Edited version of private ruling

Authorisation Number: 1011704228214

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Ruling

Subject: Foreign income

Question

Is the income you receive for working in Country X assessable income in Australia?

Answer

No.

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

The scheme commenced on:

1 January 2011

Relevant facts and circumstances

You are employed by a Commonwealth Government department.

You will be working in Country X for at least two years in a placement with the Country X.

Your position will be funded by Australia's overseas development assistance budget.

You will maintain your Australian bank accounts.

You may return to Australia from time to time on holidays and for work.

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 11-15.

Income Tax Assessment Act 1936 Subsection 23AG(1).

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

Income Tax Assessment Act 1936 Subsection 23AG(7).

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, whether in or out of Australia, during the income year.

Salary and wages are ordinary income for the purpose of subsection 6-5(2) of the ITAA 1997.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not included in assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936), which deals with overseas employment income.

Subsection 23AG(1) of the 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. However, new subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to the following:

· delivery of Australian official development assistance by your employer

· activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund)

· activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia

· deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force

Continuous period of foreign service

Subsection 23AG(7) of the ITAA 1936 (the definitions section) defines 'foreign service' to be 'service in a foreign country as the holder of an office or in the capacity of an employee'. Consistently with the decision of the Federal Court in Overseas Aircrew Basing Limited v. Federal Commissioner of Taxation [2009] FCA 7; (2009) 175 FCR 449; 2009 ATC 20-089 (Overseas Aircrew), this service involves taxpayers 'actually on the job' which is performed in a particular foreign country (see paragraph 94 of the decision).

Ordinary meaning of continuous foreign service - subsection 23AG(1)

Subsection 23AG(7) of the ITAA 1936 does not, however, define what constitutes a period of 'continuous' foreign service. The decision of the Administrative Appeals Tribunal in McCabe v. FC of T 2008 ATC 10-055; [2008] AATA 904 (McCabe) notes that the word 'continuous' in subsection 23AG(1) is not defined in subsection 23AG(7) and will accordingly bear its ordinary meaning. In McCabe, the Tribunal relied on the following definition of the word in The Macquarie Dictionary:

1. having the parts in immediate connection, unbroken.

2. uninterrupted in time; without cessation.

The taking of recreation leave by the taxpayer is an interruption or break in service during which the taxpayer is not 'actually on the job' in a particular foreign country. This interruption or break accordingly brings about a discontinuity in a period of foreign service by the taxpayer under subsection 23AG(1) of the ITAA 1936.

Extended meaning of engaged in foreign service - subsection 23AG(6)

Subsection 23AG(6) of the ITAA 1936 provides that for the purposes of section 23AG of the ITAA 1936, a 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:

(a) absent on recreation leave, other than:

(i) leave wholly or partly attributable to a period of service or employment other than that foreign service;

(ii) long service leave, furlough, extended leave or leave of a similar kind (however described): or

(iii) leave without pay or on reduced pay; or

(b) absent from work because of accident or illness.

This subsection accordingly extends the meaning of what constitutes continuous foreign service by deeming certain temporary absences from a period of foreign service to specifically form a part, and so preserve the continuity, of foreign service - absences that would otherwise constitute a break in a continuous period of foreign service.

Recreational leave that accrues while you are working overseas for an Australian employer but is not paid until you take the leave (even after you return to Australia) is still taken to be foreign earnings derived from that foreign service and is therefore exempt from Australian tax if the other earnings from that service are exempt. This is so even though you were paid after the foreign service was performed and the source of the annual leave payment was Australia.

Continuous foreign service directly attributable to certain activities

The opening words of subsection 23AG(1AA) 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) of the ITAA 1936, 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).

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, an individual's foreign service must be directly (that is, in a direct manner) related to the activities of their employer.

Application to your circumstances

In your case you will be working in Country X for at least two years in a position funded by Australia's overseas development assistance budget.

You meet the requirements of subsection 23AG(1AA) of the ITAA 1936 as you will be overseas for a continuous period of over 91 days, and you are working as part of an Australian official development assistance program.

Therefore, the income you receive for working in Country X is exempt income will not be taxable in Australia under subsection 6-5(2) of the ITAA 1997.