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Ruling

Subject: Approved overseas projects

Question 1

Is the foreign income you derive from providing service on an approved project in another country exempt from tax in Australia under section 23AF of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced on

01 July 2010

Relevant facts

You are an Australian citizen and your country of origin is Australia.

You departed Australia during 2006 and became a non-resident of Australia from this date.

You departed Australia to work for an indefinite period of time providing security services in another country.

A number of years ago until the commencement of your current contract, you were on rolling short term contracts.

You are a contractor and you have been contracted by a company.

Your contract period is for about two years.

You are contracted on a cyclical arrangement that is based on a period on followed by a period off cycle.

You are on call 24 hours seven days a week.

You are provided accommodation.

The period taken off as rest and recuperation (R&R) leave accrued as a result of your foreign service in the other country.

You spend your R&R leave in various countries; however it is expected that you will spend a large amount of this leave in Australia during the term of your contract. You will not be performing any employment duties during this leave.

When you return to Australia you would stay with your parents. Occasionally, you would also stay with friends or in hotels.

You will take no other leave apart from your R&R leave. You are not paid when you are on R&R leave.

You currently hold a 12 month diplomatic visa.

You own a house in a regional Australian city. You lived in the house with your former partner before leaving for the other country. Your former partner and a friend continued to live in the property for about six months, after which time, it has been vacant. You have some personal effects stored there but you consider the house not to be habitable due to renovations and repairs that need to be done on the property.

You have Australian bank accounts.

You do not own any assets outside Australia.

You and your former partner have not been Commonwealth of Australia Government employees.

There is no tax treaty between Australia and the other country.

As you are a contractor, your foreign service does not qualify for exemption under section 23AG of the ITAA 1936.

Relevant legislative provisions

Income tax Assessment Act 1936

§ subsection 6(1)

§ section 23AF

§ Subsection 23AF(3)

§ Subsection 23AF(17)

§ Subsection 23AF(18)

Income Tax Assessment Act 1997

§ Subsection 995-1(1)

Reasons for decision

Section 23AF of the ITAA 1936 provides that where an Australian resident has been 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 that is attributable to that qualifying service is exempt from tax.

Qualifying service includes time spent outside Australia working on the project, reasonable travel time between Australia and the project, absences due to accident or illness while engaged on qualifying service, and time spent on leave which accrued during the qualifying service (subsection 23AF(3) of the ITAA 1936).

All income directly attributable to qualifying service by the taxpayer on an approved project e.g. salary, wages, commission, bonuses, allowances, contractual payments and payments for recreation leave entitlements which accrue during the relevant period are eligible for the exemption from tax (subsection 23AF(18) of the ITAA 1936).

However, section 23AF of the ITAA 1936 does not exempt excluded income. Subsection 23AF(17) of the ITAA 1936 provides that income is excluded income if the income is exempt under section 23AG of the ITAA 1936 and exempt from tax in the overseas country, solely because of the provisions of a double taxation agreement between Australia and the other country.

Where the overseas service is performed under a cyclical arrangement, the whole of the work cycle (times on and off) may be regarded as qualifying service where leave taken in circumstances similar to those described in Taxation Ruling It 2015.

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 your case, you are on call 24 hours seven days a week and a work day can last up to 21 hours. During your R&R leave, you do not perform any work related duties. You are also not entitled to any additional leave.

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 compensates you for the long period worked. Therefore, the leave that accrues in respect of a period you were engaged on an approved project forms part of your qualifying service.

You are an Australian resident who provides service on an approved project in another country for a continuous period of not less than 91 days. As your income is not exempt from tax in the other country due to a double tax treaty, you satisfy the conditions under section 23AF of the ITAA 1936.

Accordingly, the income you derive from the other country is exempt from income tax in Australia under section 23AF of the ITAA 1936

Note:

Approved overseas projects income is taken into account in calculating Australian tax payable on other income derived by the taxpayer. Tax on the non-exempt income is calculated by applying a notional average rate of tax payable on the sum of the exempt and non-exempt income.