Edited version of private ruling

Authorisation Number: 1011733117068

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Ruling

Subject: Foreign Income

Question:

Is the employment income you derived from working in Country A exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer: Yes.

This ruling applies for the following period:

Year ended 30 June 2010.

Year ending 30 June 2011.

The scheme commenced on:

1 July 2009.

Relevant facts

You are an Australian resident for income tax purposes.

You were employed by Company A.

Company A is a corporation domiciled in Country A.

Company A was contracted by two Australian Government agencies to provide specific services to government aid workers in Country B.

You were employed by the company to provide specific services.

You commenced operations in Country B some time in the 2009-10 income year. You ceased working for them some time in the 2010-11 income year.

The employment income you derived from working in Country A contains your salary as well as two other specific allowances.

The other two specific allowances are paid for costs arising from your foreign service.

You were liable to pay tax in Country B on the income you derived from working there.

Australia does not have a tax treaty with Country B.

Your overseas employment stipulated a work cycle of a several amount of weeks on site followed by a several amount of weeks off as rest and recreation (R&R) leave. You did not take any leave other than R&R leave.

Your R&R leave accrued as a result of your foreign service in Country B.

During your R&R periods you spent some time in Australia. However, you did not perform any work related duties while in Australia.

You were on-call 24 hours a day during your specific work shift.

There is no Memorandum of Understanding (MOU) or an Agreement of Co-operation for Development in existence between the Australian Government and the Government of Country B.

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 Section 23AG

Income Tax Assessment Act 1936 Subsection 23AG(1)

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

Income Tax Assessment Act 1936 Subsection 23AG(6)

Income Tax Assessment Act 1936 Subsection 23AG(2)

Reasons for decision

Salary and allowances are ordinary income for the purposes of subsection 6-5(2) of the Income Tax Assessment Act 1997 (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 ITAA 1936, which deals with overseas employment income.

In addition to your salary, your overseas employment income consisted of two other specific allowances. As these allowances were paid to compensate for costs arising from your foreign service they are considered to be derived from your foreign service.

Accordingly, your foreign employment income is considered to be foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936.

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.

In your case, you were employed by Company A. Company A was contracted by two specific Australian Government agencies to provide specific services to government aid workers in Country B.

Therefore, your foreign service is considered to be directly attributable to the first condition mentioned above in subsection 23AG(1AA) of the ITAA 1936 - it is directly attributable to the delivery of Australian official development assistance by your employer.

Subsection 23AG(6) of the ITAA 1936 provides that the period of foreign service will include recreation leave (which is accrued as a result of the foreign service) other than long service leave or leave without pay or reduced pay and will not constitute a break in a period of foreign service.

Where the overseas employment is performed under a cyclical arrangement, the whole of the work cycle (times on and off) is regarded as a continuous period of employment (Taxation Ruling IT 2441 and Taxation Ruling TR 96/15).

IT 2441 states that where a resident is employed in a foreign country, leave taken in circumstances similar to those described in Taxation Ruling IT 2015 is treated as recreation leave that forms part of a period of foreign service under subsection 23AG(6) of the ITAA 1936.

IT 2015 considers employees who had the following terms of engagement:

· 12-hour days.

· 7-day working week.

· Engaged in uninterrupted cycles of five weeks on site and five weeks leave.

· Taking into account time off, over a period of 52 weeks average weekly hours would be in excess of 40 hours per week.

· During the periods of leave in Australia, the employee is not required to attend the company's offices, but may be required to return to work at any time if required, and

· No further entitlement to any additional annual leave.

In referring to recreation leave under subsection 23AG(6) of the ITAA 1936, TR 96/15 considers extended leave not to be part of the recreation leave. However, additional recreation leave entitlements granted to employees posted overseas are not extended leave where the additional leave is reasonable. This may be the case where it is granted due to the hardship involved in the postings resulting in the need for more rest and recreation.

In your case, your work schedule was a specific amount of weeks on, followed by a specific amount of weeks off as R&R leave which was accrued as a result of your foreign service in Country B. You were expected to work extended hours without additional compensation. You did not take any leave other than R&R leave. You did return to Australia during your R&R, however, you did not undertake any work whilst you were here.

Your circumstances are considered to be similar to that outlined in IT 2015. Your average weekly hours worked would be in excess of 40 hours per week. The rotational time off compensated you for the long period worked.

Accordingly, your rotational days off are treated as recreational leave in accordance with IT 2441.

Your work circumstances are considered to be a cyclical arrangement as described in IT 2441 and TR 96/15. Therefore, the entire period of your cyclical arrangement forms part of a continuous period of foreign service.

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. None of the reasons listed apply in your case.

There is no tax treaty between Australia and Country B. Your employment income from Country B was subject to tax in Country B under their domestic law. None of the other reasons in subsection 23AG(2) of the ITAA 1936 apply to your situation.

Therefore, as you worked continuously overseas for a period greater than 91days, your foreign employment income is exempt income in Australia under section 23AG of the ITAA 1936.