Edited version of private advice

Authorisation Number: 1051808548906

Date of advice: 22 February 2021

Ruling

Subject: Foreign income and a foreign income tax offset (FITO)

Issue 1 - Assessable income

Question 1

Is the income derived from your role as a consultant working on an overseas project based in Country A assessable whilst you are performing the role in Australia?

Answer

Yes.

Question 2

Is the income derived from your role as a consultant working on an overseas project based in Country A assessable whilst you are performing the role in Country A?

Answer

Yes.

Issue 2 - Foreign income tax offset (FITO)

Question 1

Can you claim a foreign income tax offset (FITO) on income derived from your role as a consultant working on an overseas project based in Country A that is assessable in Australia whilst you are performing the role in Australia?

Answer

No.

Question 2

Can you claim a foreign income tax offset (FITO) on income derived from your role as a consultant working on an overseas project based in Country A whilst you are performing the role in Country A?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You are a citizen of Australia.

You are undertaking a work assignment, having been engaged as a consultant (and not as an employee) working on an overseas project based in Country A (project A).

Project A is funded through a specific Investment Loan of a substantial amount from an international organisation to the organisation which oversees the running of the project (a Country A Governmental department) for the period 20XX to 20XX.

The project work is connected to a Country A Government Department in a development project and associated infrastructure for the training and upskilling in the education sector of Country A.

You work directly for and report to the Country A Government Department on the project.

After making relevant enquires with the Department of Foreign Affairs and Trading (DFAT), you have confirmed that your foreign service is not directly attributable to the delivery of Australian ODA.

The Country A Government Departmentare not operating a public fund established to provide monetary relief to people in a developing foreign country who are distressed as a result of a disaster.

The project is not an approved project for the purpose of Section 23AF of the ITAA 1936.

Your role is an 'International Consultant for specific purpose'.

The Remuneration is currently capped at a certain amount.

The aim of the development project is to achieve certain outcomes within the Country A education sector.

You have supplied a copy of the contract which outlines the terms of your engagement for the work assignment.

The contract is dated early 20XX and is between The Project Management Unit of the Project (the client) and you (the consultant).

The contract states that you shall perform the services during the period commencing early 2020 and continuing through to the end of 20XX in the capacity as a consultant.

During initial negotiations you were expecting to work in Country A but due to the increasing COVID-19 risks in early 2020 it was agreed that you could work remotely with 21 person days as stated in the contract. However, this has since changed due to COVID-19 and you will be working from Australia until at least mid-20XX.

You have been working remotely in Australia on the project since early-to-mid 20XX continuously, however it was always your intention to work in Country A on the project, where you would be completing the project work from the Country A Government offices you would have access to.

The contract states that it is a 60- day contract, however you expect the number of days to be extended as you have been required to undertake unexpected preparatory work prior to the stated works.

If the COVID-19 situation changes and you can travel to Country A to complete your work assignment as per your original intention, you will remain a resident of Australia for taxation purposes.

Your income will not be taxed in Country A even if performed in Country A, and you have been advised by authorities within the Country A Government Department that there were specific reasons for this.

Your individual consulting contract will be tax exempted in Vietnam, and this tax exemption will be applied if the task is performed in Country A if the expert is guaranteed to stay in Country A for less than 183 days per calendar year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 6-20

Income Tax Assessment Act 1997 Section 50-5

Income Tax Assessment Act 1997 Section 50-50

Income Tax Assessment Act 1997 Section 770-5

Income Tax Assessment Act 1997 Subsection 770-5(2)

Income Tax Assessment Act 1997 Subsection 770-10(1)

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Section 23AF

Income Tax Assessment Regulations 1997 Regulation 50-50.01

Income Tax Assessment Regulations 1997 Regulation 50-50.02

International Tax Agreements Act 1953

Agreement between the Government of Australia and the Government of the Socialist Republic of Vietnam for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (Article 14)

International Organisations (Privileges and Immunities) Act 1963

Specialized Agencies (Privileges and Immunities) Regulations 1986

Reasons for decision

Issue 1 - Assessable income

Questions 1 and 2

Summary

The income derived from your work on the project is only assessable in Australia under article 14 of the Country A Agreement where you are performing the work remotely in Australia, and there are no other exemptions from taxation for your foreign income whilst you are performing the work remotely in Australia.

This income is also only assessable in Australia under article 14 of the Country A Agreement where the work is performed in Country A.

Detailed reasoning

Assessable income - general

Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary and statutory income derived directly and indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business.

Therefore, the payments you receive from the Country A Government Department for your work on the project are ordinary income and will form part of your assessable income under section 6-5 of the ITAA 1997.

The Country A Agreement

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Agreement between the Government of Australia and the Government of Country A for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (The Country A Agreement) is listed in section 5 of the Agreements Act.

The Country A Agreement is located on the Austlii website (http://www.austlii.edu.au/) in the Australian Treaties Series database. The Country A agreement operates to avoid the double taxation of income received by residents of Australia and Country A.

Article 14(1) of the Country A Agreement provides that income derived by an individual who is a resident of Australia in respect of professional services or other independent activities of a similar character shall be taxable only in Australia unless a fixed base is regularly available to the individual in Country A for the purpose of performing the individual's activities. If such a fixed based is available to the individual, the income may also be taxed in Country A but only so much of it as is attributable to the activities exercised from that fixed base.

Article 14(2) of the Country A Agreement provides that the term "professional services" includes services performed in the exercise of independent educational or teaching activities.

Income derived by you from your work assignment on the project constitutes 'professional services' as defined under Article 14(2) of the Country A Agreement.

Fixed base

A " fixed base " is considered to have a similar meaning to " permanent establishment " in Article 5 of the Country A Agreement. This conclusion is supported by the deletion of Article 14 from the OECD Model Tax Convention on 29 April 2000 on the basis of the report entitled " Issues Related to Article 14 of the OECD Model Tax Convention ". That report found there was no intended difference between the terms "fixed base " and " permanent establishment " that is a prerequisite for business profits being taxable in accordance with Article 7 of the Country A Agreement.

The OECD Model Convention commentary stated before the deletion of article 14:

" Even if Articles 7 and 14 are based on the same principles, it was thought that the concept of permanent establishment should be reserved for commercial and industrial activities. The term ' fixed base ' has therefore been used. It has not been thought appropriate to try to define it, but it would cover, for instance, a physician's consulting room or the office of an architect or a lawyer. A person performing independent personal services would probably not as a rule have premises of this kind in any other State than of his residence. But if there is in another State a centre of activity of a fixed or a permanent character, then that State should be entitled to tax the person's activities."

Application to your circumstances

You are an Australian resident for taxation purposes and you are an Australian citizen.

You are undertaking a work assignment, having been engaged as a consultant (and not as an employee) working on an overseas project based in Country A (project A).

Project A is funded through a specific Investment Loan of a substantial amount from an international organisation to the organisation which oversees the running of the project (a Country A Governmental department) for the period 20XX to 20XX.

The project work is connected to a Country A Government Department in a development project and associated infrastructure for the training and upskilling in the education sector of Country A.

You work directly for and report to the Country A Government Department on the project.

During initial negotiations you were expecting to work in Country A but due to the increasing COVID-19 risks in March 2020 it was agreed that you could work remotely in Australia with 21 person days as stated in the contract. However, this has since changed due to COVID-19 and you will be working from Australia until at least the end of 20XX.

If you are able to do the work in Country A, you will be doing this from the offices of the Country A Government Department which you will have access to in this scenario.

As such, whilst you are working remotely in Australia on the project, the income you will derive from this work assignment will only be assessable in Australia under article 14(1) of the Country A Agreement, as you will be performing the work as an independent consultant relating to educational activities, with no fixed base regularly available to you in Country A, given that you will be performing the project work in Australia.

In addition, in the event that you are able to perform the work in Country A, the income you derive from this work assignment will still only be assessable in Australia under article 14(1) of the Country A Agreement, as you would still have no 'fixed base' available to you for the purpose of performing the work assignment.

Whilst we acknowledge that you would have access to the offices of The Country A Government Department in the event you are able to work on the project in Country A, this space is not a 'fixed base' in Country A, as you would not be your own exclusive office to use to provide your services from (in reference to the OECD Model Convention commentary before the deletion of article 14).

Other possible exemptions from taxation for your foreign income whilst you are performing the work remotely in Australia

In some cases, a provision of Australia's tax law or of another Commonwealth law might apply to provide an exemption from taxation on income such as salary and wages earned from certain types of employment.

In cases where an individual is employed overseas on Foreign Service, the provisions of either section 23AG or 23AF of the Income Tax Assessment Act 1936 may provide an exemption from taxation in Australia on the salary and wages earned from that Foreign Service.

In cases where an individual's foreign service relates to employment with or contracted work for an international organisation, an exemption from taxation may also be provided under section 6-20 of the Income Tax Assessment Act 1997 (ITAA 1997) by the provisions of the International Organisations (Privileges and Immunities) Act 1963 (IO(P&I)Act).

Exempt income under section 23AG of the Income Tax Assessment Act 1936

Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings of an Australian resident derived during a continuous period of foreign service of not less than 91 days employment in a foreign country are exempt from income tax in Australia.

Foreign earnings includes income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).

You have advised that you are not an employee for this work assignment. As such you are not an employee of the Country A Government Department and no exemption is available under section 23AG of the ITAA 1936.

In addition, you would not have gained the exemption under section 23AG even if you had have been engaged by your own Company which then contracted to the Country A Government Department and the service otherwise qualified for 23AG exemption which this project would not.

This is because the exemption under section 23AG does not apply to personal services income.

Paragraph 4 of Taxation Ruling TR 2005/3W - Income tax: attributed personal services income that is foreign income - allowance of a foreign tax credit to an individual where foreign tax paid by a personal services entity provides that Subsection 23AG(1AA) of the ITAA 1936 applies to foreign earnings derived on or after 1 July 2009 from foreign service performed on or after 1 July 2009, and limits the types of employment to which section 23AG can apply. Following the introduction of subsection 23AG(1AA), section 23AG will not apply to the types of employment which lead to attributed personal services income. This means that section 23AG will not apply to attributed personal services income because of the operation of subsection 23AG(1AA), as well as for the reasons set out in this Ruling.

Exempt income under section 23AF of the Income Tax Assessment Act 1936

Subsection 23AF(1) of ITAA 1936 provides that where an Australian resident has been engaged on a 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 is exempt from tax in Australia.

Approved project

Subsections 23AF (18) and (11) of the ITAA 1936, also clarify that an approved project must be a project that, the Trade Minister is satisfied is an eligible project and will be, in the national interest and the Minister, has signed approval for the project.

The granting of approved project status is currently administered by Austrade, as delegated by the Trade Minister.

This project is not an approved project.

Therefore you are not eligible for the exemption under Section 23AF of the ITAA 1936.

Exemption from taxation under the provisions of the International Organisations (Privileges and Immunities) Act 1963 (IO (P&I)A)

Taxation Ruling TR 2019/D1 considers income of international organisations and persons connected with them that is made exempt from income tax under section 6-20 of the ITAA 1997 by section 6 of the IOPIA.

The IOPIA is a Commonwealth Act under which an international organisation, and persons engaged by it, may be given certain privileges and immunities including tax exemptions.

The IOPIA applies to an international organisation if regulations declare it to be an international organisation for the purposes of the IOPIA.

A separate regulation is made for each international organisation or group of international organisations to declare that organisation to be an international organisation that falls under the IOPIA.

No such regulation has been made for the Country A Government Department.

Therefore the provisions of the IO(P&I)A (including any potential for exemption from taxation) do not apply to the Country A Government Department and persons engaged by them.

Issue 2 - Foreign income tax offset

Questions 1 and 2

Summary

Where foreign tax is paid in relation to income derived by an Australian resident from foreign sources, a credit (called a foreign income tax offset) may be allowed against the Australian income tax payable on that foreign income.

However, if foreign tax was not imposed in accordance with the relevant double tax agreement, then a foreign income tax offset is not available.

In your case, as Australia has sole taxing rights to the income where you are working both remotely in Australia and also when you are working in Country A on the project under article 14(1) of the Country A Agreement, you are not entitled to a FITO in either of these situations, despite the presence of the 'tax sparing provisions' contained in Article 23 of the Country A Agreement.

Detailed reasoning

Article 23 of the Country A Agreement deals with the elimination of double taxation. It provides that, subject to the provisions of the law of Australia which relate to the allowance of a credit against Australian tax of tax paid in a country outside Australia, Country A tax paid under the law of Country A and in accordance with the Country A Agreement, in respect of income derived by a resident of Australia from sources in Country A shall be allowed as a credit against Australian tax payable on that income.

Article 3 of the Country A Agreement contains definitions, and states that in the Country A Agreement:

•         the term 'tax' means Australian tax or Country A tax, but does not include any penalty or interest imposed under the law of either country relating to its tax.

•         the term 'Australian tax' means tax imposed by Australia, being tax to which the Agreement applies by virtue of Article 2 (that is, income tax and resource rent tax in respect of offshore projects relating to exploration for, or of, petroleum resources, imposed under the federal law of Australia), and

•         the term 'Country A tax' means tax imposed by Country A, being tax to which the Agreement applies by virtue of Article 2 (that is, income tax, profit tax and withholding tax).

Under Article 23 of the Country A Agreement, if Country A tax is paid under the law of Country A and in accordance with the Country A Agreement in relation to income derived by an Australian resident from sources in Country A, a credit may be allowed against the Australian tax payable on that income.

Tax sparing provisions (article 23 of the Country A Agreement)

Articles 23(3) to 23(8) of the Country A Agreement contain what is known as the "tax sparing provisions" under which an Australian resident for tax purposes who receives income on which Country A, under specified measures, has forgone tax, will obtain tax credit relief as if the Country A tax forgone had actually been paid.

Article 23(3) of the Country A Agreement is the main provision, which provides that the Country A tax paid, for which Australia shall give a credit, is to include any "Country A tax foregone", which is defined in Article 23(4) as the Country A tax which would have otherwise have been payable if not for an applicable exemption or tax reduction, less the amount of Country A tax actually paid.

Articles 23(5) to 23(7) of the Country A Agreement contain three further tests to determine whether an exemption or reduction under one of Country A's tax concessions qualifies for the tax sparing as follows:

•         The concession must be granted under one of Country A's laws specified in Article 23(5);

•         The relevant income must be from an activity which meets the conditions set out in at least one of the subparagraphs in article 23(6); and

•         The relevant income must not be from an activity or arrangement described in Article 23(7).

The application of Article 23 of the Country A Agreement is also subject to the provisions of the law of Australia which relate to the allowance of a credit against Australian tax of tax paid in a country outside Australia (this credit is now called a foreign income tax offset). Therefore, it is also necessary to consider the foreign income tax offset provisions of the Australian income tax law.

Foreign income tax offsets

The foreign income tax offset provisions, which apply to income years from 1 July 2008, are set out in Division 770 of the Income Tax Assessment Act 1997 (ITAA 1997).

Subsection 770-10(1) of the ITAA 1997 provides that a Foreign Income Tax Offset (FITO) can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.

Section 770-5 of the ITAA 1997 states that the object of Division 770 is to relieve double taxation where you have paid foreign income tax on amounts included in your assessable income, and you would apart from Division 770, pay Australian income tax on the same amounts. Subsection 770-5(2) states:

'To achieve this object, this Division gives you a tax offset to reduce or eliminate Australian income tax otherwise payable on those amounts.'

The taxpayer must have paid the foreign income tax before an offset is available. A taxpayer is deemed to have paid the foreign income tax if the foreign income tax has been withheld from the income at its source.

Application to your circumstances

Under Article 23 of the Country A Agreement, if Country A tax is paid under the law of Country A and in accordance with the Country A Agreement in relation to income derived by an Australian resident from sources in Country A, a credit may be allowed against the Australian tax payable on that income.

However, as previously explained, whilst you are working both remotely in Australia and also if you worked in Country A on the project, the income you will derive from this work assignment will only be assessable in Australia under article 14(1) of the Country A Agreement.

Country A does not have any rights to impose tax on the income under the Country A Agreement whilst you are working remotely in Australia on the project, and also when you are working in Country A on the project.

Therefore, where Country A has no taxing rights to your foreign income under article 14(1) of the Country A Agreement, foreign tax cannot be imposed in accordance with the terms of the Country A Agreement (article 23).

The fact that foreign tax would not have been imposed on your foreign income because of the tax exemption granted on your income by the Country A authorities, the "tax sparing provisions" contained in articles 23(3) to 23(7) of the Country A Agreement is not relevant as Country A has no taxing rights on your income.

Therefore, you are not entitled to a FITO under section 770-10 of the ITAA 1997 as the income is only assessable in Australia.

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