Edited version of private advice

Authorisation Number: 5010066765179

Date of advice: 13 July 2020

Ruling

Subject: Exempt employment income

Question 1

Will section 23AA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to you between xx October 20xx to x January 20xx?

Answer

Yes.

Question 2

Will section 23AA of the ITAA 1936 apply to you between x January 20xx and the point of time you commence work on a part-time basis with the same employer?

Answer

Yes.

Question 3

Will section 23AA of the ITAA 1936 apply to you at the point of time you transition from full-time employment to part-time employment with the same employer?

Answer

Yes.

Question 4

Will section 23AA of the ITAA 1936 apply to you from the time you cease your employment with your employer and no longer have any employment ties at the approved project?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20xx

Year ending 30 June 20xx

The scheme commences on:

xx October 20xx

Relevant facts and circumstances

You are a US citizen.

You hold a permanent residency visa which allows you to live and work in Australia.

In 19xx, you were employed by Company A (the Company) (which is a US resident company) to work on a full-time basis at the approved project in Australia.

You returned to live in the US in 20xx and you remained there until May 20xx. You were a non- resident of Australia at all times during this period.

You returned to Australia in May 20xx and recommenced your full-time role with the Company at the approved project.

The US Government is party to a contract in connection with the establishment, maintenance or operation of the approved project.

You worked for a US contractor that was in turn engaged by the US Government for purposes connected with the performance of the abovementioned contract.

Since May 20xx, you have only been employed by the Company, have not carried on business in Australia, nor have you derived any other employment income whilst in Australia.

You have not disclosed any employment income you received from the Company to the Australian Taxation Office as you believed that the income was exempt from tax under section 23AA of the ITAA 1936.

You declared full-time employment from the Company in your US tax return as US sourced income and paid tax accordingly.

Your adult child (who is not financially dependent on you), their partner and children applied for the Australian Significant Investor Visa.

You entered into a lease on xx October 20xx over a residential property in XXX.

You entered into the lease to have a property available for your child and their family on arrival in Australia.

The property remained vacant from xx October 20xx until x January 20xx. During this time, you stayed at the property a few nights and began to set the property up in anticipation of your child's arrival.

Your child and family moved to Australia on x January 20xx.

On x January 20xx, you transitioned from a full-time role (Monday to Friday) with the Company to a flexible role which continued to be full-time but allowed you to work two weeks continuously at the approved project and then take one week off. In that leave time, you would visit XXX and stay with your child and their family.

Throughout the period of employment in the approved project, at different points in time, you utilised the following types of accommodation in that location:

·   Accommodation provided by the approved project.

·   A property you purchased.

·   A property you rented via a lease in your own name.

You are contemplating moving from your current full-time flexible working arrangement to part-time employment on xx November 20xx.

Relevant legislative provisions

Section 23AA of the Income Tax Assessment Act 1936

Reasons for decision

Section 23AA of the ITAA 1936 applies to income from approved projects made in connection with certain projects of the US Government in Australia. Subject to certain conditions being met, section 23AA deems the income to have been derived from sources outside Australia.

Subsection 23AA(3) provides that a person shall be deemed not to have been a resident of Australia (except for the purposes of Subdivision A of Division 17) during such period in which they have been in Australia, or carried on business in Australia, solely for prescribed purposes during a period when the person was a foreign contractor or foreign employee.

The term 'prescribed purposes' in relation to a foreign contractor or foreign employee, means purposes relating to the performance of a prescribed contract.

The term 'prescribed contract' is defined in subsection 23AA(1) as:

(a)  a contract to which the Government of the United States of America is a party in connexion with an approved project, or

(b)  a contract made for purposes connected with the performance of a contract referred to paragraph (a).

The term 'foreign employee' is defined in subsection 23AA(1) as a person who:

(a)  is an employee of a foreign contractor; or

(b)  is a director of a company that is a foreign contractor;

and is not an Australian citizen or ordinarily resident in Australia.

Neither the term 'solely' nor the phrase 'has been in Australia... solely for prescribed purposes' are defined. Therefore, they take on their ordinary meanings in the context of the provision.

The purpose of section 23AA is to exempt from income tax the employment income of employees who are otherwise not residents and work exclusively on prescribed contracts. Periods in which a person is present in Australia solely for the purpose of working on such prescribed contracts will be disregarded when considering the person's residence for Australian tax purposes. Instead of providing an outright exemption, the legislation treats the person as a non-resident deriving foreign source income. This is all subject to the income being taxable in the US. The purpose therefore is to provide that the US effectively has an exclusive taxing right over their employee, who is paid out of US Government funds.

We accept that you were in Australia solely for a prescribed purpose:

·   between xx October 20xx and x January 20xx;

·   between x January 20xx and the point of time when you commence work on a part-time basis with the same employer; and

·   at the point of time when you transition from full-time employment to part-time employment with the same employer.

Provided you maintain your employment in relation to the relevant prescribed contract and do not pursue any other income earning activity that is facilitated by your presence in Australia, you will be accepted as being in Australia solely for prescribed purposes.

Similarly, if and when you switch to working part-time, in the absence of some other income earning activity relevantly connected to your presence in Australia, you will continue to satisfy the 'sole purpose' test.

However, once your employment ceases, you will no longer be a 'foreign employee' so the sole purpose test will no longer be of relevance. From that point forward, the normal residency rules will be used to determine your residency, and the source of any income you derive will be determined in the normal manner.

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