Edited version of private advice

Authorisation Number: 1051844468838

Date of advice: 26 May 2021

Ruling

Subject: Section 23AG exempt income

Question

Is your employment income derived while working remotely from Australia instead of performing your work locally in the foreign country exempt from taxation in Australia under Section 23AG of the Income Tax Assessment Act 1936?

Answer

No

This ruling applies for the following period periods:

Year ended 30 June 2020

Year ended 30 June 2021

The scheme commences on:

1 July 2019

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You have been working in Country A.

Your employer treated your income as exempt in Australia while you were in Country A as they understand you are providing Official Development Aid and your income is not taxable in Country A because of a Memorandum of Understanding (MOU) between Australia and Country which exempts your income from tax in that country during your employment.

You were forced to return to Australia as were all people in your circumstance.

You continued all your duties that would have been completed while in Country A, the only difference is that they were preformed remotely from Australia.

You worked according to the Country A time zone and followed Country A not Australian Public Holidays.

You continued doing your regular role for the entire period, until you changed jobs, while in Australia.

Reasons for decision

As a general rule, and under the provisions of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of an Australian resident taxpayer includes all the ordinary income they earn from all sources, in or out of Australia in an income year.

Income in the form of salary, wages and allowances are all types of ordinary income.

Although a payment may be considered ordinary income and will generally be assessable under the provisions of section 6-5 of the ITAA 1997, there are some instances where ordinary income may be excluded from an individual's assessable income in Australia. As per section 6-20 of the ITAA 1997 this includes where a specific provision of the tax law makes the income exempt from taxation in Australia.

Exemption can be provided under 23AG, specifically 23AG(1), for a continuous period of 91 days of foreign service when various conditions are met.

At issue here is the taxation of the income earned while you were working remotely from Australia rather than on site in Country A.

Subsection 23AG(6) deals with absence from work on various types of leave and because of accident or illness and whether this can be taken to be foreign service.

It says in part

For the purposes of this section, a period during which a person is engaged in foreign service includes any period during which the person is, in accordance with the terms and conditions of that service:

...

(b) absent from work because of accident or illness.

While you returned to Australia because of a decision because made as a result of COVID-19 you did not cease work - you simply worked on the same duties but remotely from Australia. Therefore, this cannot be treated as an absence.

Is the work performed from Australia 'foreign service'?

Meaning of Foreign Service

Subsection 23AG(7) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that foreign service means service in a foreign country as the holder of an office or in the capacity of an employee.

Section 2 of the Acts Interpretation Act 1901 provides that this Act applies to all Acts unless a contrary intention appears. Section 2B of the Act defines foreign country as follows:

foreign country means any country (whether or not an independent sovereign state) outside Australia and the external Territories.

There is nothing contained in either section 23AG or the ITAA 1936 more generally which would suggest that there is a contrary meaning and that this meaning should not apply.

Australia is not a foreign country for the purposes of the application of section 23AG of the ITAA 1936. Therefore, service undertaken in Australia cannot be regarded as foreign service.

Indeed, in paragraph 9 of Chaudhri v Commissioner of Taxation [2001] FCA 554 (the Chaudhri case) the Full Federal Court made it clear that it should apply in this way.

At paragraph 26 of the Chaudhri case the court considered the meaning of country. It stated:

Ultimately, we think that we should return to the ordinary English use of the word "country" in the context of that being a place where personal service such as employment may be engaged in and where income may be derived. In that context, ordinary usage would not suggest that the high seas, or for that matter some parts of them, were in a composite sense to be regarded as a country, or for that matter a series of countries. Rather the ordinary meaning of the expression "foreign country" in modern usage looks to a political entity, be that a tract of land, a district, or a group of islands. It does not extend to an ocean or region of the sea.

Therefore, in line with the Chaudhri case the words foreign service are construed to be within their strict meaning, that is it is service in a foreign country where that country is not Australia.

Refer also to ATO Interpretive Decision ATO ID 2003/907 as an example where this approach has been applied in practice.

If the term 'foreign service' is replaced with its definition, subsection 23AG(1) of the ITAA 1936 reads:

Where a resident, being a natural person, has been engaged in [service in a foreign country as the holder of an office or in the capacity of an employee] for a continuous period of not less than 91 days, any foreign earnings derived by the person from that [service in a foreign country...] are exempt from tax

It is therefore not to the point that the individuals have not been absent from work or that they are continuing the same service. Once they have returned to Australia, they are not engaged in service in a foreign country.

You raise the point that the use of the word 'in' may have had a different usage when the Income Tax Assessment Act 1936 was written, note section 23AG was included in the ITAA 1936 in 1986. As explained in Chaudhri 'in' refers to the actual location the work is performed.

The 1/6 rule referred to in subsection 23AG(6A) may apply to treat as one period of foreign service the period of time you were in a foreign country along with the time spent on leave in or other absence from the foreign country. However, it does not change the status of the period of absence, in this case, your period working in Australia. Your period working from Australia is still not taken to be foreign service as outlined above.

Accordingly, the salary you receive during your remote employment in Australia working on your Country A duties is not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

As your income is not from foreign service we have not considered whether the other requirements for exemption are met - in particular 23AG(1AA) and 23AG(2).

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