Edited version of private ruling

Authorisation Number: 1011799047609

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Ruling

Subject: Exempt foreign employment income

Question

Is your salary income derived while you were working in foreign country X exempt from income tax in Australia?

Answer

Yes.

This ruling applies for the following period

Income year ended 30 June 2009

Income year ended 30 June 2010

Relevant facts

You are an Australian resident for income tax purposes.

You were employed by an Australian entity on a project (Project A) based in foreign country X for 18 months during the 2008-09 and 2009-10 income years.

You did not take any break from your employment. However you made a number of visits to Australia to attend half yearly meetings and to report on the project progress.

You were physically based for 18 months in foreign country X, except when participating in the half yearly meetings and were present at the Australian entity for X hours in total during the 18 months of the employment on this project.

You stated that the Australian, in response to the natural disaster, launched a huge aid program that included assistance to the tertiary education sector. Within that program a specific institute was established in a region of the foreign country X.

In your original private ruling application you provided a letter from AusAID addressed to your Australian employer.

The letter states that AusAID has agreed to provide support for project A (the activity). AusAID has approved funds as a three year commitment to the activity, subject to the conditions that the activity meets specific objectives.

The letter states that the Australian entity's acceptance will form an agreement between the entity and AusAID.

The entity was appointed by AusAID as the project 'Managing Contractor'. An Annex to the letter defines the role of the entity as follows;

The entity shall manage the project, including the provision of all personnel, resources and management to undertake relevant planning, coordination, liaison, consultation and administration necessary for the effective implementation of the project.

The Annex (clause X) begins with a Preamble which refers to the Australian and foreign country partnership for Reconstruction and Development (Reconstruction project) jointly announced by Australia and the foreign country.

The reconstruction project activities are jointly managed and implemented in accordance with the existing General Agreement and Development Cooperation between Australia and foreign country X by the Australian and foreign country Governments under the existing foreign country bilateral program.

As part of the reconstruction project, the region Rehabilitation program (Rehabilitation Program) has been established to provide particular focus on parts of foreign country X most severely affected by the natural disaster.

The letter states that the project A falls within the region Rehabilitation Program.

Project A would be closely monitored by AusAID. The project will be subject to regular monitoring and review and will respond flexibly to challenges on the ground. The six-monthly work plan will be the key planning instrument of the project. Overall oversight of the project was conducted by a project co-ordinating committee among the members of which were representatives of both the Australian and foreign country X governments. The Australian representative was an AusAID official.

Your role was essentially as Team leader (the AusAID term) to manage the project A office in the foreign country.

Apart from the six-monthly work plan, you submitted brief reports every month to AusAID in the Australian embassy. You were in regular contact with AusAID officials in the embassy in foreign country X to discuss the work regularly with the AusAID representative in foreign country X and attended monthly meetings of representatives of AusAID-supported projects in foreign country X.

You stated that in effect project A was a creation of AusAID which financed and oversaw its activities while leaving responsibility for the actual provision of the program to personnel appointed by the Australian entity.

You stated that the 'General Agreement on Development Cooperation between the Government of Australia and the Government of Republic of foreign country X' signed by the Foreign Ministers of both Australia and foreign country X ( the Development Cooperation Agreement ) applies to your work in foreign country X. Annex 1 (clause X) of project A also states that the activities are jointly managed and implemented in accordance with the existing General Agreement on Development Cooperation between the two countries.

An article of the Development Cooperation Agreement states that the income tax liability of Australian firms and Australian personnel shall be borne by the foreign country's government.

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(7)

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

Income Tax Assessment Act 1936 Paragraph 23AG(1AA) (a)

Income Tax Assessment Act 1936 Subsection 23AG(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, whether in or out of Australia, during the income year.

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 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 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.

Subsection 23AG(7) of the ITAA 1936 defines foreign service 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 and allowances.

Your foreign earning derived prior to 1 July 2009 satisfies subsection 23 AG (1) of the ITAA 1936 subject to subsection 23AG (2) of the ITAA 1936.

However, from 01 July 2009 subsection 23AG(1AA) of the ITAA 1936 provides that foreign earnings will not be exempt under section 23AG(1) of the ITAA 1936 unless the continuous period of foreign service is directly attributable to, amongst other things, the delivery of Australian official development assistance by the person's employer (paragraph 23AG(1AA)(a)).

The term 'Australian official development assistance' contained in paragraph 23AG(1AA)(a) is not defined for the purposes of section 23AG. However, the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 (the Explanatory Memorandum) introducing subsection 23AG(1AA) provides guidance on the meaning of the phrase.

Paragraph 1.19 of the Explanatory Memorandum states 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 the Australian Agency for International Development (AusAID)'. The Explanatory Memorandum does not elaborate on the meaning of 'assistance' in this context.

The ordinary meaning of 'assistance' in the Macquarie Dictionary is 'the act of assisting; help; aid'. Therefore, adopting the ordinary meaning, 'assistance' for the purposes of section 23AG would encompass the provision of money, goods or services capable of affording help or aid.

The meaning of the term 'delivery' is considered in paragraphs 1.20 and 1.21 of the Explanatory Memorandum which suggests that paragraph 23AG(1AA)(a) is intended to apply to both direct and indirect delivery of Australian official development assistance by AusAID. That is, the paragraph covers the delivery by AusAID of Australian official development assistance directly through Australian Public Service employees and indirectly through employees of entities contracted by AusAID to assist it in the delivery of Australian ODA.

Reference to the 'person's employer' in paragraph 23AG(1AA)(a) to the delivery of Australian official development assistance limits eligibility for the exemption to Australian Public Service employees and employees of those entities contracted by AusAID to assist it in the delivery of Australian ODA.

Paragraph 1.35 of the Explanatory Memorandum seems to suggest that 'attributable to' in this context means 'related to'. Thus, for paragraph 23AG(1AA)(a) to apply, the person's foreign service must be directly (that is, in a direct manner) related to the delivery of Australian ODA by the person's employer.

Example 1.3 in the Explanatory Memorandum implies that employees of those entities contracted by AusAID to assist it in the delivery of Australian ODA would be covered by paragraph 23AG(1AA)(a).

Eli is a motor mechanic employed by Emu Engineering Pty Ltd, a private company contracted by AusAID to provide vocational training in Vanuatu. He is posted to Vanuatu for 180 continuous days. Eli's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

Your employer was contracted by AusAID to assist in with project A which falls within the region Rehabilitation Program and the Reconstruction project. The Annex that described the scope of services of project A that form part of the agreement between the Australian entity and AusAID states that project A falls within the region Rehabilitation Program. This program is part of the two countries Reconstruction program.

These projects could be considered to be Australian ODA. You stated that your role was essentially to serve as a team leader of project A. Based on the meaning and the example provided in the Explanatory Memorandum, employees of entity contracted by AusAID to assist in its delivery of Australian ODA would be covered by paragraph 23AG(1AA)(a) of the ITAA 1936.

Accordingly, your foreign employment income derived after 1 July 2009 from this service satisfies the requirement of paragraph 23AG(1AA)(a) of the ITAA 1936.

However, the foreign earnings of individuals engaged in foreign service will not be exempt if one of the conditions for non-exemption contained in subsection 23AG(2) applies.

Subsection 23AG(2) applies, to deny an exemption, if the foreign earnings are exempt from tax in the foreign country only because of one or more of the following reasons:

· a double tax agreement with Australia or a law giving effect to a double tax agreement (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936);

· a law of that foreign country which generally exempts from, or does not provide for, the imposition of tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936), or

· a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations (paragraphs 23AG(2)(e), 23AG(2)(f) and 23AG(2)(g) of the ITAA 1936).

You stated that your foreign income was exempt from tax in foreign country X due to the 'General Agreement on Development Cooperation between the two countries' governments. In particular, an article of the Development Cooperation Agreement states that the income tax liability of Australian firms and Australian personnel shall be borne by the foreign country's government.

The Annex 1 attached to the agreement between your employer and AusAID, states that activities of these projects are jointly managed and implemented in accordance with the existing General Agreement on Development Cooperation between the two countries under the existing bilateral program.

Since your foreign income is exempt from tax in foreign country X because of a Development Cooperation Agreement, which is not a reason listed in subsection 23AG(2) of the ITAA 1936, your foreign income can be exempt under subsection 23AG(1) of the ITAA 1936.

As your foreign salary and wages are exempt from tax under subsection 23AG(1) of the ITAA 1936, it is not assessable in Australia under subsection 6-5(2) of the ITAA 1997.

Further issues for you to consider

Please note that foreign earnings exempt under section 23AG of the ITAA 1936 are taken into account in calculating the tax payable on other income derived by a taxpayer. This method of calculation referred to as exemption with progression prevents the exempt income from reducing the Australian tax payable on the other income. This income needs to be included as exempt foreign salary and wage income in your Australian tax return.