Edited version of private ruling

Authorisation Number: 1011656525322

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Ruling

Subject: Foreign income - disability payments

1. Are the temporary total disablement payments you received in the year ending 30 June 2006 for injuries sustained in Country X exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes.

2. Are the temporary total disablement payments you received in the year ending 30 June 2007 for injuries sustained in Country X exempt from income tax in Australia under section 23AG of the ITAA 1936?

Yes.

3. Are the temporary total disablement payments you received in the year ending 30 June 2008 for injuries sustained in Country X exempt from income tax in Australia under section 23AG of the ITAA 1936?

Yes.

4. Are the temporary total disablement payments and permanent partial disability payments you received in the year ending 30 June 2009 for injuries sustained in Country X exempt from income tax in Australia under section 23AG of the ITAA 1936?

Yes.

5. Are the temporary total disablement payments and permanent partial disability payments you received in the year ending 30 June 2010 for injuries sustained in Country X exempt from income tax in Australia under section 23AG of the ITAA 1936?

No.

This ruling applies for the following period

Year ending 30 June 2006

Year ending 30 June 2007

Year ending 30 June 2008

Year ending 30 June 2009

Year ending 30 June 2010

The scheme commences on

1 July 2005

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian resident for income tax purposes.

You were engaged in foreign service for a period of not less than 91 days under a service agreement to provide security services in Country X, under contract to the defence services of Country Y.

In the 2005-06 income year, you were injured.

You received treatment for your injuries.

You returned to Australia to recover from your injuries.

Your employer paid you your normal rate of pay until your return to Australia.

A further four week discretionary payment was paid before insurance payments for temporary total disability under your service agreement commenced.

You underwent further treatment in Australia and returned to Country X in the 2006-07 income year to an office-based position.

Upon your return to Country X you suffered from further medical conditions.

You worked for approximately 12 months before being terminated from your job on medical grounds.

In addition to the two weeks' pay on notice termination, your employer paid a further two week discretionary payment, acknowledging your services as a valued employee.

You returned to Australia and sought further medical treatment for your injuries.

The insurer under your former service agreement recommenced temporary total disability payments.

You received temporary total disability payments for the 2005-06, 2006-07, 2007-08, 2007-09 income years, and permanent partial disability payments in the 2008-09 and 2009-10 income years.

There is no tax treaty between Australia and Country X.

Your income was exempt from income tax in Country X under specific government orders.

Relevant legislative provisions

Subsection 23AG(1) of the Income Tax Assessment Act 1936

Subsection 23AG(2) of the Income Tax Assessment Act 1936

Paragraph 23AG(6)(b) of the Income Tax Assessment Act 1936

Subsection 23AG(7) of the Income Tax Assessment Act 1936

Section 23AG of the Income Tax Assessment Act 1936

Subsection 23AG(1AA) of the Income Tax Assessment Act 1936

Paragraph 23AG(1AA)(a) of the Income Tax Assessment Act 1936

Paragraph 23AG(1AA)(b) of the Income Tax Assessment Act 1936

Paragraph 23AG(1AA)(c) of the Income Tax Assessment Act 1936

Paragraph 23AG(1AA)(d) of the Income Tax Assessment Act 1936

Subsection 30-80(1) of the Income Tax Assessment Act 1997

Paragraph 50-50(c) of the Income Tax Assessment Act 1997

Paragraph 50-50(d) of the Income Tax Assessment Act 1997

Paragraph 30-85(2)(a) of the Income Tax Assessment Act 1997

Paragraph 30-85(2)(b) of the Income Tax Assessment Act 1997

Section 30-86 of the Income Tax Assessment Act 1997

Section 50-5 of the Income Tax Assessment Act 1997

Regulation 50-50.01 of the Income Tax Assessment Regulations 1997

Regulation 50-50.02 of the Income Tax Assessment Regulations 1997

Reasons for decision

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

'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes income consisting of salary and wages (subsection 23AG(7) of the ITAA 1936).

Foreign earnings do not need to be derived at the time of engaging in foreign service. The important test is that the foreign earnings, when derived, need to be derived as a result of the undertaking of that foreign service.

The disability payments you received from the insurer under your service agreement are sufficiently incidental to your employment to permit it to be characterised as having been received in the capacity of an employee. The entitlement to the payments arose due to the foreign service.

Accordingly, the disability payments you received from the insurer are 'foreign earnings' under subsection 23AG(7) of the ITAA 1936.

Subsection 23AG(6)(b) of the ITAA 1936 provides that the 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, absent from work because of accident or illness.

Accordingly, your foreign service includes the period during in which you will be absent from Country X due to injury.

Therefore, your disability payments are foreign earnings derived as a result of foreign service.

Exemption for years ending 30 June 2006, 30 June 2007, 30 June 2008 and 30 June 2009

Subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country only because of any of the reasons listed in this section.

One of the reasons listed is where the income is exempt in the foreign country because of a tax treaty (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936).

There is no tax treaty between Australia and Country X.

The exemption under Country X's government orders is a specific exemption from income tax, this is not a reason listed in subsection 23AG(2) of the ITAA 1936.

None of the other reasons apply to your situation.

Accordingly, your disability payments for the years ending 30 June 2006, 30 June 2007, 30 June 2008 and 30 June 2009 are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

Exemption for year ending 30 June 2010

Section 23AG of the ITAA 1936 has been amended so that foreign employment income derived by Australian residents will only be exempt in certain circumstances. These amendments are effective from 1 July 2009.

Subsection 23AG(1AA) of the ITAA 1936 provides that foreign earnings are not exempt from tax 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;

(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 (ITAA 1997)(international affairs deductible gift recipients);

(c) the activities of the person's employer, if the employer is exempt from income tax because of paragraphs 50-50(c) or (d) of the ITAA 1997 (prescribed institutions located or pursuing objectives outside Australia);

(d) the person's deployment outside Australia as a member of a disciplined force by:

(i) the Commonwealth, a State or a Territory; or

(ii) an authority of the Commonwealth, a State or a Territory;

(e) an activity of a kind specified in the regulations.

Australian official development assistance

The Explanatory Memorandum (EM) which accompanied the Tax Laws Amendment (2009 Budget Measures No 1) Act 2009 (which implemented subsection 23AG(1AA) of the ITAA 1936) states that Australian official development assistance is Australian government assistance intended to reduce poverty and promote sustainable development in developing countries provided directly under programs overseen by the Australian Department of Foreign Affairs and Trade (DFAT) and/or the Australian Agency for International Development (AusAID).

AusAID also oversees the delivery of Australian official development assistance under contract with both Australian and international service providers.

Australian residents employed to carry out diplomatic and consular activities are performing services of benefit to the Australian government, and therefore their service is not directly attributable to the delivery of Australian official development assistance.

In your case, your foreign service was not under a program overseen by DFAT or AusAID, or under contract to AusAID, and therefore does not qualify as Australian official development assistance.

Employer operating a developing country relief fund or a public disaster relief fund

According to the EM, this applies where the continuous foreign service period of a resident individual is directly attributable to the activities of the individual's employer in operating a public fund covered by item 9.1.1 or item 9.1.2 in the table in subsection 30-80(1) of the ITAA 1997.

Gifts or donations made to these public funds are tax deductible for income tax purposes to the donor.

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.

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.

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 developed country who are in distress as a result of a disaster (a public disaster relief fund). 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.

A list of deductible gift recipients is available on the Australian Business Register. Your employer is not on the register as a deductible gift recipient.

Employer exempt from income tax under paragraphs 50-50(c) or (d)

The exemption also applies where the continuous foreign service period of a resident individual is directly attributable to the activities of the individual's employer if the employer is exempt from income tax because of paragraphs 50-50(c) or (d) of the ITAA 1997.

This applies to a prescribed charitable or religious institution that is exempt from Australian income tax pursuant to item 1.1 or 1.2 of section 50-5 of the ITAA 1997.

A list of prescribed institutions for the purposes of paragraph 50-50(c) of the ITAA 1997 is contained in regulation 50-50.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997).

A list of prescribed institutions for the purposes of paragraph 50-50(d) of the ITAA 1997 is contained in regulation 50-50.02 of ITAR 1997.

In your case, your employer is not on the list of charitable and religious institutions contained in regulations 50-50.01 or 50-50.02 of the ITAA 1997. It is therefore not a prescribed institution exempt from income tax by virtue of paragraphs 50-50(c) or (d) of the ITAA 1997.

Deployed as member of disciplined force

The EM states that the phrase is intended to mean a defence force (including a peacekeeping force) that is engaged in a non-warlike operation. It also covers a member of a police force, and applies to members of the Australian Federal Police deployed on an International Deployment Group mission who are subject to Commanders Orders to achieve operational policing outcomes.

In order for a person's deployment outside Australia as a member of a disciplined force to be by the Commonwealth, a State or Territory, it must be directly effected by an Australian government or an authority thereof.

In your case, you were not deployed as a member of the defence forces or Australian Federal Police, and your deployment was not by the Australian government or a government authority.

Activity of a kind specified in the regulations

This is to allow the scope of section 23AG of the ITAA 1936 to be extended. There are currently no regulations gazetted.

In your case, you do not satisfy paragraphs (a), (b), (c), or (d) of subsection 23AG(1AA) of the ITAA 1936 as your deployment is not directly attributable to:

· an Australian overseas aid program by your employer

· your employer operating a developing country relief fund or a public disaster relief fund as an international affairs deductible gift recipient

· activities by your employer exempt from income tax as a prescribed institution because of paragraphs 50-50(c) or (d) of the ITAA 1997

· your deployment by the Australian government or a government authority as a member of a disciplined force such as the Australian defence forces or the Australian Federal Police.

Consequently, the disability payments you received for the year ending 30 June 2010 are not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.