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Ruling

Subject: Foreign employment income

Question

Is the employment income you earned in Country X exempt from income tax in Australia under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

The Australian and Country X (Country X) governments signed a joint understanding to work together to protect a track and mountain ranges in Country X, and to improve the lives of communities living along the corridor. The joint understanding and its activities focus on investing in people, in their health and education; and ensure that the track and its globally significant values are sustainably managed.

As the result of the joint understanding, Australia would provide aid to Country X through an initiative. An Australian department fact sheet outlines the essence of the initiative. It states the Australian and Country X governments have signed a joint understanding to work together to protect the track and ranges, and improve the lives of the communities living along the corridor; and refers to the sharing of knowledge and resources between Country X and Australian government agencies; and states staff exchanges are underway in capacity building in areas such as geographic information system mapping.

Australia committed funding to assist the Country X Government for this purpose. The funding was managed by the Australian Department. This Department delegated management and appropriate funding for some tasks to other agencies. A development program was one of such task and was delegated to AusAID.

Apart from providing services in water & sanitation, health, education, communication and transport, the initiative partnership also ensures the transfer of knowledge between Country X and Australian government agencies through a staff exchange program. Staff exchanges in strategic management and capacity building are in a range of areas, such as Geographic Information System (GIS) mapping, catchment and protected area management and land use planning.

As part of the staff exchange program as a employee of the Australian department, you were seconded to work in the Country X Government Department in Country X, to assist with the development of a GIS, as a GIS specialist. Development of a GIS in Country X was a component of the work conducted under the initiative.

You advised us that you were seconded to:

· supervise the development of a GIS database for use within Country X Department.;

· supervise the migration of existing data into the database;

· provide specialist expertise to assist in country X department in the acquisition and development of physical, biological and cultural data sets;

· mentor a small team of GIS analysts in the maintenance of the database, and in the application of GIS systems to support the country X department policy objectives; and

· provide specialist expertise to assist in the development and use of spatial standards, guidelines and policy within the country X department.

You explained this role as follows:

· for the Development Program -- You were responsible for the provision of mapping and mapping related advice to support the AusAID delivery of services for livelihoods and sustainable development in the corridor. This included the provision of geospatial products and advices regarding census data, population centres, transport infrastructure, education infrastructure, safety infrastructure and environmental sustainability. This work was primarily focused for support to the development program agenda within the track region but was equally applicable to the broader AusAID agenda in Country X.

· Direct Track activities -- You conducted activities to support the management, maintenance and development of the Track including mapping the track, collection site data from the track and surrounding region; and this enabled you to provide geospatial advice in support of future track development, particularly the delivery and construction of track safety infrastructure (e.g. aid-posts, bridges and airfields).

· Broader support to the country X department -- Your activities were to develop a geospatial capability and a small team of professionals within the country X department to support the future achievement of Country X policy goals. These policy goals include supporting Environmentally Sustainable Economic Growth and the Millennium Development Goals.

You stated that the entire initiative was funded from the AusAID contingency reserve, and the development of GIS in Country X was funded out of the AusAID budget and completed by Department in Australia.

You worked in Country X for not less than 91 days in the 2009-10 income year. During this period of foreign service, you took four days recreational leave, which was accrued during your period of foreign service. You received your standard salary and standard foreign allowances from Department in Australia.

This foreign income was exempt from tax in Country X under a treaty on development cooperation between the Government of Australia and the Government of Country X.

Country X generally taxes employment income under its domestic law.

There is a tax treaty between Australia and Country X.

Relevant legislative provisions

Subsection 23AG(1) of the Income Tax Assessment Act 1936

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

Section 23AG of the Income Tax Assessment Act 1936

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

Subsection 23AG(2) of the Income Tax Assessment Act 1936

Reasons for decision

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, amongst other things, the delivery of Australian official development assistance (ODA) by the person's employer.

Accordingly, to be eligible for an exemption under section 23AG of the ITAA 1936, the following two conditions (amongst other things) must be satisfied:

your employer must be delivering Australian ODA; and

your foreign service must be directly attributable to the delivery of that Australian ODA.

Whether your employer is delivering Australian ODA

You provided us with e-mails between the Departments making clear their understanding that the initiative is Australian ODA; and that the initiative is funded from the AusAID ODA contingency reserve. Further, you advised us (and we confirmed from Australian government websites) that the initiative includes the Development Program, and the provision of broader support to the Country X Department of Environment and Conservation.

You also advised us that the initiative is managed by the Australian Department, and that department delegated the delivery of the Development Programme to AusAID.

On the basis of the above information, we conclude that your employer is delivering Australian ODA for the period during which you were employed by the department in Australia, for the purposes of paragraph 23AG(1AA)(a).

Whether your foreign service is directly attributable to the delivery of Australian ODA

The term "directly attributable" is not defined in the Act. However, in the context of subsection 23AG(1AA) of the ITAA 1936, ATO ID 2010/117 states the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009, which introduced subsection 23AG(1AA) of the ITAA 1936, indicates that term should mean directly related to. Accordingly, for paragraph 23AG(1AA)(a) of the ITAA 1936 to apply, an individual's continuous period of foreign service must be directly related to the employer's delivery of ODA.

It is clear from the description above of how your activities implemented various aspects of the Initiative, that your foreign service is directly related to the delivery of Australian ODA by your employer.

Therefore, we conclude your foreign service is directly attributable to the delivery of Australian ODA by your employer, for the purposes of paragraph 23AG(1AA)(a) of the ITAA 1936.

Exemption of foreign employment income

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 because of any of the conditions listed in this section.

One of the reasons listed is where the income earned by the resident in the foreign country is made exempt by the operation of a tax treaty (paragraph 23AG(2)(b) of the ITAA 1936).

Australia has a tax treaty with Country X which operates to avoid the double taxation of income received by residents of Australia and Country X.

The income you earned while posted to Country X was exempt from tax in Country X in accordance with the provisions of a treaty on development cooperation between the Government of Australia and the Government of Country X.

As a result, your foreign earnings were not exempt from tax in Country X solely because of a tax treaty.

Country X generally tax employment income under its domestic law. 

None of the other reasons listed in subsection 23AG(2) of the ITAA 1936 applies to your situation.

Therefore, subsection 23AG(2) of the ITAA 1936 will not operate to deny the foreign earnings exemption from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

Accordingly, the employment income you received from Country X is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.