Edited version of private ruling

Authorisation Number: 1011657189620

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Ruling

Subject: Foreign income - employee/contractor - Country A

1. Are you an employee as a result of your contract with X?

Yes.

2. Is the foreign income derived from services provided under your contract exempt under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes.

This ruling applies for the following periods

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts

You are an Australian resident for tax purposes.

There is a tax system in place in Country A that taxes employment income.

There is no tax treaty between Australia and Country A.

You worked for X.

The Australian Government announced a program of assistance for Country A. This program is delivered through the Australian Government's aid program (AusAID).

You were required to comply with the clauses and provisions of the documents which have been provided and form part of this ruling.

The terms of reference (TOR) have also been provided.

You were required to work standard full time business hours.

X is responsible for your occupational health and safety during your assignment. You are covered by a security plan and for emergency medical and evacuation cover.

You are provided with working space, supplies, communications and administrative support.

You are to provide all equipment necessary for your own use for performance of the terms of reference for each assignment; including a computer equipped with any software required.

X shall, subject to receipt of:

· the agreements signed by you

· details of your nominated superannuation fund

· your air ticket stubs for project travel, and

· all services included in the TOR continually being performed satisfactorily,

pay monthly in arrears the monthly payment due into your nominated bank account.

The final month's professional fees will be paid within 30 days after completion of the contract, subject to satisfactory performance of the TOR and acceptance of work by the Y and X.

You are entitled to the following monthly payments:

· professional fee of $A

· an in-country accommodation allowance of $B (You were not provided with accommodation)

· superannuation of $C

You are entitled to the following additional periodic payments:

· transit and terminal expenses which includes visa, taxis, taxes, transit costs and sundries of $D

· mobilisation allowance for freight of personal belongings, transit, accommodation, storage of personal effects, and sundries of $E

· demobilisation allowance for freight of personal belongings, transit accommodation, storage of personal effects, and sundries of $E.

Other X Provided Benefits

· return economy class travel between city B and Country A

· medical and evacuation insurance.

Nowhere in the contracted documents is it stated that you could be required to pay damages arising from mishandling of your allotted tasks or were you requested to be insured to cover such damages.

You promise to:

· act at all times to protect the interests of X and carry out the services with due diligence and efficiency in conformity with sound administrative, professional and financial practices

· take all reasonable steps to minimise expenses

· keep accurate systematic records for in-field expenses and provide records to the X representative in such form and detail as is consistent with sound administrative practices

· furnish X with such information relating to the services as the X may from time to time reasonably request

· in addition to reports specified, keep detailed notes to be available on request to the X's nominated representative

· recognise the advisory nature of the services and behave in a manner consistent with the fostering and maintenance of friendly relations between the recipient government, X, the Y and any recipient government staff employed on the project.

You may take public holidays observed by the Government of Country A.

You are entitled to special leave including bereavement leave.

You will comply with any instructions from the Australian Diplomatic Mission in the project country regarding security and welfare matters.

During any assignments under this Agreement, you shall not engage, directly or indirectly, in your own name or in any other name, in any business or professional activities in Country A which is not directly related to Services under this agreement without the prior written consent of HR.

Either party may terminate an agreement by providing 30 days notice to the other party.

Either party may terminate an agreement immediately in writing, if the other party has failed to remedy a default under this Agreement within 14 days of receiving written notice to the other party.

X reserves the right to terminate an agreement immediately for any of the following reasons:

· your absence from duties without notifying HR's nominated representative except as a result of sickness or accident requiring hospitalisation

· unsatisfactory performance of the TOR by you

· significant misconduct by you which in the reasonable opinion of HR may bring it into disrepute

· significant incompatibility of you with local personnel/officials

· the premature termination or suspension, for any reason, of the X's agreement with the Y in relation to any individual project in which you have bean engaged

· at the specific request of the Y.

You are required to complete a time sheet daily to be submitted monthly for approval.

Relevant legislative provisions

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

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

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

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

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

Reasons for decision

Subsection 23AG(1) of the ITAA 1936 provides that where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived will be exempt from tax in Australia, subject to the qualification under subsection 23AG(2) of the ITAA 1936.

'Foreign service' is defined in subsection 23AG(7) of the ITAA 1936 as service in a foreign country as the holder of an office or in the capacity of an employee, and 'foreign earnings' include salary, wages, commission, bonuses or allowances.

Holder of an office

The meaning of this term was considered In Grealy v. Federal Commissioner of Taxation (1989) 24 FCR 405; 89 ATC 4192; (1989) 20 ATR 403, which concerned a university lecturer, the Full Federal Court held:

The word 'office' usually connotes a position of defined authority in an organisation, such as director of a X or tertiary educational body, president of a club or holder of a position with statutory powers……..Holders of professional employments, is not made an office holder merely because his position has a name.

Therefore, the term 'holder of an office' connotes a person who holds a position of authority and not a person engaged under a contract to provide professional services.

Your arrangement, does not involve the provision of services as a holder of an office but as a person providing professional services under a contract.

In the capacity of an employee

The expression employee is not defined in either the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997), therefore it has its ordinary meaning.

Taxation Ruling TR 2005/16 deals with the ordinary definition of employee, paragraphs 17-21 provide:

The relationship between employer and employee is often described as a contract of service, whereas the relationship between principal and independent contractor is a contract for services. Whether a person is an employee of another person or entity is a question of fact to be determined by examining the terms and circumstances of the contract between the parties whether express or implied.

A clause in the contract purporting to characterise the relationship between the parties as one of principal and independent contractor is not of itself determinative of the matter Trylow Pty Ltd v FC of T 2004 ATC 4406; (2004) 55 ATR 408.

The features below have been regarded as key indicators of whether an individual is an employee or contractor at common law:

(A) Control test

In an employer/employee relationship, the employer has the right to tell the employee not only what work is to be done but how and where it is done. The employee is subject to the employer's orders and directions.

The High Court in Zuijs v. Wirth Bros. Pty. Ltd. (1955) 93 CLR 561 at 571 described the significance of control in the context of skilled employment where the nature of the work performed left little scope for detailed control:

What matters is lawful authority to command so far as there is scope for it. And there must always be some room for it, if only in incidental or collateral matters.

(Paragraphs 26 and 27 of TR 2005/16)

You were required to comply with the clauses and provisions of the documents supplied.

You were under the direct day to day control and supervision of X through an in country team leader.

You promise to:

· act at all times to protect the interests of X and carry out the services with due diligence and efficiency in conformity with sound administrative, professional and financial practices

· take all reasonable steps to minimise expenses

· keep accurate systematic records for in-field expenses and provide records to the X representative in such form and detail as is consistent with sound administrative practices

· furnish X with such information relating to the Services as the X may from time to time reasonably request

· in addition to reports specified, keep detailed notes to be available on request to the X's nominated representative

· recognise the advisory nature of the Services and behave in a manner consistent with the fostering and maintenance of friendly relations between the recipient government, X, the Y and any recipient government staff employed on the project.

You will comply with any instructions from the Australian Diplomatic Mission in the project country regarding security and welfare matters.

You will take all reasonable steps to ensure that all electronic data (for example disks, e-mail. and other) sent to the X is free of any computer virus.

You were required to perform other tasks as directed.

This emphasises the intensity of control and limited scope of your activities and indicated that you could be deployed elsewhere on the project.

You were required to work standard full time business hours.

You are required to complete a time sheet daily to be submitted monthly for approval.

Hence, in terms of the indicator of control, your have a contract of service (employee).

(B) Integration test

The integration or organisation test seeks to distinguish whether a worker is operating on his or her own account and having independence in the conduct of their operations or working in the business of the payer (Paragraphs 32 to 34 of TR 2005/16).

Income Tax Ruling IT 2129 which has since been withdrawn gives a useful discussion of the integration test.

This test establishes whether you are performing the relevant services as an individual carrying on business on your own account or are your activities, part and parcel of the principal's business organisation. You would satisfy the integration test where:

· the relationship is a continuing one

· your activities are in effect restricted to providing service to one principal; and/or

· the individual would not generally profit commercially from sound management in the performance of his tasks, that is, the individual is so inextricably integrated in the business organisation of the principal that any benefit arising from the individual's work would flow to the principal.

A contract of employment is normally of continuing duration. However, fixed period contracts of employment are common in professional or specialised fields of employment.

You had no reward for better than expected performance.

A self employed person in a business may accumulate Goodwill, usually by creativeness or initiative to greatly influence a financial outcome. Because of the nature of assignments you accepted, you never had the opportunity to create business Goodwill.

Hence, in terms of the integration test, your have a contract of service (employee).

(C) Results

Paragraphs 35 and 36 of TR 2005/16 explain the importance and meaning of a contract for a specified result:

Where the substance of a contract is to achieve a specified result, there is a strong (but not conclusive) indication that the contract is one for services. In World Book (Australia) Pty Ltd v. FC of T Sheller JA said:

Undertaking the production of a given result has been considered to be a mark, if not the mark, of an independent contractor'.

The phrase 'the production of a given result' means the performance of a service by one party for another where the first-mentioned party is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome. Satisfactory completion of the specified services is the 'result' for which the parties have bargained. The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked. If remuneration is payable when, and only when, the contractual conditions have been fulfilled, the remuneration is usually made for producing a given result.

If you were a contractor, you would not be restricted as to time, location or redirection to other duties elsewhere.

You were engaged to be present at a fixed daily rate paid monthly, based on hours worked. It is therefore not based on an estimate of the time and labour cost necessary to complete a specified task. Your contract is not a results contract.

You are paid public holidays, annual leave, sick leave and special leave and superannuation.

You are required to work standard full time business hours.

Hence, in terms of the results test, your have a contract of service (employee).

(D) Whether the work can be delegated or subcontracted

Paragraph 42 of TR 2005/16 states:

If an individual has unlimited power to delegate the work to others (with or without the approval or consent of the principal), this is a strong indication that the person is engaged as an independent contractor. Under a contract for services, the emphasis is on the performance of the agreed services (achievement of the 'result'). Unless the contract expressly requires the service provider personally to perform the contracted services, the contractor is free to arrange for their employees to perform all or some of the work or may subcontract all or some of the work to another service provider. In these circumstances, the contractor is the party responsible for remunerating the replacement worker.

The contract does not specifically mention that you can substitute or delegate services to someone else. You do not have unlimited power to delegate.

It would seem there is an implied or express agreement that the work allocated is to be performed personally by you.

In terms of the delegated or subcontracted test, your have a contract of service (employee).

(E) Risk

An independent contractor, but not an employee, bears the commercial risk and responsibility for any substandard work or injury sustained in performing the work and will usually take out the appropriate insurance (paragraph 44 of TR 2005/16).

A contractor bears the responsibility and liability for losses occasioned by poor workmanship or negligence.

X have voluntarily covered you for workers compensation in a security and medical plan.

You were never required by X to provide Public Liability or Professional Indeminity insurance.

The final month's professional fees will be paid within 30 days after completion of the contract, subject to satisfactory performance of the TOR and acceptance of work by Y and X.

Your contract indicates you are an employee on this point.

(F) Provision of tools and equipment and payment of business expenses

Paragraphs 45 to 50 of TR 2005/16 state:

The provision of assets, etcetera, by an individual, and the incurring of expenses and other overheads, indicate an independent contractor although this is not necessarily inconsistent with some employment relationships.

Also an employee is often compensated for expenses incurred in the course of employment.

You are provided with all your work requirements, including working space, supplies, communications and administrative support.

You are to provide all equipment necessary for your own use for performance of the terms of reference for each assignment; including a computer equipped with any software required.

X in this contract paid all expenses surrounding your duties on the site and your agreement stipulates your personal expenses will be reimbursed.

You are entitled to a monthly in-country accommodation allowance of $B (You were not provided with accommodation).

Additional periodic payments:

· transit and terminal expenses which includes visa, taxis, taxes, transit costs and sundries of $D

· mobilisation allowance for freight of personal belongings, transit, accommodation, storage of personal effects, and sundries of $E

· demobilisation allowance for freight of personal belongings, transit accommodation, storage of personal effects, and sundries of $E.

Other X Provided Benefits

· return economy class travel between city B and Country A

Individuals who are provided or furnished with the necessary facilities, such as accommodation, furniture and equipment, by the person making the payment are, in terms of physical or working conditions, no different to that of an employee as such. This is contrasted to a case where, for example, an individual acquires and maintains special accommodation, that is, an office, workshop or studio from which activities are to be carried out and from which the activities may in fact be publicly advertised……………..

(IT 2129 paragraph 42)

You have been provided with an office to work from.

On these criteria you would be considered to have a contract of service

(G) Other indicators

Paragraphs 51 and 52 of TR 2005/16 discuss other key indicators suggesting an employment relationship:

(a) the employer's right to suspend or dismiss the person engaged.

Either party may terminate an agreement by providing 30 days notice to the other party

Either party may terminate an agreement immediately in writing, if the other party has failed to remedy a default under this Agreement within 14 days of receiving written notice to the other party.

X reserves the right to terminate an agreement immediately for any of the following reasons:

· your absence from duties without notifying HR's nominated representative. except as a result of sickness or accident requiring hospitalisation

· unsatisfactory performance of the TOR by you

· significant misconduct by you which in the reasonable opinion of HR may bring it into disrepute

· significant incompatibility of you with local personnel/officials

· the premature termination or suspension, for any reason, of the X's agreement with the Y in relation to any individual project in which you have bean engaged

· at the specific request of the Y.

(b) provision of employee benefits such as annual, sick and long service leave and other benefits prescribed under an award for employees.

You are not paid under an award, however, your contract contains annual leave, sick leave, long service and special leave provisions.

(c) the right to the exclusive services of the person engaged,

During any assignments under this Agreement, you shalI not engage, directly or indirectly, in your own name or in any other name, in any business or professional activities in Country A which is not directly related to services under this agreement subject to certain restrictions and without the prior written consent of HR.

In accordance with other indicators tests you are an employee.

In conclusion and on balance and in consideration of all the above factors it is felt that you have a contract of service and are an employee in terms of TR 2005/16. Accordingly, you are engaged in foreign service in terms of subsection 23AG(1) of the ITAA 1936.

Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available under subsection 23AG(1) of the ITAA 1936 in circumstances where an amount of foreign earnings derived in a foreign country is exempt from tax in the foreign country solely because of various reasons. None of the reasons apply to you

Therefore, the salary and wages received by you from employment in Country A will not be assessable under subsection 6-5(2) of the ITAA 1997.

As from 1 July 2009, a new rule was introduced into the ITAA 1936, section 23AG(1AA) of the ITAA 1936 provides that foreign earnings derived by Australian resident from 91 days continuous foreign service will be exempt if the foreign service is directly attributable to the delivery of Australia's overseas aid program by the individual's employer.

The Australian Government announced a program of assistance for Country A. This program is delivered through AusAID.

X has been contracted by Y to assist in the delivery of the program of work which constitutes Australian official development assistance.

The Explanatory Memorandum (EM) to the Tax Laws Amendment (2009 budget Measures No 1) Bill 2009 states that Schedule 1 inserts subsection 23AG(1AA) into the ITAA 1936 and provides that 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 Australian Agency for International Development (AusAID).

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.

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.

Since your secondment is part of the delivery of Australia's overseas aid program by AusAID, your foreign service under this deployment satisfies paragraph (a) of section 23AG(1AA) of the ITAA 1936.