Edited version of private advice

Authorisation Number: 1051810248700

Date of advice: 12 April 2021

Ruling

Subject: Income from an approved project exemption under section 23AF of the Income Tax Assessment Act 1936

Question

Is your income earned overseas from an approved project exempted from tax under section 23AF of the Income Tax Assessment Act 1936?

Answer

Yes

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

1 July 20XX to 30 June 20XX

The scheme commences on:

1 October 20XX

Relevant facts and circumstances

You are a resident of Australia for taxation purposes.

You are employed by an Australian employer XXXX.

You were sent to an approved project No: XXXX to work for XXXX on 2 projects the XXXX Project from October 20XX to January 20XX and XXXX from January 20XX to July 20XX.

You worked for XXXX days of which XXXX was covered under the project and XXXX days that was not covered as the section 23AF exemption expired for the project.

The approved project ended in April 20XX.

XXXX and XXXX attempted to re-negotiate a new contract, but the negotiations were unsuccessful. During the negotiations XXXX continued to work on the contract project. On the breakdown of the negotiations, XXXX ceased working on the contract on XX July 20XX.

You worked on the contract under your employment contract until XX July 20XX and paid under this contract until XX July 20XX.

You took leave without pay at the end of the contract and left XXXX on XX August 20XX returning to Australia.

On XX August 20XX, you were directed by your company to take Company Convenience Leave of Absence due to insufficient work.

You continued to be on leave until XX November 20XX and left the company at this time.

You received payments in May, June and July 2019 when the project was no longer an approved project under Austrade due to continuing negotiations and it was expected that the contract between the companies would be renewed and section 23AF under an approved project would likely have been granted and the project continued.

Relevant legislative provisions

Income Tax Assessment Act 1936, s23AF

Income Tax Assessment Act 1936, s23AG

Income Tax Assessment Act 1997, s6-5

Income Tax Assessment Act 1997, s6-15

Income Tax Assessment Act 1997, s6-20

Income Tax Assessment Act 1997, s11-15

Taxation Administration Act 1953, s12-35

Income Tax Assessment Act 1997, s50-5

Income Tax Assessment Act 1997, s50-50

The International Organisations (Privileges and Immunities) Act 1963

Reasons for Decision

Summary

Is income from an approved project exemption under section 23AF of the Income Tax Assessment Act 1936?

Detailed reasoning

Assessable income

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 purposes of subsection 6-5(2) of the ITAA 1997. However, as per section 6-20 of the ITAA 1997, 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.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not 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 23AF of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with income derived in respect of overseas approved projects.

Section 23AF of the 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 that is attributable to the qualifying service is exempt from tax.

However, section 23AF of the ITAA 1936 does not exempt excluded income. Subsection 23AF(17) of the ITAA 1936 provides income is excluded income if the income is exempt under section 23AG of the ITAA 1936 and exempt from tax in the overseas country.

Qualifying service includes time spent outside Australia working on the project, reasonable travel time between Australia and the project, absences due to accident or illness while engaged on qualifying service, and time spent on leave which accrued during the qualifying service (subsection 23AF(3) of the ITAA 1936).

All income directly attributable to qualifying service by the taxpayer on an approved project (for example, salary, wages, commission, bonuses, allowances, contractual payments and payments for recreation leave entitlements which accrue during the relevant period) is eligible for the exemption (subsection 23AF(18) of the ITAA 1936).

Taxation Ruling IT 2015 looks at the determination of period of qualifying service for contractors that are employed on a cyclical basis. The determination states that leave that accrues in respect of a period, during which employees are engaged on qualifying service on an approved project, is regarded as qualifying service. In your situation, you spend time on project relate work in Australia. As such, your cyclical arrangement is considered part of your qualifying 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 by the provisions of the International Organisations (Privileges and Immunities) Act 1963 (IOPI Act).

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.

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

Subsection 23AF(1) of the 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.

Qualifying service includes time spent outside Australia working on the project, reasonable travel time between Australia and the project, absences due to accident or illness while engaged on qualifying service, and time spent on leave which accrued during the qualifying service (subsection 23AF(3) of the ITAA 1936).

All income directly attributable to qualifying service by the taxpayer on an approved project (for example, salary, wages, commission, bonuses, allowances, contractual payments and payments for recreation leave entitlements which accrue during the relevant period) is eligible for the exemption (subsection 23AF(18) of the ITAA 1936).

However, even if your assignment is for more than 91 days you would still need to have met the other conditions of this subsection.

Eligible foreign remuneration

Subsection 23AF(18) of the ITAA 1936 defines 'eligible foreign remuneration', in relation to a person, as income that is derived by the person who is resident of Australia for taxation purposes, consisting of salary, wages, commission, bonuses or allowances derived by the person in his or her capacity as an employee of an eligible contractor.

An exemption under section 23AF will be available where:

(a) The eligible contractor has applied to Austrade and the project has been confirmed in writing to be an 'approved project' for the purposes of section 23AF; and

(b) An individual lodges an income tax return with the ATO covering the period (in whole or in part), and claims exemption from income tax with respect to eligible foreign remuneration earned whilst engaged on the approved project.

Subsection 23AF of the ITAA 1936 also defines 'eligible contractor' as:

•         a resident of Australia (for taxation purposes),

•         the Commonwealth, a State, a Territory, the Government of a country other than Australia or an authority of the Commonwealth, of a State, of a Territory or of the or of the government of a country other than Australia;

•         an organisation of which Australia and a country or countries other than Australia are members; or

•         an organisation that is constituted by a person or persons representing Australia and a person or persons representing a country or countries other than Australia, or an agency of an organisation to which this applies.

Furthermore, s23AF(6) of the ITAA 1936 states that if you have not worked under an approved project due to some unforeseen circumstances, where:

(a)a person was engaged on qualifying service on a particular approved project; and

(b) due to unforeseen circumstances, the person ceased to be engaged on qualifying service on that approved project,

the period during which the person is to be taken to have been engaged on qualifying service on that approved project shall, except for the purpose of determining whether income derived by the person is eligible foreign remuneration, be taken to include the additional period after the person ceased to be engaged on qualifying service on that approved project during which the person would, in the opinion of the Commissioner, have continued to be engaged on qualifying service on that approved project but for those unforeseen circumstances

Exempt income under section 23AG of the ITAA 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).

Subsection 23AG(1AA) of the ITAA 1936 provides that foreign earnings are not exempt from tax unless the continuous period of foreign service is directly attributable to any of the following:

a)    the delivery of Australia's overseas aid program by the individual's employer (except if that employer is an Australian Government Agency);

b)    the activities of the individual's employer in operating a public fund that:

              i.        is covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the ITAA 1997 international affairs deductible gift recipients): and

             ii.        meets the special conditions mentioned in that item.

c)    the activities of the individual's employer being a prescribed institution that is exempt from Australian tax (because of paragraphs 50-50 (c) or (d) of the ITAA 1997); or

d)    (d) the individual's deployment outside Australia as a member of a disciplined force.

e)    (e) an activity of a kind specified in the regulations.

In your case you do not meet the conditions of subsection 23AG(1AA) of the ITAA 1936, for the reasons explained below.

Application to your circumstances:

Your income is not exempted under section 23AG and not exempted from tax in Saudi Arabia. Therefore, as you engaged on a qualifying service on an approved overseas project for a continuous period of more than 91 days, the foreign remuneration you derived from the approved overseas project is exempt from tax pursuant to section 23AF of the ITAA 1936 to the expiration of the approved project.

As you are an Australian resident who provides service on an approved project in the foreign country for a continuous period of not less than 91 days and your income is taxed in Australia, you satisfy the conditions under section 23AF of the ITAA 1936.

You have provided information to confirm that your work was part of an approved project No: XXXX for the purpose of Section 23AF of the ITAA 1936You were an employee of XXXX that provided services to a foreign company overseas under this approved project as a contractor.

Furthermore, you have also advised that you continued to work on this assignment, after the approved project had ended as there were negotiations between the XXXX and XXXX and there was a likely assumption by XXXX that the project would continue and further approval would be granted as an approved project. As an employee of the contractor to the approved project, you were not aware of the circumstances and continued to work on the project as directed by your employer.

Subsection 23AF(6) of the ITAA 1936 provides for any unforeseen circumstances that may cause a person to cease to be engaged on qualifying service on that approved project. On the breakdown of the negotiations, you were advised to cease working on the project on XX July 20XX. As such, you will be eligible for the exemption under Section 23AF(6) of the ITAA 1936 until XX July 20XX. Any earning after this date would be ineligible for any tax exemption.

Therefore, the income you derive from the foreign country is exempt from income tax in Australia under section 23AF of the ITAA 1936 to XX July 20XX.

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