the meaning of 'exempt from income tax under the law of the foreign country' in paragraph 83-240(1)(f) of the ITAA 1997.

The applicant also contends that paragraph 83-240(1)(f) of the ITAA 1997 will always be met for payments that are received in consequence of termination on qualifying service on an approved project which satisfies the requirements of section 23AF of the ITAA 1936. The basis for this contention is that foreign remuneration which is attributable to qualifying service on an approved project must not be subject to tax in the foreign country in order to be covered by section 23AF of the ITAA 1936.

We do not agree with this contention for the following reasons.

Firstly, section 23AF of the ITAA 1936 does not require that the foreign remuneration not be subject to tax in the foreign country. In relation to the tax treatment in the foreign country, subsection 23AF(17) of the ITAA 1936 treats income as excluded income, that is not subject to section 23AF of the ITAA 1936, if:

(a) the income is income to which section 23AG applies; or

(b) the income …

(i) is exempt from income tax in that country; and

(ii) would not be exempt from income tax in that country apart from the operation of an agreement applying to Australia and that other country relating to the avoidance of double taxation or of a law of that other country giving effect to such an agreement;

Section 23AF of the ITAA 1936 may consequently apply to income which is not excluded by subsection 23AF(17) of the ITAA 1936. It may therefore apply to income which is not exempt from tax in the foreign country, or in other words, income which is subject to tax in the foreign country.

Section 23AF of the ITAA 1936 was introduced by the Income Tax Assessment Amendment Act (No. 5) 1980. The House of Representatives Explanatory Memorandum to the Income Tax Assessment Amendment Bill (No. 5) 1980 (1980 EM) refers to section 23AF of the ITAA 1936 applying '…where the income is not taxed in that overseas country'. It is on the basis of that statement in the EM that the applicant contends that section 23AF of the ITAA 1936 is only ever applicable in relation to countries where there is no income tax regime for employment income.

The use of the words '…where the income is not taxed in that overseas country' are explained in the 1980 EM and by other provisions of section 23AF of the ITAA 1936.

Subsection 23AF(17) of the ITAA 1936, as originally enacted, stated as far as is relevant:

For the purposes of this section, income is excluded income if -

(a) the income is income to which paragraph (q) or (qa) of section 23 applies;

Under the heading 'Taxation relief for Australians working overseas on approved projects (Clause 3)', the 1980 EM summarises section 23AF of the ITAA 1936 as follows:

A new section is to be inserted in the income tax law to provide for exemption, either wholly or in part, of income derived by Australian resident individuals from personal services performed by them over a continuous period of 3 months or more in an overseas country on projects approved by the Minister for Trade and Resources where the income is not taxed in that overseas country : income derived overseas by non-residents of Australia, or such income derived by residents that is taxed in the country of source, is already exempt from Australian tax. The section will apply where services are performed for an Australian resident, the government of an overseas country or certain international bodies and will have effect in relation to income earned on projects which are approved and commence after 19 August 1980. (emphasis added)

The 1980 EM goes on to say:

Sub-section (17) will identify categories of income to which this section will not apply ("excluded income").

In some situations income that a person from Australia derives from overseas is already exempt from Australian tax. If the person has ceased to be a resident, the income is exempt (section 23(r) of the Principal Act) and section 23AF reflects this by limiting its scope to remuneration of people who are residents of Australia (see definition of "eligible foreign remuneration" in sub-section (18)).

If the person concerned is a resident, and the income is (broadly speaking) taxed in the overseas country it is exempt from Australian tax by reason of section 23(qa) (Papua New Guinea) or section 23(q) (other countries). Accordingly, sub-paragraph (a) will formally exclude from section 23AF income that is taxed in the country of source and is exempt from Australian tax by application of section 23(q) or 23(qa). (emphasis added)

Under sub-paragraph (b), income from the performance of services in another country that is exempt from tax in the other country solely because of the provisions of a double taxation agreement between Australia and that country, will not be exempt from Australian tax under this section. Such exemption provisions in double taxation agreements have been inserted in them on the basis that the income concerned will be taxed in Australia.

Hence the 1980 EM referred to section 23AF of the ITAA 1936 applying '…where the income is not taxed in that overseas country' because where income was taxed in the overseas country it would, at that point in time, have generally been exempt under section 23(q) or section 23(qa) of the ITAA 1936 and by virtue of paragraph 23AF(17)(a), section 23AF of the ITAA 1936 would not have applied.

However, the words 'not taxed in that overseas country' did not mean that section 23AF of the ITAA 1936 could apply only in relation to countries where there is no income tax regime for employment income or where employment income is not subject to income tax.

The original paragraph 23AF(17)(b) of the ITAA 1936 was also similar to the current paragraph 23AF(17)(b) of the ITAA 1936. It stated:

(b) the income is derived from sources in a country other than Australia and -

(i) is exempt from income tax in that country; and

(ii) would not be exempt from income tax in that country apart from the operation of an agreement between Australia and that other country relating to the avoidance of double taxation or of a law of that other country giving effect to such an agreement;

Hence the original paragraph 23AF(17)(b) of the ITAA 1936 also left scope for section 23AF of the ITAA 1936 to apply in relation to countries which had an income tax regime for employment income.

Secondly, it should not be expected that paragraph 83-240(1)(f) of the ITAA 1997 will always be met for payments that are received in consequence of termination on qualifying service on an eligible project that has been approved under section 23AF of the ITAA 1936, because section 83-240 of the ITAA 1997 and section 23AF of the ITAA 1936 use different tests to determine, as a consequence of the tax treatment in the foreign country, whether an amount will be exempt in Australia.

Section 23AF of the ITAA 1936 uses the test in paragraph 23AF(17)(b) which is set out above; that is, an amount is not exempt under section 23AF of the ITAA 1936 if the income is exempt from income tax in the foreign country and it is exempt in that country only because of a tax treaty or a law of that country giving effect to a tax treaty.

Section 83-240 of the ITAA 1997 uses the test in paragraph 83-240(1)(f) of the ITAA 1997; that is, an amount is not exempt under section 83-240 of the ITAA 1997 if the amount is exempt from income tax under the law of the foreign country.

Given the difference in the two tests, it is not hard to envisage cases where paragraph 83-240(f) of the ITAA 1997 will not be satisfied for payments relating to the termination of qualifying service even though eligible foreign remuneration from that same qualifying service satisfied section 23AF of the ITAA 1936.

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