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Authorisation Number: 1012130237928

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Subject: Foreign Income - Income Tax exemption

Question and answers

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

Yes

This ruling applies for the following period

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 31 December 2012

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You are an Australia resident for tax purposes

You are a contractor and you have been contracted to provide consultancy services)

The contract is an approved overseas project for the period 2010 to 2012.

You are contracted on a cyclical arrangement that is based on an eight weeks on followed by four weeks off.

The four weeks off is taken as rest and recuperation (R&R) leave accrued as a result of your foreign service.

You usually spend your R & R leave in Australia and you do not perform any duties at this time.

You are on-call 24 hours seven days a week. A work day can start from 5am through to 2am on occasion (21 hours).

You will take no other leave apart from your R & R leave and whilst on leave, you are not being paid.

You are liable to pay income tax in the overseas location.

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

Relevant legislative provisions

Section 23AF of the Income Tax Assessment Act 1936

Subsection 23AF(3) of the Income Tax Assessment Act 1936

Subsection 23AF(18) of the Income Tax Assessment Act 1936

Section 23AG of the Income Tax Assessment Act 1936

Reasons for decision

Section 23AF of the ITAA 1936 provides that where an Australian resident has been engaged on 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.

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 (for example, salary, wages, commission, bonuses, allowances, contractual payments and payments for recreation leave entitlements which accrue during the relevant period) is eligible for the exemption (subsection 23AF(18) of the ITAA 1936).

However, section 23AF of the ITAA36 does not exempt excluded income. Subsection 23AF(17) of the ITAA 1936 provides income is excluded income if the income is exempt under section 23AG of the ITAA 1936 and exempt from tax in the overseas 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 a 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 start from 5am through to 2am on occasion (21 hours). During your R&R leave, you are not required to attend the company's office. You are also not entitled to any additional leave.

Your circumstances are considered to be similar to that outlined in IT2015. 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.

Accordingly, the income you derive from the overseas location is exempt from income tax in Australia under section 23AF of the ITAA 1936.