Edited version of private ruling

Authorisation Number: 1011765631628

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Ruling

Subject: Foreign income

Question

Is the foreign income you derive in respect of an approved overseas project exempt from tax pursuant to section 23AF of the Income Tax Assessment Act 1936?

Answer

Yes.

This ruling applies for the following periods:

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are a resident of Australia for income tax purposes and will remain so while overseas.

You are an independent contractor who is contracted by Company X to work in Country A.

Company X is a resident of Australia for income tax purposes.

You commenced your work in Country A in 2011 and you expect to terminate your contract 40 weeks later.

You have a cyclical work arrangement in which you work in 8 week rotations.

You have stated that during your 8 week rotations, you work everyday. You also stated that there are no fixed times for your work but on average, you work 10 to 12 hours everyday.

After working 8 weeks in Country A, you take 4 weeks' leave in Australia.

You have stated that the 4 weeks' leave you take in Australia is recreation leave which is accrued as a result of your foreign service in Country A.

You earn $X per day whilst on duty.

You have stated that you are not related or have any business association with Company X.

The Minister of Trade has approved the services provided by Company X in Country A as an eligible project for the purposes of section 23AF of the Income Tax Assessment Act 1936.

The expiry date of the approval is in 2012.

Your foreign income is not subject to tax in Country A.

There is no double tax agreement between Australia and Country A.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AF,

Income Tax Assessment Act 1936 Section 23AG,
Income Tax Assessment Act 1997 Subsection 6-5(2),
Income Tax Assessment Act 1997 Subsection 6-15(2) and
Income Tax Assessment Act 1997 Section 11-15.

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 purposes 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 assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AF of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with income derived in respect of overseas approved projects.

Subsection 23AF(1) of the ITAA 1936 provides that where a resident individual has been engaged in qualifying service on an approved project for a continuous period of at least 91 days, any eligible foreign remuneration derived from that service will be exempt from taxation.

For the purposes of subsection 23AF(1), paragraph 23AF(18)(b) states that "eligible foreign enumeration" means income (not being excluded income) that is derived by the individual under a contract with an eligible contractor, being a contract that is wholly or substantially for the personal services of the person.

Paragraph 23AF(18)(a) states that "eligible contractor" includes a resident of Australia.

Subsections 23AF(3)-(9) consider what period is to be included as qualifying service.

Subsection 23AF(3) provides qualifying service includes the time spent by the individual:

(a) outside Australia during which he is engaged in the performance of personal services in connection with the approved project;

(b) travelling between Australia and the site of the approved project;

(c) was absent from work by reason of an incapacity for work due to accident or illness occurring during paragraph a) or b); or

(d) is on eligible leave, being leave that accrued in respect of the period the individual was taken to be engaged on qualifying service by virtue of paragraphs a), b) or c).

For the purposes of paragraph 23AF(3)(d), subsection 23AF(18) states that "eligible leave" means leave other than long service leave.

Subsection 23AF(11) provides that an approved project is one approved in writing by the Minister for Trade.

Subsection 23AF(17) provides that income is excluded income if it is:

(a) subject to section 23AG; or

(b) included in assessable income under certain provisions;

(c) derived from sources outside Australia and

i. is exempt from income tax in that country; and

ii. would not be exempt from income tax in that country apart from the operation of a double tax agreement; or

iii. payments in lieu of long service leave; or

iv. payments by way of superannuation or pension.

Subsection 23AF(10) provides that the Commissioner may limit the amount of exempt income under this section where he feels the amount is excessive.

Approved overseas project

You are contracted by Company X to work in Country A.

The Minister of Trade has approved the services provided by Company X in Country A as an eligible project for the purposes of section 23AF of the Income Tax Assessment Act 1936.

The expiry date of the approval is in 2012.

Therefore, you are engaged on an approved overseas project pursuant to subsection 23AF(11).

Qualifying service of at least 91 days

You are a resident of Australia for income tax purposes and will remain so while overseas.

You commenced your work in Country A in 2011 and you expect to terminate your contract 40 weeks later.

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.

IT 2015 states the leave taken in such circumstances was eligible leave for the purposes of paragraph 23AF(3)(d). Thus, the 5 week break after each 5 weeks service did not constitute a break in the 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. Taking into account time off, over a period of 52 weeks, average weekly hours worked were in excess of 40 hours per week.

You have a cyclical work arrangement in which you work in 8 week rotations. After working 8 weeks in Country A, you take 4 weeks' leave in Australia. This leave is not long service leave.

You have stated that during your 8 week rotations, you work everyday. You also stated that there are no fixed times for your work but on average, you work 10 to 12 hours everyday.

Taking into account time off, over a period of 40 weeks, your average weekly hours worked will also be in excess of 40 hours per week. As your circumstances are similar to that described in IT 2015, the period of leave taken by you under the cyclical arrangement are taken to be eligible leave for the purposes of paragraph 23AF(3)(d).

Eligible foreign remuneration

Section 23AG of the ITAA 1936 applies to a resident engaged in foreign service for a continuous period of at least 91 days. Pursuant to subsection 23AG(7), foreign service means service in a foreign country as the holder of an office or in the capacity of an employee.

You are an independent contractor who is contracted by Company X. Therefore, section 23AG does not apply to you as you are not engaged in foreign service as the holder of an officer or in the capacity of an employee pursuant to subsection 23AG(7).

Your income is not included in the specific provisions listed under paragraph 23AF(17)(aa).

Your foreign income is not subject to tax in Country A. There is no double tax agreement between Australia and Country A.

Thus, your foreign income is not exempt from income tax in Country A due to a double tax agreement for the purposes of paragraph 23AF(17)(b).

Your payments do not consist of payments in lieu of long service leave or by way of superannuation or pension for the purposes of paragraph 23AF(17)(c).

Accordingly, your foreign income is not excluded income because it does not fall under any of the conditions listed in subsection 23AF(17).

Company X is a resident of Australia for income tax purposes. Thus, it is an eligible contractor for the purposes of subsection 23AF(18).

Therefore, your foreign income is eligible foreign remuneration pursuant to subsection 23AF(18) as it is not excluded income and it is derived by you under a contract with an eligible contractor.

Not excessive income

You earn $X per day whilst on duty.

What is excessive remuneration is a question of fact to be decided on the merits of each case. You have stated that you are not related or have any business association with Company X. This suggests that your remuneration was negotiated by you with Company X at arm's length and on commercial terms.

Therefore, your remuneration is not excessive pursuant to subsection 23AF(11).

Exempt from tax

Therefore, as you are engaged on qualifying service on an approved project for a continuous period of at least 91 days, your eligible foreign remuneration is exempt from tax pursuant to section 23AF.