Edited version of your written advice

Authorisation Number: 1012721989457

Ruling

Subject: Assessability of overseas volunteer program allowance

Questions and answers:

1. Are the allowances you will receive in relation to the performance of foreign service as part of an overseas volunteer program exempt income?

Yes.

2. Are the allowances you will receive in relation to arriving and departing the country in order to participate in an overseas volunteer program exempt income?

No.

This ruling applies for the following periods:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts:

You are an Australian resident.

You have completed an Australian Youth Ambassadors for Development (AYAD) Program for a period of less than 12 months.

The Program is fully funded by the Department of Foreign Affairs and Trade and run by Organisation X.

Organisation X is responsible for all aspects of the AYAD program from recruiting and selecting, to mobilising, allowances, in-country management and community engagement.

Your Program Handbook states that you were taking part in the program as a volunteer and not an employee of Organisation X.

You received various allowances to cover the costs associated with establishment, living a modest life whilst undertaking your assignment and relocation to Australia.

The allowances were paid by Organisation X.

One allowance covers expenses associated with taking up the assignment including visa costs, excess baggage and costs associated with setting up accommodation in-country.

Another allowance is based on the average cost of living for a volunteer in each country. This allowance is calculated by taking into account the costs of a number of factors including food, daily travel to and from an assignment placement, communication and other incidental costs.

A third allowance is to cover the costs of activities or materials that are needed to help support the assignment and achieve assignment outcomes including language training, purchase of books and equipment.

A fourth allowance is to assist with the costs of settling back into Australia.  

The program handbook states that your assignment has clearly outlined activities and objectives and they will be set out in a position description.

You were required to report on your progress on the assignment and the achievement of assignment objectives and outcomes on a quarterly basis.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 15-2

Income Tax Assessment Act 1936 Section 23AG

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Section 15-2 of the ITAA 1997 provides that the value of all allowances, gratuities, compensation, benefits etc. given or granted in respect of employment or services rendered are included in assessable income.

Paragraph 2 of Taxation Ruling TR 92/15: Income tax and fringe benefits tax: the difference between an allowance and a reimbursement advises that a payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance. If a volunteer worker receives an allowance, with no regard to expenses actually incurred and with no requirement to repay unspent monies, this office will generally treat the payment as assessable income.

As an Australian resident, you are assessable on your worldwide income in Australia. The allowance you received in relation to your volunteer work in Country Y is assessable income.

Australia has entered into special tax treaties called 'double taxation agreements' with over 40 countries to prevent double taxation and to allow co-operation between Australia and overseas tax authorities in enforcing their respective tax laws.

There is no double taxation agreement between Australia and Country Y that would preclude the allowance from being assessed in Australia.

Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) states that where a resident has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the person from that foreign service are exempt from tax.

You are an Australian resident and the period of foreign service you engaged in was more than 91 days. Therefore, you fulfil the requirements of residency and period of service.

The tax exemption only applies to persons engaged in foreign service. Foreign service means service in a foreign country as the holder of an office or in the capacity of an employee (subsection 23AG(7) of the ITAA 1936). Therefore, to be engaged in foreign service there must usually be an employer / employee relationship. Subsection 23AG(7) states that the definition of employee includes a person employed by an international organisation.

Taxation Ruling TR 2005/16 Income Tax: Pay As You Go - withholding from payments to employees provides some clarification in determining the employee status of the worker. Paragraph 6 states that the term 'employee' is not defined and whether a person is an employee is a question of fact determined by examining the terms and circumstances of the arrangement. Paragraph 21 states that the underlying reality of the relationship should be determined and that parties to an arrangement cannot deem the relationship to be something that it is not.

Paragraph 26 of TR 2005/16 states that the classic 'test' for determining the nature of the relationship between a person who engages another to perform work and the person so engaged is the degree of control which the former can exercise over the latter.

You were required to perform clearly outlined activities and services on a regular basis and to report on your progress in meeting defined objectives on a quarterly basis. Despite your program information indicating you are not an employee, these clear assignment conditions indicate that the program organisers have a significant degree of control over your actions and as such the arrangement can be considered an employer / employee relationship. The true essence of your arrangement overrides any attempt by program organisers to label the arrangement otherwise. The 'volunteer' nature refers to the fact that you will not be paid a salary to work, and instead will receive a living allowance. Therefore, you fulfil the requirements for engagement in foreign service.

The tax exemption only applies to foreign earnings derived from that foreign service. Any establishment allowance or resettlement allowance would not be attributable to a period where you are engaged in foreign service and would simply be compensation for expenses incurred prior to or after the completion of foreign service. These amounts would not be considered exempt under section 23AG of the ITAA 1936.

Your program provides a range of allowances in order to support you while you are on assignment. These allowances are not a salary, instead they cover the cost of establishing yourself on assignment and living in-country.

These allowances will be paid for the foreign service you were performing and would therefore be exempt from taxation under subsection 23AG(1) of the ITAA 1936.

Subsection 23AG(1AA) of the ITAA 1936 imposes conditions on this tax exemption. The continuous period of foreign service must be directly attributable to any of the following:

a) the delivery of Australian official development assistance by the person's employer

b) the activities of the person's employer in operating a public fund covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the ITAA 1997 (international affairs deductible gift recipients)

c) the activities of the person's employer, if the employer is exempt from income tax because of paragraph 50-50(c) or (d) of the ITAA 1997 (prescribed institutions located or pursuing objectives outside Australia)

d) the person's deployment outside Australia as a member of a disciplined force by

a. the Commonwealth, a State or a Territory; or

b. an authority of the Commonwealth, a State or a Territory

e) an activity of a kind specified in the regulations.

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). In addition to providing Australian ODA directly, AusAID also competitively contracts aid work to Australian and international entities. Therefore, for the purposes of paragraph (a) of subsection 23AG(1AA) of the ITAA 1936 the delivery of ODA must be undertaken by the person's employer, which includes AusAID and an entity contracted by AusAID in the delivery of Australian ODA.

In your case, Organisation X is an entity contracted by AusAID to deliver Australian official development assistance. AusAID fully funds the program that you participated in. It provides all funding to Organisation X who administer all aspects of the program including paying you various allowances. It has been determined for the purposes of section 23AG of the ITAA 1936 that an employee / employer relationship does exist between you and Organisation X. Therefore the continuous period of foreign service is directly attributable to the delivery of Australian official development assistance by your employer.

Accordingly, paragraph (a) is applicable to your situation and subsection 23AG(1AA) of the ITAA 1936 has been satisfied.

Under subsection 23AG(2) of the ITAA 1936, an amount of foreign earnings derived in a foreign country is not exempt from tax under this section if the amount is exempt from income tax in the foreign country only because of any of the following:

a) a law of the foreign country giving effect to a double tax agreement

b) a double tax agreement

c) provisions of a law of the foreign country under which income covered by any of the following categories is generally exempt from income tax:

a. income derived in the capacity of an employee

b. income from personal services

c. similar income

d) the law of the foreign country does not provide for the imposition of income tax on one or more of the categories of income mentioned in paragraph (c);

e) a law of the foreign country corresponding to the International Organisations (Privileges and Immunities) Act 1963 or to the regulations under that Act

f) an international agreement to which Australia is a party and that deals with:

(i) diplomatic or consular privileges and immunities; or

(ii) privileges and immunities in relation to persons connected with international organisations

g) a law of the foreign country giving effect to an agreement covered by paragraph (f).

The Income Tax Act of Country Y states that the income derived by any person from personal (including professional) services performed by that person for the Government of Country Y pursuant to an arrangement for assistance entered into by the Government of Country Y with the Government of any other country or International Organisation to the extent such arrangement provides that income so derived is to be exempt from income tax.

Therefore, the exemption from tax of your volunteer allowance in Country Y is not caused by any of the reasons referred to in subsection 23AG(2) of the ITAA 1936 and thus the exemption is allowable.

In conclusion, the allowances directly attributable to the performance of your foreign service are exempt from taxation under section 23AG of the ITAA 1936. Any allowances you receive that are paid to assist you in arriving and departing the country will not be exempt from taxation as they are not derived directly from the performance of your foreign service.