Edited version of private advice

Authorisation Number: 1012651891706

Ruling

Subject: Foreign income

Question 1

Is the income, including the living allowance, you receive as part of an expert group training specified inspectors in country X as arranged by the International Organisation, assessable in Australia?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You were nominated by an organisation in Australia to be part of an expert group training specified inspectors in country X and to evaluate the process and systems used by a Country X company in the evaluation of items.

The missions are arranged by an International Organisation and you fly to Country X, usually for short periods, and conduct training and observed inspections for Country X state organisation on behalf of the International Organisation's programme.

You have conducted missions in Country X on behalf of the International Organisation.

You will probably receive payment in the 2014-15 Australian financial year.

You also receive an allowance for living purposes while in Country X. You receive a similar allowance when working for the Australian organisation which is not taxable.

The International Organisation does not issue any tax certificates and your payments were deposited into your account on behalf of the International Organisation from a bank.

Your Agreement states:

It is understood that the execution of the work does not create any employer/employee relationship.

Each individual Contractor certifies that he/she does not presently, and will not during the term of this agreement, hold any form of contractual relationship with International Organisation (including any International Organisation regional, country or project office, as well as any programme, center of other entity where staff is subject to International Organisation Staff Regulations and Rules) that confers upon the individual Contractor the status of an International Organisation staff member.

Your arguments and references

You have been told that the International Organisation and Australia have an agreement that income earned as an expert working for the International Organisation is tax free.

You believe the reason for this is that Australia being a contributor to International Organisation has agreed that incomes will be adjusted on a tax free basis.

You refer to ATO Interpretative Decision ATO ID 2005/116.

You contend that as the International Organisation enjoys immunity from direct taxes custom duties and the like, payments are made in light of this fact and should not incur taxes as part of the funding agreement by Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-15

Income Tax Assessment Act 1997 Section 6-20

International Organisations (Privileges & Immunities) Act 1963 (IO(P&I)A)

Specialised Agencies (Privileges & Immunities) Regulations 1986 (SA(P&I)

Agreement between the Government of Australia and the Government of the People's Republic of Country X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1990 No. 45]

Reasons for decision

Assessable income

Subsection 6-5(2) of the Income Tax assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include 3 categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of ordinary income that have evolved from case law include receipts that:

• are earned

• are expected

• are relied upon; and

• have an element of periodicity, recurrence or regularity.

However, subsection 6-15(2) of the ITAA 1997 says that if an amount is exempt income then it is not assessable income. Section 6-20 of the ITAA 1997 provides that an amount of ordinary income is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law.

Exemption from income tax

You referred us to ATO Interpretative Decision ATO ID 2005.

That ATO ID explains that entitlement to exemption under the International Organisations (Privileges & Immunities) Act 1963 (IO(P&I)A) depends on whether you are engaged as an independent consultant or as a person who holds an office in the International Organisation.

It goes further to explain that under subregulation 8(1) of the Specialised Agencies (Privileges & Immunities) Regulations 1986 (SA(P&I) Regs) a person who holds an office, other than a high office, in a Specialized Agency such as the International Organisation, has the privileges and immunities specified in Part I of the Fourth Schedule to the IO(P&I)A, including income tax exemption on salaries and emoluments received from the organisation.

Taxation Determination TD 92/153 Income tax: who is a 'person who holds an office' as specified in various regulations made under the International Organisations (Privileges and Immunities) Act 1963? advises that the Department of Foreign Affairs and Trade (DFAT), who administer the IO(P&I)A and regulations, take the view that the phrase 'person who holds an office' in relation to a prescribed international organisation covers those people who work as employees for that organisation. They do not accept, however, that the phrase includes either:

• persons who are locally engaged by the organisation and paid at an hourly rate; or

• persons engaged by the organisation as experts or consultants.

In determining whether a person holds an office, the relevant international organisation is required to apply these tests.

Taxation Ruling TR 92/14 Income tax: taxation privileges and immunities of prescribed International Organisations and their staff describes the operation of privileges and immunities relating to taxation that apply to International Organisations and persons working for these organisations.

TR 92/14 explains that persons engaged by an International Organisation may be accorded privileges and immunities in the nature of exemption from taxation as described in the Second, Third, Fourth and Fifth Schedules to the IO(P&I)A. Tax exemptions may be available to a High Officer, Representative, Officer, or expert or consultant. As with the organisation itself, it is necessary to examine the regulations of the particular International Organisation to ascertain to what taxation exemptions, if any, a person may be entitled.

Paragraph 9 explains that a holder of an office in an International Organisation may have exemption from tax on salaries and emoluments received from the organisation.

Paragraph 11 then explains that experts, consultants, persons serving on a committee or participating in the work of, or performing a Mission on behalf of an International Organisation may be accorded exemption from tax on salaries and emoluments received from the organisation. This usually covers experts and consultants engaged by the organisation.

However, Australia generally agrees with the view of DFAT that experts and consultants are not exempt from tax in Australia. Limited exemption has been provided under regulations in the following cases only:

• Asian Development Bank;

• Common Fund for Commodities Customs Cooperation Council; and

• International Court of Justice.

Application to your circumstances

You signed an agreement for performance of work on behalf of the International Organisation wherein you provided technical assistance to the Country X company as part of a team of experts. You received a fixed amount of income together with a living allowance from the provision of your expert services. Even though they are not regular payments, they are expected and relied upon by you to cover expenses incurred and therefore both payments meet the characteristics of ordinary income.

You are not entitled to the privileges and immunities specified in Part 1 of the Fourth Schedule to the IO(P&I)A as you did not hold an office in the International Organisation. 

Regulation 9 of the SA(P&I) Regs applies to your engagement as a consultant and you are entitled to the privileges and immunities specified in paragraphs 1, 2, 3, 4, 5 and 6 of Part 1 of the Fifth Schedule to the IO(P&I)A, however, income tax exemption is not available for persons serving on a committee or performing a mission (such as independent consultants) for the International Organisation.

Double tax agreement

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country X Agreement is listed in section 5 of the Agreements Act.

The agreement between Australia and Country X (the DTA) is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The DTA operates to avoid the double taxation of income received by residents of Australia and Country X.

Article XX of the DTA states that income derived by an individual who is a resident of Australia in respect of professional services or other independent activities of a similar character shall be taxable only in Australia except in one of the following circumstances, when the income may also be taxed in Country X:

(a) if the individual has a fixed base regularly available to him or her in Country X for the purpose of performing his or her activities; in such a case, only so much of the income as is attributable to that fixed base may be taxed in Country X; or

(b) if the individual's stay in Country X is for a period or periods exceeding in the aggregate 183 days in any consecutive period of 12 months; in such a case, only so much of the income as is derived from his or her activities performed in Country X may be taxed in Country X.

The term "professional services" includes especially those performed in the exercise of independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.

You have stated that the missions are arranged by the International Organisation. You are engaged as part of an expert group and you fly to Country X usually for a short time to carry out your work.

The income you derive in Country X constitutes 'professional services' as defined under Article XX of the DTA. Australia has sole taxing rights under Article XX of the DTA to tax the income you derive in Country X for the following reasons:

• You are a resident of Australia for income tax purposes.

• If you do have a fixed base regularly available in Country X to perform your services, the Agreement states that Country X 'may' tax that income if they deem it necessary to do so. Australia has primary taxing right over the income according to its domestic income tax laws.

• You were not in Country X for at least 183 days in the income year.

The living allowance forms part of your assessable income under Article YY of the DTA which states that amounts of income that are not specifically dealt with in the DTA shall be taxable only in the country of residence of the individual.

Conclusion 

The income, including the living allowance you receive as an expert for performing work on behalf of the International Organisation is included in your assessable income in Australia as it is not exempt income under the provisions of the IO(P&I)A or section 23AG of the ITAA 1936 or any other provision of the ITAA 1997 or another Commonwealth law.

Additional information

You may be entitled to deduct travel expenses incurred in relation to earning this income.