Edited version of your private ruling

Authorisation Number: 1012546621636

Ruling

Subject: Foreign Income - 23AG

Question

Are the salary and allowances you earned while employed overseas exempt from income tax in Australia?

Answer

No

This ruling applies for the following periods:

Year ending 30 June 2013

The scheme commences on:

1 July 2012.

Relevant facts and circumstances

You are an Australian resident for income tax purposes.

You are employed by the employer A

You were seconded to work for employer B as a humanitarian worker in country X.

Your secondment was for a timeframe.

You did not take any leave breaks during your overseas engagement.

Your gross salary for the period of overseas employment was $xxx.

You salary was paid by employer A.

Your tax was withheld by employer A

Your fixed mission allowance was paid by employer B

Country X has a tax system in place.

There is no tax treaty between Australian and Country X

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23AG

Income Tax Assessment Act 1936 subsection 23AG(1),

Income Tax Assessment Act 1936 subsection 23AG(1AA),

Income Tax Assessment Act 1936 paragraph (a) of subsection 23AG(1AA),

Income Tax Assessment Act 1936 paragraph (b) of subsection 23AG(1AA),

Income Tax Assessment Act 1936 paragraph (c) of subsection 23AG(1AA),

Income Tax Assessment Act 1936 paragraph (d) of subsection 23AG(1AA),

Income Tax Assessment Act 1997 subsection 6-5(2),

Income Tax Assessment Act 1997 subsection 6-5(3),

Income Tax Assessment Act 1997 subsection 6-15(2),

Income Tax Assessment Act 1997 section 11-15,

Income Tax Assessment Act 1997 item 9.1.1 of the table in subsection 30-80(1),

Income Tax Assessment Act 1997 item 9.1.2 of the table in subsection 30-80(1),

Income Tax Assessment Act 1997 section 30-15,

Income Tax Assessment Act 1997 subsection 30-15(1),

Income Tax Assessment Act 1997 item 1 of the table in subsection 30-15(2),

Income Tax Assessment Act 1997 section 30-80,

Income Tax Assessment Act 1997 subsection 30-80(1),

Income Tax Assessment Act 1997 paragraph (a) of subsection 30-85(2),

Income Tax Assessment Act 1997 paragraph (b) of subsection 30-85(2),

Income Tax Assessment Act 1997 section 30-86,

Income Tax Assessment Act 1997 section 50-50,

Income Tax Assessment Act 1997 section 50-50 (a),

Income Tax Assessment Act 1997 section 50-50 (b),

Income Tax Assessment Act 1997 section 50-50 (c),

Income Tax Assessment Act 1997 section 50-50 (d),

Income Tax Assessment Regulations 1997 regulation 50-50.01, and

Income Tax Assessment Regulations 1997 regulation 50-50.02.

Reasons for decision

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

· delivery of Australian official development assistance by your employer

· activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund)

· activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia

· deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force.

Delivery of Australian official development assistance by the person's employer

The term 'Australian official development assistance' is not defined for the purposes of section 23AG of the ITAA 1936. However, the Explanatory Memorandum (EM) which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009) introducing paragraph 23AG(1AA)(a) of the ITAA 1936 provides guidance on the meaning of the phrase. The relevant paragraphs are below:

Australian official development assistance

1.19 Australian official development assistance (ODA) is assistance delivered through the Australian Government's overseas aid program, as administered by the Department of Foreign Affairs and Trade and/or the Australian Agency for International Development (AusAID). Australian ODA aims to reduce poverty and achieve sustainable development in developing countries, in line with Australia's national interest.

1.20 In addition to providing Australian ODA directly, AusAID also competitively contracts aid work to Australian and international entities. Thus, in practice, individuals involved in the delivery of Australian ODA can include both Australian Public Service (APS) employees and non-APS employees.

1.21 For the purposes of subsection 23AG(1AA) the delivery of Australian ODA must be undertaken by the person's employer, which includes AusAID and an entity contracted by AusAID to assist in the delivery of Australian ODA.

Example 1.1

Colin is an APS employee employed by AusAID. He is posted to the Cook Islands, for 120 continuous days, as a project advisor on an Australian ODA project aimed at improving the quality of early childhood education.

Colin's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

Example 1.2

Robert is an APS employee employed by the Commonwealth Department of Climate Change. He is posted to Tokelau for 150 continuous days, to work on a project aimed at minimising the impacts of rising sea levels in Tokelau.

Robert is not an AusAID employee but the project is classified as Australian ODA by AusAID. Robert's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

Example 1.3

Eli is a motor mechanic employed by Emu Engineering Pty Ltd, a private company contracted by AusAID to provide vocational training in Vanuatu. He is posted to Vanuatu for 180 continuous days.

Eli's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2).

The ordinary meaning of 'assistance' in the Macquarie Dictionary is 'the act of assisting; help; aid'. Therefore, adopting the ordinary meaning, 'assistance' for the purposes of section 23AG of the ITAA 1936 would encompass the provision of money, goods or services capable of affording help or aid.

In your case, you are employed by employer A. You were seconded to work for employer B as a humanitarian worker in country X. This was not delivered through the Australian Government's overseas aid program, as administered by the Department of Foreign Affairs and Trade and/or the Australian Agency for International Development (AusAID).

Accordingly, your foreign service is not directly attributable to the delivery of Australian overseas aid program by AusAID.

Employer operating a developing country relief fund or a public disaster relief fund

The EM states that this applies where the continuous Foreign Service period of a resident individual is directly attributable to the activities of the individual's employer in operating a public fund covered by item 9.1.1 or item 9.1.2 in the table in subsection 30-80(1) of the ITAA 1997. Gifts or donations made to these public funds are tax deductible for income tax purposes to the donor.

Item 9.1.1 of subsection 30-80(1) of the ITAA 1997 applies to a public fund declared by the Treasurer to be a developing country relief fund. A developing country relief fund is a fund established by an organisation solely for the purpose of providing relief to people of a developing country. The organisation must be an approved organisation as declared by the Minister for Foreign Affairs and the country must be a developing country as declared by the Minister for Foreign Affairs. These conditions are contained in paragraphs 30-85(2)(a) and (b) of the ITAA 1997 respectively.

Item 9.1.2 of subsection 30-80(1) of the ITAA 1997 applies to a public fund operated by a public benevolent institution solely to provide relief to people of a developing country who are in distress as a result of a disaster (a public disaster relief fund). A public disaster relief fund is a fund established and operated by a public benevolent institution in response to an event recognised as a disaster by the Minister for Foreign Affairs. The recognition requirement is contained in section 30-86 of the ITAA 1997.

Employer B is not an approved organisation as declared by the Minister for Foreign Affairs

Employer is an exempt institution for income tax purposes

The EM provides further guidance on determining whether an employer is an exempt institution for income tax purposes.

Section 50-50 of the ITAA 1997 provides for special conditions for an entity covered by item 1.1 (i.e. charitable institutions) and item 1.2 (i.e. religious institutions) of section 50-5 of the ITAA 1997. Section 50-50 indicates that such an entity is not exempt from income tax unless the entity:

a) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

b) is an institution that meets the description and requirements in item 1 of the table in section 30-15 of the ITAA 1997

c) is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident; or

d) is a prescribed institution that has a physical presence in Australia but which incurs its expenditure and purses its objectives principally outside Australia.

Paragraph (a) section 50-50 of the ITAA 1997

In order to satisfy the requirements of paragraph (a) of section 50-50 of the ITAA 1997, an entity would have a physical presence in Australia and incur their expenditure and pursue their objectives principally within Australia.

Employer B does not have a physical presence in Australia and incurs its expenditure and pursues its objective principally outside Australia. Given this, employer B would not meet the requirements of paragraph (a) of section 50-50 of the ITAA 1997.

Paragraph (b) section 50-50 of the ITAA 1997

In order to satisfy the requirements of paragraph (b) of section 50-50 of the ITAA 1997, an entity would need to meet the description and requirements in item 1 of the table in section 30-15 of the ITAA 1997. The table referred to within paragraph (b) contains the rules governing the deductibility of gifts or contributions to a recipient. Item 1 within the table specifies that the recipient must be a fund, authority or institution covered by an item in any of the tables listed in subdivision 30-B.

Employer B is not listed within any of the tables within subdivision 30-B of the ITAA 1997. Given this, it does not fall within the requirements of paragraph (b) of section 50-50 of the ITAA 1997.

Paragraph (c) section 50-50 of the ITAA 1997

In order to satisfy the requirements of paragraph (c) of section 50-50 of the ITAA 1997, an entity needs to be a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident.

A list of prescribed institutions for the purposes of paragraph (c) of section 50-50 of the ITAA 1997 is contained in regulation 50-50.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997).

Employer B is not contained within any of the lists contained within 50-50.01 of the ITAR 1997. Given this, it does not fall within the requirements of paragraph (c) of section 50-50 of the ITAA 1997.

Paragraph (d) section 50-50 of the ITAA 1997

In order to satisfy the requirements of paragraph (d) of section 50-50 of the ITAA 1997, an entity needs to be a prescribed institution that has a physical presence in Australia, but which incurs its expenditure and purses its objectives principally outside Australia.

A list of prescribed institutions for the purposes of paragraph (d) of section 50-50 of the ITAA 1997 is contained in regulation 50-50.02 of the Income Tax Assessment Regulations 1997 (ITAR 1997).

The employer B is not contained within any of the lists contained within 50-50.02 of the ITAR 1997. Given this, it does not fall within the requirements of paragraph (d) of section 50-50 of the ITAA 1997.

Deployed as member of disciplined force

The EM states that the phrase "disciplined force" is intended to mean a defence force (including a peacekeeping force) that is engaged in a non-warlike operation. It also covers a member of a police force, and applies to members of the Australian Federal Police deployed on an International Deployment Group mission who are subject to Commanders Orders to achieve operational policing outcomes.

You are not employed as a member of the Australian Defence Force or the Australian Federal Police and consequently your foreign service would not satisfy the requirements of this category. Given this, your foreign employment income would not be exempt from tax in Australia under paragraph (d) of section 23AG(1AA) of the ITAA 1936.

Conclusion:

As your foreign service with employer B does not satisfy any of the criteria under section 23AG(1AA) of the ITAA 1936, the income from your employment with employer B in country X would not be exempt from tax in Australia under section 23AG of the ITAA 1936.

Consequently, your foreign employment income would not be classed as exempt income under subsection 6-15(2) of the ITAA 1997 and should therefore be included in your assessable income under subsection 6-5(2) of the ITAA 1997.