Edited version of private ruling

Authorisation Number: 1011679241667

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Ruling

Subject: Approved overseas projects

Issue

Whether contract income derived whilst working on an approved overseas project in a foreign country is exempt from Australian income tax under section 23AF of the Income Tax Assessment Act 1936 (ITAA 1936).

Question

Is your contract income derived whilst working on an approved overseas project in a foreign country exempt from Australian income tax under section 23AF of the Income Tax Assessment Act 1936 (ITAA 1936) for the following income years.

30 June 2011

30 June 2012

30 June 2013

Answer: Yes.

Yes for the period from 1 July 2012 to the expiry date of the Project the income will be exempt.

For the period from the expiry date of the Project the income will not be exempt.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on

The scheme has commenced.

Relevant facts

You are an Australian resident for income tax purposes.

You have been offered a contract to work for a company ('the Company') as an independent contractor, in relation to a project in a foreign country (the Project) to provide consultancy services to the Company.

The project has been granted 'approved project status' by the Minister for Trade under subsection 23AF(11) of the Income Tax Assessment Act 1936 ('ITAA 1936').

A contractor agreement ('the Contract') between yourself and the Company to provide your personal services in relation to the Project was entered.

You will be renewing your current contact when it expires.

You are an independent contractor of the Company. You have commenced the contracted services in the foreign country.

The timetable for completion of the contracted services will be X week rotations.

You state that you work in the foreign country on the project X days a week, X hours a day, your rotation to fulfil the contracted services is X weeks in the foreign country X weeks leave rotation back to Australia. While on leave you will be taking a holiday.

You are paid a daily rate in respect of the services provided to the Project.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AF.

Income Tax Assessment Act 1997 Subsection 6-5(2).

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Contract income is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Subsection 23AF(1) provides that where a natural person is engaged on qualifying service on a particular approved project for a continuous period of not less than 91 days, any eligible foreign remuneration derived by the person from that qualifying service is exempt from tax.

Subsection 23AF(18) of the ITAA 1936 defines 'eligible foreign remuneration'. The definition refers to income (not being excluded income) that is directly attributable to qualifying service by a resident individual on an approved project.

Paragraph 23AF(17)(b) exclude an income from being eligible foreign remuneration where that income is derived in a foreign country and is exempt from income tax in that country solely because of a double tax agreement.

In your case, paragraph 23AF(17)(b) does not apply to treat the contract income as excluded income on the basis of information provided.

You are engaged by the Company as an independent contractor to provide your personal services on a project that is an approved overseas project. Therefore, the income you derive in respect of the Project is eligible foreign remuneration as defined under subsection 23AF(18) only whilst the approval remains in force.

Subsection 23AF(3) of the ITAA 1936 provides that a person shall be taken to be engaged on qualifying service on an approved project during any of the following periods during which the person:

(a) is outside Australia and engaged in performing services on the project, including days within those periods when, as a normal incidence of work arrangements, the person is not actually performing services on the project (for example weekends, public holidays and equivalent time-off);

(b) is travelling between Australia and the project site, provided the Commissioner considers the time taken for the journey is reasonable;

(c) is absent from work due to accident or illness occurring while the person was on qualifying service as described in (a) or (b); or

(d) is on leave, other than long service leave, that accrued while the person was engaged in qualifying service on the project, whether or not taken in Australia.

Taxation Ruling IT 2015 provides the Commissioner's view on the determination of the period of qualifying service for the purposes of section 23AF of the ITAA 1936, where employees engaged on an approved project have contracts that dictate that they are engaged in uninterrupted cycles of 5 weeks on site and 5 weeks leave in Australia.

The ruling states that the 5 week break after each 5 weeks service would not constitute a break in the service period as, in accordance with subsection 23AF(3) (ITAA 1936), the employees are on leave accrued during a period that the employee was engaged in eligible foreign service. This is so due to the terms of the employment being such that the employees work 12 hours a day, 7 days a week for the 5 weeks that they are on duty.

In your case, you work X days a week, X hours a day in the foreign country, with site rotation cycles being X weeks on and X weeks off. As your circumstances are similar to that described in IT 2015, the period leave taken by you under the cyclical arrangement are taken to be qualifying service.

You work in the foreign country on a project which has been approved by Australian Trade Commission as an approved overseas project for the purposes of section 23AF of the ITAA 1936. As your period of service in the Project is not less than 91 days, the income you derive from working on the project is exempt from tax in Australia under section 23AF of the ITAA 1936 until the expiration of the Project. However, for the period from the expiration of the Project to 30 June 2013, as the Project is no longer an approved project the income will not exempt under section 23AF (unless of course the approval is renewed).

Exempt 23AF income and other income

Subsection 23AF(17A) of the ITAA 1936 provides that the eligible foreign remuneration of a taxpayer which is exempt from Australian tax under section 23AF is nevertheless taken into account in calculating the Australian tax on other assessable income derived by the taxpayer.

Tax on other assessable income will be calculated by applying to the non-exempt income (for example Australian business or investment income), the notional average rate of tax payable on the sum of exempt income and non-exempt income.

Any deductions that relate to the exempt income are allowed as if the exempt income was assessable income. That is, expenses which relate directly to earning income in the foreign country are deductible from exempt income.