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Edited version of your written advice
Authorisation Number: 1012753041202
Ruling
Subject: PAYG Withholding
Question and Answer
As an employer are you required to withhold an amount, under the Pay As You Go Withholding (PAYG(W)) rules from payments made to an employee while they are on long term leave of absence?
Yes
This ruling applies for the following periods
Year ended 30 June 2014
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
The scheme commences on
01 June 2014
Relevant facts and circumstances
An employee applied for, and was successful in being appointed to a position in Country X. The role commenced late in 20XX for a period of 2 years.
The employee will be responsible solely to the Country X employer and the terms and conditions of their service are outlined in an agreement. This agreement notes that the employee will be solely responsible to the Country X employer
As part of the arrangement the employee remains subject to their Australian employers professional standards as an ongoing employee. They have been granted leave without pay for the duration. This leave is counted towards Long Service Leave only, no annual leave or personal leave will accrue during the period.
It is the intention of the Australian employer to pay the employee their Australian salary for the period of foreign service in order to address the difference in salary between their current position and the new role. To facilitate this, the Country X employer will pay into a specific bank account, controlled by the Australian employer, the net amount of the employees Country X salary (i.e. gross salary less an amount withheld for Country X taxation). This bank account will be reconciled and cleared monthly by the Australian employer. The Australian employer will pay the employees Australian salary directly into the employees Australia bank account.
The employee's contract states that they will be subject to Country X taxation. The laws of Country X provide for the imposition of income tax and do not generally exempt employment income from income tax.
For the duration of the foreign service, the employee will be a resident of Australia for tax purposes.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 23AG,
Tax Administration Act 1953 Division 12 of Part 2-5 of Schedule 1
Reasons for decision
Section 12-35 of Schedule 1 to the Tax Administration Act 1953 (TAA 1953) provides that an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).
Subsection 12-1(1) of Schedule 1 to the TAA 1953 provides an entity need not withhold an amount under section 12-35 or 12-45 from a payment if the whole of the payment is exempt income of the entity receiving the payment.
Therefore, to work out whether an amount needs to be withheld from a payment it is necessary to determine whether the payment is exempt income of the payee.
Section 11-15 of the Income Tax Assessment Act 1997 (ITAA 1997) lists those provisions dealing with income that may be exempt. Included in the list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with exempt foreign employment income.
Section 23AG of the ITAA 1936 provides an exemption from Australian tax on the foreign earnings derived by an Australian resident individual from foreign service in which they have been engaged continuously for at least 91 days.
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 an activity that is listed in subsection 23AG(1AA) of the ITAA 1936.
Further, certain foreign earnings that meet the requirements of subsections 23AG(1) and 23AG(1AA) of the ITAA 1936 may not be exempt from tax under section 23AG of the ITAA 1936 if the amount is exempt from income tax in the foreign country only because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936.
Foreign earnings includes income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).
Accordingly, the basic tests for the exemption of foreign employment income in section 23AG of the ITAA 1936 are:
1. the taxpayer must be a 'resident of Australia';
2. the taxpayer must be 'engaged in foreign service';
3. the foreign service must be for a 'continuous period of not less than 91 days';
4. the taxpayer must derive 'foreign earnings' from that 'foreign service';
5. the foreign earnings must not be covered by subsection 23AG(2) of the ITAA 1936; and
6. the foreign service must be directly attributable to an activity that is listed in subsection 23AG(1AA) of the ITAA 1936;
The employee and their employment in Country X meet first five (5) conditions above. Therefore, the remuneration from that service will be exempt if the service is directly attributable to an activity that is listed in subsection 23AG(1AA) of the ITAA 1936.
Specific employment activities
Subsection 23AG(1AA) of the ITAA 1936 restricts the foreign earnings that are exempt from tax to earnings where the continuous period of foreign service is directly attributable to any of the following:
(a) the delivery of Australian official development assistance by the person's employer;
(b) 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 Income Tax Assessment Act 1997 (international affairs deductible gift recipients);
(c) 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 Income Tax Assessment Act 1997 (prescribed institutions located or pursuing objectives outside Australia);
(d) the person's deployment outside Australia as a member of a disciplined force by:
the Commonwealth, a State or a Territory; or
an authority of the Commonwealth, a State or a Territory;
(e) an activity of a kind specified in the regulations.
The Country X employment does not satisfy conditions (b) to (e) above.
Therefore, for the remuneration to be exempt the employee's foreign service must be directly attributable to the delivery of Australian official development assistance by their employer.
Under the arrangement it is clear that the Country X employer is not engaged in the delivery of Australian ODA, accordingly paragraph 23AG(1AA)(a) of the ITAA 1936 is not satisfied.
As a consequence, the employee's foreign earnings are not exempt from Australian income tax under subsection 23AG(1) of the ITAA 1936 and the Australian employer is obliged to withhold PAYG(W) amounts from the remuneration.
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