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Ruling

Subject: Foreign Income - 23AF

Question:

Is the foreign employment income you derive from working in Country A in the 2011-12 income year exempt income in Australian 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.

The scheme will commence in:

1 July 2011.

Relevant facts

You are an Australian resident for income tax purposes.

You are employed by Company A and have been expatriated to Country A to work on a specific project. This project meets the conditions set by the Australian Trade Commission and has a specific project number attached to it.

Your employment contract commenced some time early in the 2011-12 income year and will terminate some time late in that same year.

Whilst expatriated, you are contracted to work a specific amount of hours for a specific amount of days in a week, with any approved overtime to be paid on top of this. You are also required to work for a specific amount of weeks on followed by a specific amount of weeks off as rest and recreation leave (R&R).

You may return to Australia during some, but not every single one of the R&R periods. However, whilst in Australia during these periods, you will not perform any work related duties.

You will be working in excess of 91 continuous days in Country A.

Apart from your salary and wages, you won't receive any other allowances.

You do not pay any tax in Country A on the income you derive from working there.

Australia does not have a tax treaty with Country A.

Relevant legislative provisions:

Income Tax Assessment Act 1936 Section 23AF

Income Tax Assessment Act 1936 Subsection 23AF(3)

Income Tax Assessment Act 1936 Subsection 23AF(17)

Income Tax Assessment Act 1936 Subsection 23AF(18)

Income Tax Assessment Act 1936 Section 23AG

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 tax treaty 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 required to work a specific amount of hours in a week. 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 Country A for a continuous period of not less than 91 days. As your income is exempt from tax in Country A not due to a tax treaty, you satisfy the conditions under section 23AF of the ITAA 1936.

Accordingly, the income you derive from Country A 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.