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Ruling

Subject: Foreign Income

Question 1:

Is the salary income you derived from working in Country X exempt income in Australia under section 23AF of the Income Tax Assessment Act 1936 (ITAA 1936) in the 2010-11 income year?

Answer 1:

Yes.

Question 2:

Is the specific allowance you were paid for travelling to and departing Country X exempt income in Australia under section 23AF of the ITAA 1936 in the 2010-11 income year?

Answer 2:

No.

This ruling applies for the following period:

Year ended 30 June 2011.

The scheme commenced on:

1 July 2010.

Relevant facts

You are an Australian resident for income tax purposes.

You were employed on a contract to provide services in Country X for Company A during specific periods in the 2010-11 income year.

You state that you performed more than 91 days service in the 2010-11 income year.

Company A had been engaged to provide specific services to the Australian Government on a specific approved project by a Ministry.

You worked on a rotation of several weeks on, followed by several weeks off as rest and recreation (R&R). You worked 7 days a week on an on-call basis 24 hours a day.

After the end of each rotation at work, you returned to Australia for your R&R. However, whilst in Australia you were on call to return to Country X at any time. You did not undertake any work whilst in Australia.

There is no tax treaty between Australia and Country X.

The tax laws of Country X provide for the imposition of income tax on employment income and do not generally exempt such income from tax.

Apart from your salary income, you derived a specific allowance which was paid to cover the costs you incurred for travelling to and departing from Country X.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AF

Income Tax Assessment Act 1936 Section 23AF(1)

Income Tax Assessment Act 1936 Section 23AF(11)

Income Tax Assessment Act 1936 Section 23AF(3)(d)

Income Tax Assessment Act 1936 Section 23AG(6)

Income Tax Assessment Act 1997 Section 6-5(2)

Reasons for decision

Salary Income

Section 23AF(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where an Australian resident has been engaged in a 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 the qualifying service is exempt from tax.

For a project to be an approved project for the purposes of section 23AF, there must be in force an approval granted in writing by the Minister of Trade (subsection 23AF(11) of the ITAA 1936).

Subsection 23AG(6) of the ITAA 1936 provides that a period during which a person is engaged in foreign service includes any period during which the person is absent on recreation leave in accordance with the terms and conditions of the foreign service.

Paragraph 7 of Tax Ruling IT 2441 states that where an Australian resident taxpayer is employed in a project in a foreign country, leave taken in circumstances similar to those mentioned in Tax Ruling IT 2015 would be treated as recreation leave forming part of a period of foreign service under subsection 23AG(6) of the ITAA 1936.

IT 2015 refers to the application of paragraph 23AF(3)(d) of the ITAA 1936 where employees are engaged in uninterrupted cycles of 5 weeks on site on an onshore oil drilling project and 5 weeks leave in Australia. IT 2015 states that the employees will be taken to have been engaged on an approved project for a period of qualifying service equal to the total number of days they are engaged under the 5 weekly cyclical arrangements.

As your circumstances are similar to that described in IT 2015, it is considered that the periods of rest and recreation leave spent by you away from your work form part of your foreign service period. Accordingly, it is considered the taking of rest and recreation leave does not break your period of continuous foreign service for the purposes of section 23AF of the ITAA 1936.

Overseas employment income may also be specifically exempted from tax under agreements made between countries, such as Tax Treaties and Memoranda of Understanding. There is no tax treaty between Australia and Country X.

As you are an Australian resident who was employed on a specific approved project in Country X for a continuous period of not less than 91 days, you satisfy the conditions under section 23AF of the ITAA 1936.

Accordingly, the salary income you derived from Country X is exempt from income tax in Australia under section 23AF of the ITAA 1936.

Travel Allowance

You received a travel allowance which was paid to cover the costs you incurred for travelling to and departing from Country X. This allowance was not paid to cover costs arising from the performance of your foreign service. It is paid to cover costs arising prior to and at the end of your foreign service. Accordingly, this allowance is not considered to be derived from your foreign service.

Therefore, as this allowance is not exempt from income tax under subsection 23AFof the ITAA 1936, it is included in your assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997).