Edited version of private ruling

Authorisation Number: 1011622144053

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Ruling

Subject: Consultancy services for the foreign bank

Question 1

Are the payments received by the relevant trust from the foreign bank for the services of an expert consultant to perform a mission in overseas countries assessable income?

No.

Question 2

Are the payments received by the relevant trust from the foreign bank for the services by an expert consultant for mission related work undertaken in Australia assessable income?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commences on:

1 July 2010

Relevant facts and circumstances

The relevant trust is an Australian resident entity for income tax purposes.

The relevant trust trading as X Pty Ltd provides environmental consulting services to the foreign bank under a contract for a period late in the calendar (note - it is anticipated that new contracts with similar terms and conditions are anticipated over the next five years).

The terms and conditions of this contract form part of the scheme under consideration.

The services are provided by its consultant undertaking a combination of overseas Missions and the provision of related advice on the Mission projects from Australia. The international Missions account for about 50% of the work conducted for the foreign bank, while related work on these projects is undertaken in Australia and makes up the remaining 50% of the foreign bank work. International missions have been undertaken in many overseas countries.

The foreign bank has provided certification for the contract to the effect that under the provisions of the Agreement Establishment the foreign bank (the Charter), the consultant is entitled to the immunities, privileges and exemptions set forth in relevant Articles of the Charter, including exemption from taxation in respect of salaries and emoluments paid by the foreign bank.

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 6-20.

Acts Interpretation Act 1901 Paragraph 22(1)(a).

Taxation Ruling TR 92/14.

ATOID 2006/240

ATOID 2006/241

Section 3 International Organisations (Privileges and Immunities Act) 1963

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

Part I Fifth Schedule International Organisations (Privileges and Immunities Act) 1963

Regulation 2 Asian Development Bank (Privileges and Immunities) Regulations 1967

Regulation 3 Asian Development Bank (Privileges and Immunities) Regulations 1967

Subregulation 7(1) Asian Development Bank (Privileges and Immunities) Regulations 1967

Subregulation 7(2) Asian Development Bank (Privileges and Immunities) Regulations 1967

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997(ITAA 1997) provides that the assessable income of an Australian resident taxpayer will include ordinary income derived from all sources, whether in or out of Australia, during the income year.

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 an amount of ordinary income is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law.

Article 56 of the Charter provides that no tax will be levied on or in respect of salaries and emoluments paid by the foreign bank to the directors and officers of foreign bank including experts performing missions for the bank except where a member of the foreign bank deposits with its instrument of ratification or acceptance a declaration that such a member retains for itself the right to tax salaries and emoluments paid by the foreign bank to citizens or nationals of such member. Australia is a member under the terms of the Agreement.

The International Organisation (Privileges and Immunities) Act 1963 (IOPIA) is a Commonwealth Act under which an international organisation, and persons engaged by it, may be accorded certain privileges and immunities including an exemption from tax.

Section 3 of the IOPIA defines an international organisation to which the IOPIA applies to mean an organisation that is declared by the regulations to be an international organisation to which IOPIA applies.

Regulation 3 of the Asian Development Bank (Privileges and Immunities) Regulations 1967 (ADB bank Regulations) provides that the foreign bank is an international organisation to which IOPIA applies (Regulation 2 of the ADB Regulations).

Paragraph 6(1)(e) of the IOPIA provides that the regulations may confer any or all of the privileges and immunities set out in Part I of the Fifth Schedule upon a person who is serving on a committee of, or participating in the work of, or performing a mission on behalf of, an international organisation.

Paragraph 2A of Part I of the Fifth Schedule to the IOPIA provides an exemption from taxation on salary and emoluments received from the international organisation. Paragraphs 2 and 5 of Part I of the Fifth Schedule to the IOPIA deal with immunity from legal process and exemption from currency or exchange restrictions respectively.

Subregulation 7(1) of the ADB Regulations provides that a person who is performing, whether alone or jointly with other persons, a mission on behalf of the foreign bank has the privileges and immunities specified in paragraphs 2, 2A and 5 of Part I of the Fifth Schedule to the IOPIA.

Subregulation 7(2) of the ADB Regulations provides that salary and emoluments received from the foreign bank by a person on whom privileges and immunities are conferred by subregulation 7(1), being a resident of Australia, are not exempt from taxation, to the extent to which they are for services rendered in Australia.

As the term person is not defined either in the IOPIA or in the ADB Regulations, the definition of person in the Acts Interpretation Act 1901 (AIA) can be relied on.

Paragraph 22(1)(a) of the AIA provides that unless the contrary intention appears, expressions used to denote persons generally (such as person) include a body politic or corporate as well as an individual.

The term emoluments is also not defined either in the IOPIA or in the ADB Regulations. In Andrews and Muir v. Inland Revenue Commissioner (NZ) (1979) 10 ATR 151, the issue was the assessability of payments received from the foreign bank by a partnership in providing the services of a partner as an expert. Sinclair J held that the term emoluments covers a payment made to an expert in respect of their services which was a remuneration, or at least an advantage obtained a result of giving those services. The court noted that the secondary dictionary meaning of emolument is advantage. The court also accepted as sound the submission by the counsel that the purpose of Article 56 of the Charter was to encourage experts to go to inhospitable places to discharge New Zealand's duty under the treaty and therefore the income was exempt from tax in New Zealand.

Sinclair J also held that one must pay some attention to the actual wording in Article 56 of the Charter as it refers to the fact that no tax shall be levied on or in respect of emoluments paid by the bank to specified persons. The court held that words or in respect of require a wider application rather than a narrower one. The true approach to the construction of the Article in relation to experts is that it obviously contemplated to apply to persons who had no connection with the foreign bank in either a directorate or employment situation.

The Commissioners views on the application of IOPIA are set out in Taxation Ruling TR 92/14 (including Addendum). Paragraph 6 of TR 92/14 states that persons engaged by an international organisation including expert or consultant may be accorded privileges and immunities in the nature of exemption from taxation as described in the Second, Third, Fourth and Fifth Schedules to the IOPIA. However, it is necessary to examine the regulations of the particular international organisation to ascertain a persons entitlement for taxation exemption.

Paragraph 12 of TR 92/14 provides that Australia's general policy is that salaries and emoluments received by experts and consultants engaged by international organisations are not exempt from tax in Australia. However, limited exemption is provided under regulations regarding the foreign bank.

The relevant trust is entitled to the exemption from tax for the payments received from the foreign bank for mission work under subregulation 7(1) of the ADB Regulations as the payments are emoluments received while performing a mission on behalf of the foreign bank in overseas countries.

Therefore, the payments received by the relevant trust from the foreign bank for the services by an expert consultant to perform a mission in overseas countries are not assessable income under subsection 6-5(2) of the ITAA 1997 as the income is exempt under section 6-20 of the ITAA 1997.

The payments received by the relevant trust from the foreign bank for mission related work undertaken in Australia by the consultant are not exempt from tax under subregulation 7(2) of the ADB Regulations.

Accordingly, the payments received by the relevant trust from the foreign bank for mission related work undertaken in Australia are assessable income under subsection 6-5(2) of the ITAA 1997.