Edited version of private ruling

Authorisation Number: 1011515120674

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Ruling

Subject: Pay As You Go (PAYG) Withholding and section 23AG of the Income Tax Assessment Act 1936

Issue 1

The questions 1 to 3 under Issue 1 are to be considered in terms of whether the foreign earnings derived by employees of Company A engaged in the foreign service are exempt pursuant to section 23AG(1) and paragraph 23AG(1AA)(a) of the Income Tax Assessment Act 1936 (ITAA 1936).

It is assumed that the other conditions for exemption under section 23AG of the ITAA are satisfied by the employees of Company A.

Question 1

Is Company A required to withhold tax under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from salary and wages paid to employees who perform their services in foreign countries under a Staffing and Training Agreement between AusAID and Company A?

Answer

Company A is required to withhold tax under section 12-35 of Schedule 1 to the TAA from salary and wages paid to employees who perform their services in foreign countries where that foreign service is directly related to the delivery of the training or administrative components of the Staffing and Training Deed, rather than the delivery of a program which aims to reduce poverty and achieve sustainable development.

The employees engaged in such foreign service are not entitled to claim an exemption for the foreign earnings derived from the foreign service pursuant to section 23AG(1) and paragraph 23AG(1AA)(a) of the ITAA 1936.

Question 2

Is Company A required to withhold tax under section 12-35 of Schedule 1 to the TAA from salary and wages paid to employees who perform their services in foreign countries under the funding agreements between AusAID and Company A for the deployment or provision of personnel to support humanitarian relief programs in various countries?

Answer

Company A is not required to withhold tax under section 12-35 of Schedule 1 to the TAA from salary and wages paid to employees who perform their services in foreign countries where those employees perform their services in foreign countries under funding agreements between AusAID and Company A for the deployment or provision of personnel to support humanitarian relief programs in various countries.

The employees engaged in such foreign service are entitled to claim an exemption for the foreign earnings derived from the foreign service pursuant to section 23AG(1) and paragraph 23AG(1AA)(a) of the ITAA 1936.

Question 3

Is Company A required to withhold tax under section 12-35 of Schedule 1 to the TAA from salary and wages paid to employees who perform their services in foreign countries under Project - Partner contracts or Company A - UN contracts approved by AusAID?

Answer

Company A is required to withhold tax under section 12-35 of Schedule 1 to the TAA from salary and wages paid to employees who perform their services in foreign countries under Project - Partner contracts or Company A - UN contracts approved by AusAID.

The employees engaged in such foreign service are not entitled to claim an exemption for the foreign earnings derived from the foreign service pursuant to section 23AG(1) and paragraph 23AG(1AA)(a) of the ITAA 1936.

Issue 2

The question below is to be considered in terms of whether the foreign earnings derived by the employees of Company A engaged in the foreign service which is related to Company A's activities in operating a developing country relief fund are exempt pursuant to section 23AG(1) and paragraph 23AG(1AA)(b) of the ITAA 1936.

It is assumed that the other conditions for exemption under section 23AG of the ITAA are satisfied by the employees of Company A.

Question 1

Is Company A required to withhold tax under section 12-35 of Schedule 1 to the TAA from salary and wages paid to employees who perform their foreign service which is related to Company A's activities in operating a developing country relief fund?

Answer

Company A is not required to withhold tax under section 12-35 of Schedule 1 to the TAA from salary and wages paid to employees who perform their foreign service which is related to Company A's activities in operating a developing country relief fund.

The employees engaged in such foreign service are entitled to claim an exemption for the foreign earnings derived from the foreign service pursuant to section 23AG(1) and paragraph 23AG(1AA)(b) of the ITAA 1936.

This ruling applies for the following periods:

I July 2009 to 1 July 2013

Relevant facts and circumstances

Company A is a resident of Australia for tax purposes.

Company A operates a public fund which has been declared by the Treasurer to be a fund for the purpose of Item 9.1.1 of section 30-80 of the Income Tax Assessment Act 1997 (ITAA1997).

Company A undertakes aid or charitable activities in foreign countries. It does so by deploying its employees to undertake assignments in developing countries.

The employees of Company A are residents of Australia for taxation purposes.

The employees of Company A are deployed to foreign countries under the following contracts:

· Staffing and Training Deed between AusAID and Company A;

· Funding Agreements AusAID and Company A for the deployment of personnel to various developing countries;

· Project-Partner Contracts.

Occasionally, on the conclusion of the Funding Agreements AusAID and Company A, the UN agency may request that the Company A employees extend their period of assistance.

The project partner making the request would typically fund the continued service. The employees of Company A continue the project pursuant to an agreement between Company A and the project partner.

Contracts between Company A and the UN:

Contracts may be entered into between Company A and the UN for work not previously the subject of a contract between Company A and AusAID. In such circumstances, Company A obtains AusAID approval, whether written or otherwise, that the work to be performed pursuant to the contract accords with AusAID's objectives of Australia's overseas aid program.

The Scheme that is the subject of this Ruling also incorporates the documents and agreements received with the application for the Ruling and the response to the ATO's request for further information.

Assumptions

The Private Ruling is made on the following assumptions:

· that all other conditions for the exemption under section 23AG of the ITAA 1936 are satisfied by the employees of Company A who perform their services in foreign countries;

· that the activities of Company A carried out in the countries for which agreements have not been provided, are carried out in accordance with AusAID agreements for the deployment of personnel, which are similar to those already provided to the ATO.

Relevant legislative provisions

Taxation Administration Act 1953

schedule 1 section 12-1(1)

schedule 1 section 12-35

Income Tax Assessment Act 1936

section 23AG

subsection 23AG(1)

subsection 23AG(1AA)

paragraph 23AG(1AA)(a)

paragraph 23AG(1AA)(b)

Other references

Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No.1) Bill 2009

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Issue 1

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that under the PAYG Withholding system an entity must withhold amounts from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

Subsection 12-1(1) of Schedule 1 to the TAA however, provides that an entity need not withhold an amount under section 12-35 from a payment if the whole of the payment is exempt income of the recipient.

An example where such a payment is exempt income of the recipient is where subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) applies.

Section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)

Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from tax in Australia.

Paragraph 23AG(1AA)(a) of the ITAA 1936

Paragraph 23AG(1AA)(a) of the ITAA 1936, which took effect from 1 July 2009, states that:

However, those foreign earnings are not exempt from tax under this section unless the continuous period of foreign service is directly attributable to any of the following:

(a) the delivery of Australian official development assistance by the person's employer.

Some key phrases of the amended subsection 23AG(1AA) and paragraph 23AG (1AA)(a) of the ITAA 1936 are discussed below.

Directly attributable

The opening words of subsection 23AG(1AA) of the ITAA 1936 contain a requirement applicable to all the employment activities in that subsection. That is, they state that the relevant foreign service must be 'directly attributable to' any of the employment activities listed in the subsection.

Section 23AG of the ITAA 1936 does not specify what this means. However, the Explanatory Memorandum (EM) which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 introducing subsection 23AG(1AA) provides guidance on this (see subparagraph 15AB(1)(b)(i) and paragraph 15AB(2)(e) of the Acts Interpretation Act 1901).

The relevant paragraphs appear below:

1.35 Subsection 23AG(1AA) will apply where an individual undertakes a continuous period of foreign service of 91 days or more and the foreign service relates to more than one of the activities listed in paragraphs (a) to (e).

Example 1.5

Lisa is an APS employee employed by AusAID. On 1 July 2009 Lisa is posted to Tonga for 45 days, as a project advisor on an Australian ODA project.

At the end of the 45 day posting, Lisa resigns from AusAID and takes up a position as an aid worker in Tonga, employed by a prescribed charitable institution covered by paragraph 23AG(1AA)(c). Lisa remains in her new position for another 100 days.

Lisa's continuous period of foreign service for the purpose of subsection 23AG(1AA) is 145 days and her foreign earnings are eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

Example 1.6

As in the above example, Lisa resigns from AusAID at the end of her 45 day posting. However, rather than commencing work as an aid worker, Lisa takes up permanent employment with a bank in Tonga.

Lisa's continuous period of foreign service in Tonga exceeds 91 days but none of her foreign earnings are eligible for exemption because she did not attain 91 days of continuous foreign service in relation to an activity covered by subsection 23AG(1AA).

(Emphasis added.)

The words 'attributable to' have commonly been interpreted to require a causal connection (see Federal Commissioner of Taxation v. Sun Alliance Investments Pty Ltd (in Liquidation) (2005) 225 CLR 488 at 514-515; (2005) 60 ATR 560; 2005 ATC 4955).

However, these paragraphs in the EM suggest they bear a different meaning in this context.

Specifically, they suggest that the words 'attributable to' in the context of subsection 23AG(1AA) of the ITAA 1936 mean 'related to'. Accordingly, for paragraph 23AG(1AA)(a) of the ITAA 1936 to apply, a person's foreign service must be directly (that is, in a direct manner) related to the delivery of Australian official development assistance by the person's employer.

Delivery of Australian official development assistance by the person's employer

The term 'Australian official development assistance' is not defined for the purposes of section 23AG of the ITAA 1936.

However, the Explanatory Memorandum (EM) which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009) introducing paragraph 23AG(1AA)(a) provides guidance on the meaning of the phrase.

The relevant paragraphs are below:

Australian official development assistance

1.19 Australian official development assistance (ODA) is assistance delivered through the Australian Government's overseas aid program, as administered by the Department of Foreign Affairs and Trade and/or the Australian Agency for International Development (AusAID). Australian ODA aims to reduce poverty and achieve sustainable development in developing countries, in line with Australia's national interest.

1.20 In addition to providing Australian ODA directly, AusAID also competitively contracts aid work to Australian and international entities. Thus, in practice, individuals involved in the delivery of Australian ODA can include both Australian Public Service (APS) employees and non-APS employees.

1.21 For the purposes of subsection 23AG(1AA) the delivery of Australian ODA must be undertaken by the person's employer, which includes AusAID and an entity contracted by AusAID to assist in the delivery of Australian ODA.

Example 1.1

Colin is an APS employee employed by AusAID. He is posted to the Cook Islands, for 120 continuous days, as a project advisor on an Australian ODA project aimed at improving the quality of early childhood education.

Colin's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

Example 1.2

Robert is an APS employee employed by the Commonwealth Department of Climate Change. He is posted to Tokelau for 150 continuous days, to work on a project aimed at minimising the impacts of rising sea levels in Tokelau.

Robert is not an AusAID employee but the project is classified as Australian ODA by AusAID. Robert's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

Example 1.3

Eli is a motor mechanic employed by Emu Engineering Pty Ltd, a private company contracted by AusAID to provide vocational training in Vanuatu. He is posted to Vanuatu for 180 continuous days.

Eli's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

1.22 Foreign service directly attributable to the delivery of Australian ODA does not include diplomatic or consular duties carried out by Australian residents.

The examples in the EM reveal that paragraph 23AG(1AA)(a) of the ITAA 1936 is intended to restrict the section 23AG exemption to foreign earnings derived by:

Australian Public Service (APS) employees providing assistance that is classified as Australian official development assistance and is administered by AusAID or the Department of Foreign Affairs and Trade (DFAT); or

Other employees delivering Australian official development assistance on behalf of their employers who in turn have been contracted by the Australian Government to assist in the delivery of Australian official development assistance that is administered by AusAID or DFAT.

Assistance

The ordinary meaning of 'assistance' in the Macquarie Dictionary is 'the act of assisting; help; aid'. Therefore, adopting its ordinary meaning, 'assistance' for the purposes of section 23AG of the ITAA 1936 would encompass the provision of money, goods or services capable of affording help or aid.

Question 1

Is Company A required to withhold tax under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from salary and wages paid to employees who perform their services in foreign countries under a Staffing and Training Agreement between AusAID and Company A?

Summary

Company A is required to withhold tax under section 12-35 of Schedule 1 to the TAA from salary and wages paid to employees who perform their services in foreign countries in so far as the foreign service of the employees is directly related to activities such as training of personnel for deployment rather than the delivery of a program which aims to reduce poverty and achieve sustainable development.

Detailed reasoning

The Staffing and Training Agreement deals with the provision of funds by AusAID to Company A to undertake emergency and standby staffing and training.

We recognise that in order for Australia to deliver upon its Australian ODA commitments it must have sufficiently and appropriately trained personnel at its disposal to meet needs as they arise and that the training of staff is a critical aspect in the delivery of Australia's ODA program. However, we consider that the aim of the 'Staffing and Training Agreement is not 'to reduce poverty and achieve sustainable development in developing countries', as is suggested in paragraph 1.19 of the EM to be the aim of Australian ODA.

Furthermore, we consider that the aim of the agreement is to outline the obligations of both AusAID and Company A in the funding of the training, deployment and administrative costs incurred by Company A. We consider that this is not the 'assistance' of the kind contemplated by paragraph 23AG(1AA)(a) of the ITAA 1936.

The Staffing and Training Agreement provides that the training service supplied by Company A may be delivered by Company A's trainers at locations outside Australia.

For the foreign earnings of Company A employees to be eligible for exemption pursuant to paragraph 23AG(1AA)(a) of the ITAA 1936, Company A must have been contracted directly by the Australian Government to assist in the delivery of Australian ODA under the aid program that is administered by AusAID or DFAT.

In this case, we consider that Company A has not been contracted directly by AusAID or the Australian Government to assist in the delivery of Australian official development assistance. Rather, Company A has been contracted by AusAID to assist with the training and development of Company A staff for deployment overseas.

As such, the employees' foreign income from foreign service, where that foreign service is directly related to the delivery of the training or administrative components of the Staffing and Training Deed will not be exempt pursuant to section 23AG of the ITAA.

PAYG Withholding

Company A is required to withhold tax under section 12-35 of Schedule 1 to the TAA from salary and wages paid to employees who perform their services in foreign countries where that foreign service is directly related to the delivery of the training or administrative components of the Staffing and Training Deed, rather than the delivery of a program which aims to reduce poverty and achieve sustainable development.

Question 2

Is Company A required to withhold tax under section 12-35 of Schedule 1 to the TAA from salary and wages paid to employees who perform their services in foreign countries under the funding agreements between AusAID and Company A for the deployment or provision of personnel to support humanitarian relief programs in various countries?

Summary

Company A is not required to withhold tax under section 12-35 of Schedule 1 to the TAA from salary and wages paid to employees who perform their services in foreign countries where those employees perform their services in foreign countries under funding agreements between AusAID and Company A for the deployment or provision of personnel to support humanitarian relief programs in various countries

Detailed reasoning

Where Company A is contracted by AusAID to deploy personnel to support humanitarian relief programs in various countries, we consider that Company A has been contracted by AusAID to assist in the delivery of Australian ODA as outlined in paragraphs 1.19 to 1.21 of the EM which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009) introducing paragraph 23AG(1AA)(a) of the ITAA 1936.

Accordingly the employees of Company A who are deployed to various countries by Company A under such agreements are entitled to claim an exemption from tax on the foreign earnings derived from such foreign service under section 23AG of the ITAA 1936.

This is based on the assumption that the other conditions for exemption under section 23AG of the ITAA are satisfied by the employees of Company A.

PAYG Withholding

As the foreign earnings of the employees of Company A are exempt under section 23AG of the ITAA 1936 under these circumstances, there will be no requirement for tax to be withheld, under section 12-35 of Schedule 1 to the TAA, from the salary and wages paid to the employees by Company A.

Question 3

Is Company A required to withhold tax under section 12-35 of Schedule 1 to the TAA from salary and wages paid to employees who perform their services in foreign countries under Project - Partner contracts or Company A - UN contracts approved by AusAID?

Summary

Company A is required to withhold tax under section 12-35 of Schedule 1 to the TAA from salary and wages paid to employees who perform their services in foreign countries under Project - Partner contracts or Company A - UN contracts approved by AusAID.

Detailed reasoning

For the requirements of paragraph 23AG(1AA)(a) of the ITAA 1936 to apply to the employees of Company A, Company A must have been contracted by AusAID to assist in the delivery Australian ODA.

As stated above, the examples in the EM reveal that paragraph 23AG(1AA)(a) of the ITAA 1936 is intended to restrict the section 23AG exemption to foreign earnings derived by:

· Australian Public Service (APS) employees providing assistance that is classified as Australian official development assistance and is administered by AusAID or the Department of Foreign Affairs and Trade (DFAT); or

· Other employees delivering Australian official development assistance on behalf of their employers who in turn have been contracted by the Australian Government to assist in the delivery of Australian official development assistance that is administered by AusAID or DFAT (emphasis added).

In absence of a contractual relationship between Company A and AusAID, the employees of Company A are not considered to be undertaking the delivery of Australian ODA within the meaning of paragraph 23AG(1AA)(a) of the ITAA 1936.

In other words, the lack of a direct contract with AusAID precludes the favourable application of paragraph 23AG(1AA)(a) of the ITAA 1936 to the foreign earnings of employees of Company A where those foreign earnings are in respect of the delivery of assistance under Project - Partner contracts or Company A -UN contracts.

Accordingly the employees of Company A who are deployed to various countries by Company A under Project - Partner contracts or Company A -UN contracts are not entitled to claim an exemption from tax on the foreign earnings derived from such foreign service under section 23AG of the ITAA 1936.

PAYG Withholding

As the foreign earnings of the employees of Company A are not exempt under section 23AG of the ITAA 1936 under these circumstances, there will be a requirement for tax to be withheld, under section 12-35 of Schedule 1 to the TAA, from the salary and wages paid to the employees by Company A.

Issue 2

Question 1

Is Company A required to withhold tax under section 12-35 of Schedule 1 to the TAA from salary and wages paid to employees who perform their foreign service which is related to Company A's activities in operating a developing country relief fund?

Summary

Company A is not required to withhold tax under section 12-35 of Schedule 1 to the TAA from salary and wages paid to employees who perform their foreign service which is related to Company A's activities in operating a developing country relief fund.

Detailed reasoning

Paragraph 23AG(1AA)(b) of the ITAA 1936

The amended subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, now restricts the exemption to specific employment activities. It relevantly states:

However, those foreign earnings are not exempt from tax under this section unless the continuous period of foreign service is directly attributable to any of the following:

(a) ……….

(b) the activities of the person's employer in operating a public fund covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the Income Tax Assessment Act 1997 (international affairs deductible gift recipients);

Directly attributable

The meaning of the phrase "directly attributable" has been discussed under Issue 1 and applies equally here. Accordingly, for paragraph 23AG(1AA)(b) of the ITAA 1936 to apply, a person's foreign service must be directly (that is, in a direct manner) related to the activities of their employer in operating a public fund covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the ITAA 1997.

Employer operating a public fund

The following paragraphs in the EM provide guidance on the scope and meaning of paragraph 23AG(1AA)(b) of the ITAA 1936:

1.23 A person's foreign earnings will be eligible for exemption if they are directly attributable to their employer's activities in operating a public fund covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the ITAA 1997. [Schedule 1, item 1, paragraph 23AG(1AA)(b)]

1.24 Item 9.1.1 of subsection 30-80(1) of the ITAA 1997 applies to a public fund declared by the Treasurer to be a developing country relief fund. Item 9.1.2 of subsection 30-80(1) applies to a public fund operated by a public benevolent institution solely to provide relief to people of a developing country who are in distress as a result of a disaster (a public disaster relief fund). Gifts or donations made to these public funds are tax deductible for income tax purposes to the donor.

1.25 A developing country relief fund is a fund established by an organisation solely for the purpose of providing relief to people of a developing country. The organisation must be an approved organisation as declared by the Minister for Foreign Affairs and the country must be a developing country as declared by the Minister for Foreign Affairs. These conditions are contained in paragraphs 30-85(2)(a) and (b) of the ITAA 1997 respectively.

1.26 A public disaster relief fund is a fund established and operated by a public benevolent institution in response to an event recognised as a disaster by the Minister for Foreign Affairs. The recognition requirement is contained in section 30-86 of the ITAA 1997.

1.27 Paragraph 23AG(1AA)(b) ensures that employees of recognised organisations that undertake aid or charitable activities, that do not form part of Australian ODA, are eligible for exemption on their relevant foreign employment income.

Example 1.4

Kate is a social worker employed by a charitable organisation that operates a fund approved as a developing country relief fund by the Treasurer.

Kate is posted to Nigeria for 120 days to help provide relief to people in distress.

Kate's foreign earnings are eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

(Emphasis added.)

This reveals that a continuous period of foreign service that is directly related to aid or charitable activities undertaken by the person's employer in operating the relevant public fund, will satisfy paragraph 23AG(1AA)(b) of the ITAA 1997.

Company A operates a developing country relief fund covered by item 9.1.1 of the table in subsection 30-80(1) the ITAA 1997 and the foreign service of the employees is directly related to aid or charitable activities undertaken by Company A in operating the developing country relief fund.

Consequently the foreign earnings of the employees will satisfy paragraph 23AG(1AA)(b) of the ITAA 1936 and are exempt under section 23AG.

This is based on the assumption that the other conditions for exemption under section 23AG of the ITAA are satisfied by the employees of Company A.

PAYG Withholding

As the foreign earnings of the employees of Company A are exempt under section 23AG of the ITAA 1936, there will be no requirement for tax to be withheld, under section 12-35 of Schedule 1 to the TAA, from the earnings paid to the employees by Company A in respect of activities undertaken by Company A in operating the developing country relief fund.