Edited version of private advice

Authorisation Number: 1052086471881

Date of advice: 28 April 2023

Ruling

Subject: Exempt income

Question 1

Is income you earned as a consultant to the International Organisation performed remotely while residing in Australia exempt from taxation in Australia and therefore not assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is income you earned as a consultant to the International Organisation performed on-site in developing nations exempt from taxation in Australia and therefore not assessable under section 6-5 of the ITAA 1997?

Answer

Yes.

Question 3

Are reimbursements for airfares you paid to travel overseas to the locations of your on-site work exempt from taxation in Australia and therefore not assessable under section 6-5 of the ITAA 1997?

Answer

Yes.

Question 4

Are amounts provided as a per diem allowance to cover accommodation, food and out of pocket expenses you paid while overseas at the locations of your on-site work exempt from taxation in Australia and therefore not assessable under section 6-5 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20xx

Year ended 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

You are an Australian citizen.

You worked as an Independent Consultant engaged by an International Organisation (the Organisation) on contracts to developing nations.

Most of your work has been performed remotely from Australia.

You have performed a small amount of in-country work in developing nations.

You did not come to Australia specifically to perform the work of the Organisation.

You have remained an Australian resident for taxation purposes over the entire duration of the ruling period.

You were reimbursed for airfares which you purchased to travel to and from work locations.

You were provided with a per diem allowance to cover accommodation, meals, and out of pocket expenses for which you paid while working on-site in developing nations.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

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

Income Tax Assessment Act 1997 section 6-15

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

Income Tax Assessment Act 1997 section 6-20

International Organisations (Privileges and Immunities) Act 1963 Subsection 6(1)

International Organisations (Privileges and Immunities) Act 1963 Paragraph 6(1)(e)

International Organisations (Privileges and Immunities) Act 1963 Part 1 of the Fifth Schedule

International Organisations (Privileges and Immunities) Act 1963 Item 2A of Part 1 of the Fifth Schedule

Reasons for decision

Taxation of income from consultancy services

Section 6-5 of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year. This includes income derived from all overseas sources.

Income from consultancy services is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

However, subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.

Section 6-20 of the ITAA 1997 provides that income which would be ordinary income under section 6-5 is exempt income if a provision of the ITAA 1997 or any other Commonwealth law exempts such an amount from taxation.

Exemption of income under the International Organisations (Privileges and Immunities) Act 1963

Income of Australian residents working for designated international organisations may be exempted from taxation in accordance with the International Organisations (Privileges and Immunities) Act 1963 (IOPI Act). The application of these benefits to persons performing the work of the Organisation is specified in the regulations relevant to the Organisation (the Regulations).

The IOPI Act confers different strata of benefits to individuals engaged to perform work for designated international organisations, differentiated in the relevant Regulations by the character of their position and the manner in which they are engaged by the organisation. Draft Taxation Ruling TR 2019/D1 expounds the classifications used in the IOPI Act and provides the following definitions:

• Person who holds a high office - these are senior officers such as presidents or managing directors of international organisations. Organisations must have positions of high office prescribed by the regulations pertinent to that organisation for the position to be recognised as such under the IOPI Act.
• Person who holds an office - Whether a person holds an office for a designated international organisation (other than a high office) must be ascertained by evaluating the nature of the individual's professional relationship with the organisation and the duties and authority associated with the office held by that individual.
• Person who is accredited to, or is in attendance at an international conference convened by an international organisation.
• Person who is serving on a committee/performing the work/performing a mission - This classification includes experts, consultants, and other persons whose engagement with the organisation is related to undertaking a specific task or producing a particular piece of work.

To determine the appropriate classification, the substance of the terms of the engagement of the person, and the relationship between their engagement and the organisation performing its function must be considered.

As per paragraph 25 of TR 2019/D1, the characteristics of an "office holder" for the purposes of the IOPI Act, are:

•         independent existence - the office must exist regardless of the individual who occupies the office from time to time. This means that if the individual currently occupying the office vacates that office, the office must continue to exist to be filled by another individual;

• duties, functions, responsibilities or powers - the office must have identifiable duties, functions, responsibilities or powers other than a mere advisory function. These features of the office (or of the panel, board, committee or tribunal to which the individual has been appointed) would usually be specified in the relevant legislation or statutory instrument (or for a common law situation, foundation document or equivalent document of that nature); and
• the relevant duties, functions, responsibilities or powers must attach to the office itself, rather than the individual who occupies the office.

Furthermore, paragraph 27 of TR 2019/D1 states that direct employees of designated international organisations may be office holders, however locally engaged staff and persons engaged as experts or consultants cannot be office holders. This was affirmed by the High Court in paragraph [52] of Jayasinghe [2017] HCA 256 (Jayasinghe case).

TR 2019/D1 goes on the state at paragraph 32 that examples of persons serving on a committee or participating in the work or performing a mission include "experts, consultants, other persons engaged by the organisation to perform a specific act or thing."

It should be clear from the duties and authority associated with a person's position within the international organisation why the privileges and immunities are conferred. As per paragraph [38] of the Jayasinghe case, a person is unlikely to be an 'office holder' if their terms of engagement place them outside the organisational structure and do not include defined duties or authority in relation to the organisation and its functions. This is consistent with the purpose of the IOPIA 1963 to confer privileges and immunities to assist organisations to perform their functions, rather than to personally benefit persons connected with the organisation (see paragraph [39] of the Jayasinghe case and paragraph [54] of Macoun v. FCT (2015) 257 CLR 519).

Based on the contracts you have provided which sets out your duties, responsibilities and output schedule, you fit into the classification of a person who is serving on a committee/performing the work/performing a mission. You are not an office holder of the Organisation because you do not have the authority and standing that is required in the Organisation.[1]

Regulation 3 of the Regulations confirms that the Organisation is an international organisation to which the IOPI Act applies, and provides that persons performing the work of the bank shall be afforded the following privileges:

7 Privileges and immunities of other persons connected with (the Organisation)

1)    A person who is serving on a committee, or is participating in the work, of (the Organisation) or is performing, whether alone or jointly with other persons, a mission on behalf of (the Organisation) has the privileges and immunities specified in paragraphs 2, 2A and 5 of Part I of the Fifth Schedule to the Act[2].

2)    The salary and emoluments received from (the Organisation) by a person on whom privileges and immunities are conferred by subregulation (1), being a resident of Australia within the meaning of the Income Tax Assessment Act 1936, are not, to the extent to which they are for services rendered in Australia, exempt from taxation unless the person is not an Australian citizen and came to Australia solely for the purpose of serving on a committee, or participating in the work, of (the Organisation) or performing a mission on behalf of (the Organisation).

3)    A person who has served on a committee, or participated in the work, of (the Organisation) or performed a mission on behalf of (the Organisation) has the immunities specified in Part II of the Fifth Schedule to the Act[3].

Paragraphs 2, 2A and 5 of part I of the Fifth Schedule of the IOPI Act 1963 provide:

2. Immunity from suit and from other legal process in respect of acts and things done in serving on the committee, participating in the work or performing the mission.

2A. Exemption from taxation on salaries and emoluments received from the organisation.

5. Exemption from currency or exchange restrictions to such extent as is accorded to a representative of a foreign government on a temporary mission on behalf of that government.

Therefore, the exemption from taxation on salaries and emoluments provided under Paragraph 2A of the Fifth Schedule of the IOPI Act is modified by Subregulation 7(2) of the Regulations to exclude from the exemption any salaries and emoluments earned by Australian citizens for services rendered in Australia.

Defining "services rendered"

The term 'rendered' is not defined in the Regulations and therefore takes on its ordinary meaning.

The term rendered is defined in the Oxford English dictionary to mean to 'provide or give'. It is our view that this phrasing is interchangeable with the meaning of 'to exercise'.

Services are rendered or exercised where the person is physically located at the time. We do not agree with the argument that a service is rendered or exercised at the place where what the taxpayer says/advises/instructs has effect - for example if the taxpayer is physically located in Australia but the instructions or advice given only have effect, for example, in the Philippines, that this means that the service is rendered in the Philippines.

Subregulation 7(2) is concerned with where the employment is exercised. This will be the place where the taxpayer is currently located when they are performing the services that make up their employment duties. This is evident when looking at the term 'rendered' in the context of Subregulation 7(2) which says 'services rendered in', meaning where the work is exercised.

We take a similar view to the approach taken in relation to the exercising of employment under the Double Taxation Agreements.

In respect of this, in Case T41 86 ATC 336 at 340 the Taxation Board of Review stated:

... common sense would indicate that an employee is exercising his employment where he is performing the work involved in such employment and I am unaware of any authorities to the contrary.

Further support for the position that an employee is exercising employment where work is being performed or where they are carrying out their duties is provided by The Commentary to paragraph 1 of article 15 - Income from Employment on page 305 of OECD Model Tax Convention on Income and on Capital (condensed version as it read on 21 November 2017) that states:

Paragraph 1 establishes the general rule as to the taxation of income from employment (other than pensions), namely that such income is taxable in the State where the employment is actually exercised. The issue of whether or not services are provided in the exercise of an employment may sometimes give rise to difficulties which are discussed in paragraphs 8.1 ff. Employment is exercised in the place where the employee is physically present when performing the activities for which the employment income is paid. One consequence of this would be that a resident of a Contracting State who derived remuneration, in respect of an employment, from sources in the other State could not be taxed in that other State in respect of that remuneration merely because the results of this work were exploited in the other State. (emphasis added).

The commentary in Part 2 of Chapter VI The Second Rule (Art. 15(1) End of First Sentence and Second Sentence) in Income from International Private Employment[4] provides in section 2.9, that this is the case irrespective that the services may have effect in another state.

Taxation of allowances and reimbursements

Taxation Ruling TR 92/15 outlines the difference between a reimbursement and an allowance for income tax purposes, as allowances are assessable income whereas reimbursements are not.

TR 92/15 states that:

2. A payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance.

3. A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense to be its own and the recipient incurs the expenditure on behalf of the provider. A requirement that the recipient vouch expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A requirement that the recipient refunds unexpended amounts to the employer adds further weight to that presumption.

Application to your circumstances

Question 1

The income you receive as a consultant to the Organisation for work performed in Australia is ordinary income under subsection 6-5(2) of the ITAA 1997 and is therefore assessable unless exempted by provisions in Commonwealth law.

You are a consultant to the Organisation, retained as an expert to perform a mission for the Organisation under the relevant consulting contracts. You are not an office holder of the Organisation because you do not have the authority and standing that is required in the Organisation. The privileges and immunities conferred to you under the IOPI act are applied in accordance with Regulation 7 of the Regulations.

Subregulation 7(2) of the Regulations provides that income earned by residents of Australia for services rendered in Australia is not exempt from taxation, except in the case where the person is not an Australian citizen and is in Australia solely to serve on a committee or perform the work of the Organisation.

The ATO view is that work is performed at your physical work location, regardless of the fact that your work may have an effect in a different location. Therefore, work done remotely from Australia is regarded as "services rendered" in Australia for the purposes of Subregulation 7(2) of the Regulations.

You are an Australian citizen, and you did not come to Australia solely to perform the work of the Organisation, therefore the work you performed in Australia is not exempt from taxation and will be assessable under section 6-5 of the ITAA 1997.

Question 2

The income you receive as a consultant to the Organisation for work performed overseas is ordinary income under subsection 6-5(2) of the ITAA 1997 and is therefore assessable unless exempted by provisions in Commonwealth law.

You are a consultant to the Organisation, retained as an expert to perform a mission for the Organisation under the relevant consulting contracts. You are not an office holder of the Organisation because you do not have the authority and standing that is required in the Organisation. The privileges and immunities conferred to you under the IOPI act are applied in accordance with Regulation 7 of the Regulations.

Subregulation 7(1) of the Regulations confers the exemption from taxation on salaries and emoluments provided for in Paragraph 2A of part I of the Fifth Schedule of the IOPI Act onto persons performing the work of the Organisation.

As there are no provisions denying you this exemption for work performed overseas, income you have earned for work performed overseas is exempted from taxation under Paragraph 2A of the Fifth Schedule of the IOPI Act through the application of Subregulation 7(1) of the Regulations. Income you earned as a consultant for work performed overseas is therefore not assessable.

Question 3

You have provided receipts and information to show that airfare costs to travel to work locations were compensated exactly after providing receipts to the Organisation. This meets the definition of a reimbursement as outlined in paragraph 3 of TR 92/15 and is therefore not assessable income.

Question 4

You have stated that the per diem payments received while working overseas for the Organisation were provided without any requirement for costs to be substantiated. These payments are an allowance rather than a reimbursement and are assessable income under section 6-5 of the ITAA 1997.

However, as these amounts were received for days you were working overseas, they are exempted from taxation under Paragraph 2A of the Fifth Schedule of the IOPI Act through the application of Subregulation 7(1) of the Regulations and are therefore not assessable.

[1] For further information see:

- paragraphs 24 to 33 of Taxation Ruling TR 2019/D1 Income Tax: income of international organisations and persons connected with them that is exempt income

- paragraphs 15, 59 to 61 and 76 to 91 of Taxation Ruling TR 2002/21 Income tax: Pay As You Go (PAYG) Withholding from salary, wages, commissions, bonuses or allowances paid to office holders

- Hamilton v FC of T [2020] AATA 1812.

[2] IOPI Act 1963.

[3] IOPI Act 1963.

[4] F.P.G. Pötgens, Income from International Private Employment, IBFD Books.

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