Edited version of private advice

Authorisation Number: 1051832827896

Date of advice: 29 April 2021

Ruling

Subject: Foreign income

Question 1

Are your foreign earnings whilst posted with an International organisation and physically working in Country A and on paid leave exempt from tax in Australia under section 23AG of the Income Tax Assessment Act 1936?

Answer

Yes.

Question 2

Are your foreign earnings whilst posted with an International organisation but physically working in Australia remotely on-line whilst you completed a compulsory quarantining period just prior to you taking paid leave exempt from tax in Australia under section 23AG of the Income Tax Assessment Act 1936?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You have been engaged by an International organisation (the organisation) as a Project Manager with effect from mid- 20XX on a specific development project (the project).

You are employed by the organisation as an employee.

The duration of your contract is from mid-20XX to late-20XX.

The original intention was to be located full-time in Country A working on the project.

However, due to the COVID-19 travel restrictions and new travel approval processes between the Australian and Country A Governments the date you were to commence working on the project in Country A was delayed.

The organisation has been actively working with both Governments to hasten the travel approval process, however due to the unforeseen circumstances you have been working full-time on the project from home in Australia from the contract start date (mid-20XX), interacting with the project team in Country A.

You eventually obtained approval to travel to Country A, having arrived there in late- 20XX, where you commenced working on the project in Country A.

As such, your period of foreign service began in late-20XX, and it will cease in late-20XX.

As such you will be working in Country A for a period greater than 91 days.

You will be remaining in Country A following your period of Foreign Service, as you anticipate continuing to work on the project post late-20XX, as negotiations are currently taking place to extend the contract between the Department of Foreign Affairs and Trade (DFAT) and the organisation.

You plan to take 10 days of annual leave accrued as part of your foreign service from mid-20XX where you will be in Australia, and you plan on returning to Country A directly following this period of leave.

However you plan to actually arrive in Australia a couple of weeks before the leave commences where you will be required to quarantine (due to the COVID-19 pandemic) for 14 days. As such you will be quarantining in Australia for 14 days prior to you commencing the period of leave, and during this period you will be working on the project remotely (on-line) in Australia.

You also intend on taking further future leave in Country A which will be accrued as part of your foreign service, but you have no further trips back to Australia scheduled.

You have supplied a copy of the employment contract with the organisation which confirms that you will be entitled to 20 days recreational leave per year of service.

The employment contract also specifies in several sections that you are defined as an employee, and not as a contractor.

You have provided a letter from the organisation which confirms that your foreign service is directly attributable to the delivery of Australian official overseas development assistance.

In Country A, if you are an employee, your income is employment income and is therefore liable to tax.

Australia has signed a double tax agreement (DTA) with Country A (The Country A agreement).

Article X of The Country A agreement provides that salaries, wages, and similar remuneration derived by an individual who is a resident of Australia in respect of an employment can be taxed in Country A in circumstances which include where the employment is exercised in Country A for a period or periods exceeding 90 days in a year of income.

The Treaty on Development Co-operation between the Government of Australia and the Government of Country A (the Treaty) sets out arrangements relating to development co-operation between Australia and Country A.

Article X of the Treaty covers Development Assistance and provides that Development assistance shall be provided as part of an agreed program of co-operation which contributes to development and self-reliance in Country A, allows for forward planning and implementation in accordance with policies and priorities set by the Government of Country A, and takes due account of the Government of Country A and the Government of Australia's policies on development co-operation.

Clause X of the Annex listed at the end of the Treaty (procedures applying to Jointly Programmed Aid) - (the Annex) provides that in relation to activities under the annex, the co-ordinating authorities (the Australian Agency for International Development of the Department of Foreign Affairs and the Country A Department of Treasury and Planning Trade) and may enter into specific subsidiary arrangements for their implementation.

Your income is exempt from tax in Country A under a specific clause of the Annex.

Clause X of the Subsidiary Arrangement between the Government of Australia and the Government of Country A relating to the development activity undertaken by the project (the Subsidiary Arrangement) provides that the terms of the abovementioned Treaty apply to the Subsidiary Arrangement.

Clause X of the Subsidiary Arrangement also provides that the Government of Country A will facilitate the deployment of Government of Australia funded personnel required for the purposes of the program by granting exemption from income or other taxes on salaries and allowances.

You are not liable for tax in Country A due to clause X of the Subsidiary Arrangement.

You have supplied written confirmation from the organisation that your foreign service is covered under the Subsidiary Arrangement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Subsection 6-15(2)

Income Tax Assessment Act 1997 Section 11-15

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 purposes 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 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 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with exempt foreign employment income.

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 employee for this work assignment. In addition the employment contract also specifies in several sections that you are defined as an employee, and not as a contractor. As such an exemption is available under section 23AG 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:

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

•         the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund;

•         the activities of the individual's employer being a prescribed institution that is exempt from Australian tax; or

•         the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force.

In your case you meet the conditions of subsection 23AG (1AA) of the ITAA 1936 as you have supplied a letter from your employer which confirms that your foreign service is directly attributable to the delivery of Australian official overseas assistance by your employer.

Continuous foreign service

For the exemption from Australian tax to apply, your foreign service must be for a continuous period of 91 days or more.

Subsection 23AG(6) of the ITAA 1936 treats certain temporary absences from foreign service as forming part of the period of foreign service. The Commissioner's view on temporary absences is discussed in Taxation Determination TD 2012/8 Income tax: what types of temporary absences from foreign service form part of a continuous period of foreign service under section 23AG of the Income Tax Assessment Act 1936?

Absences counted as foreign service

In certain circumstances, temporary absences from foreign service (such as time spent in Australia) still count as a period of foreign service. For the absence to count as foreign service, it must be during a scheduled period of foreign service and be both:

•         in accordance with the terms and conditions of the foreign service, and

•         for one of the following reasons

-        recreation leave on full pay that is attributable to the period of foreign service

-        absence from work due to an accident or illness of yours

-        absence from work due to an accident or illness of a person other than you, including

the death of another person, or

•         short term absences for reasons directly related to your continuing foreign-service engagement (that is, work-related trips directly related to the foreign service), provided the absences are not excessive by comparison with the scheduled period of foreign

service.

An absence from foreign service because you have returned to Australia as a result of COVID-19 and commenced working in Australia is not a temporary absence from foreign service that falls into these situations. You are returning without knowing when you can recommence your service in the foreign country. The same principle will apply to periods where you are required to quarantine in Australia after arriving back from an overseas country to commence annual leave in Australia.

Treating two separate periods as one continuous period (one-sixth rule)

Absences that would otherwise break the continuity of your period of service for the purposes of the 91 days or more requirement can be bridged by applying the one-sixth test. The one-sixth test means that as long as your absence does not exceed one-sixth of your period of service up to that point, the absence will not break the continuity of your service.

However, the time spent on these type of absences are not treated as foreign service.

Application to your circumstances

You plan to take 10 days of annual leave accrued as part of your foreign service from mid-20XX where you will be in Australia and you plan on returning to Country A directly following the period of leave.

However you plan to actually arrive in Australia 14 days prior to the period of leave where you will have to quarantine in Australia due to COVID-19 for 14 days. During this period you will be working on the project remotely (on-line) in Australia.

You also intend on taking further future leave in Country A which is accrued as part of your foreign service, but you have no further trips back to Australia scheduled.

The period of the leave taken is an absence counted as foreign service as the leave was accrued as part of your foreign service.

However, the 14 day period where you will be quarantining in Australia and working on the project remotely (on-line) in Australia is not an absence that will count as foreign service.

However, when applying the abovementioned one-sixth test, you had already completed over 100 days of foreign service prior to the 14- day period of quarantine. As the 14 day absence from your foreign service does not exceed one-sixth of your first period of foreign service, the first period of foreign service (from late-20XX to mid-20XX) and the second period of foreign service (commencing from the first day of your period of leave taken on mid-20XX onwards) can be treated as continuous foreign service.

However as stated above the 14- day absence for the quarantine period does not itself count as foreign service.

As such you satisfy the 91 days continuous foreign service, and, with the exception of the salary you received during the period where you will be quarantining in Australia for 14 days just prior to you taking leave (which as stated above is not an absence that will count as foreign service) the salary you receive is derived from your foreign service and is foreign earnings from foreign service for the purposes of subsection 23AG (1) of the ITAA 1936

However, subsection 23AG(2) of the ITAA 1936, prevents the exemption under subsection 23AG(1) of the ITAA 1936 where the income is exempt from income tax in the foreign country only because of one or more of the following conditions:

•         a double tax agreement or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b));

•         the foreign country exempts from income tax, or does not provide for the imposition of income tax on, income derived in the capacity of an employee, income from personal services or similar income (paragraphs 23AG(2)(c) and (d)); or

•         a law or international agreement dealing with diplomatic or consular privileges and immunities, or privileges and immunities of persons connected international organisations (paragraphs 23AG(2)(e), (f) and (g)).

In your case, it is evident that your employment income is not exempt from tax in Country A for any of the above reasons that are listed in subsection 23AG(2) of the ITAA 1936.

In Country A, if you are an employee, your income is employment income and is therefore liable to tax.

In addition, as your work assignment will be exercised in Country A for a period exceeding 90 days, Article X of The Country A agreement will not provide a tax exemption in Country A on your foreign earnings.

The Treaty on Development Co-operation between the Government of Australia and the Government of Country A (the Treaty) sets out arrangements relating to development co-operation between Australia and Country A.

Clause X of the Annex listed at the end of the Treaty (procedures applying to Jointly Programmed Aid) - (the Annex) provides that in relation to activities under the annex, the co-ordinating authorities (the Australian Agency for International Development of the Department of Foreign Affairs and the Country A Department of Treasury and Planning Trade) and may enter into specific subsidiary arrangements for their implementation.

Your income is exempt from tax in Country A under a specific clause of the Annex.

Clause X of the Subsidiary Arrangement between the Government of Australia and the Government of Country A relating to the development activity undertaken by the project (the Subsidiary Arrangement)provides that the terms of the abovementioned Treaty apply to the Subsidiary Arrangement.

Clause X of the Subsidiary Arrangement also provides that the Government of Country A will facilitate the deployment of Government of Australia funded personnel required for the purposes of the program by granting exemption from income or other taxes on salaries and allowances.

You have supplied written confirmation from the organisation that your foreign service is covered under the Subsidiary Arrangement.

Therefore, subsection 23AG(2) of the ITAA 1936 will not apply to deny an exemption under subsection 23AG(1) of the ITAA 1936.

Conclusion

Accordingly, as you satisfy all the exemption conditions provided for under section 23AG of the ITAA 1936, the foreign earnings you derived from your overseas work assignment whilst posted with the organisation and physically working in Country A is not assessable in Australia under section 6-5(2) of the ITAA 1997.

The income you earn from work you do while located in Australia will not be exempt income and will therefore be assessable to you in Australia. This is because the income you earn from work in Australia is not from service in a foreign country.

As such, the income you derived from your work assignment whilst you were physically working in Australia is assessable in Australia under section 6-5(2) of the ITAA 1997.

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