Edited version of your written advice

Authorisation Number: 1013125104040

Date of advice: 6 December 2016

Ruling

Subject: Foreign employment income

Question 1

Is your income earned from foreign employment exempt from Australian income tax?

Answer

No

Question 2

Will your income earned from future foreign employment be exempt from Australian income tax?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2016

Year ending 30 June 2017

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You are employed by Company X in the position of Region C Representative.

Company X has been engaged by the Commonwealth of Australia (CoA) to provide support to the Australian Defence Force (ADF) and the Relevant Department in respect of CoA specific capabilities.

You were issued a deployment order from your Command.

You met a series of pre-deployment requirements, including consent and acknowledgement as a defence civilian.

You departed Australia and travelled to Country A under the deployment order during 2016 and provided continuous foreign service for more than 91 days.

You were based in City B, Country A and you were required to live and work at a related facility location.

Under your employment contract you will be required to complete at least two rotations.

Your employment contract states you are covered under the Manufacturing and Associated Industries and Occupations Award 2010.

Your role is to support CoA agencies with provision of Company Y specific capabilities and Company Z system maintenance support to Utility Vehicles and other vehicle maintenance tasks as required.

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(2)

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

Income Tax Assessment Act 1936 subsection 23AG(7)

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

Defence Force Discipline Act 1982.

Reasons for decision

Summary

Your income from foreign employment is not exempt from income tax in Australia under section 23AG of the ITAA 1936.

Detailed reasoning

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

Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived will be exempt from tax in Australia.  

'Foreign service' includes service in a foreign country in the capacity as an employee (subsection 23AG(7) of the ITAA 1936). 'Foreign earnings' includes salary and wages income (subsection 23AG(7) of the ITAA 1936).

However, subsection 23AG(1AA) of the ITAA 1936, provides that those foreign earnings will not be exempt under section 23AG unless the continuous period of foreign service is directly attributable to any of the following:

(a) the delivery of Australian official development assistance by the person's employer (except if that employer is an Australian government agency (within the meaning of the ITAA 1997));

(b) the activities of the person's employer in operating a public fund that:

(i) is 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); and

(ii) meets the special conditions mentioned in that item;

(c) the activities of the person's employer, if the employer is exempt from income tax because of paragraph 50-50(1)(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:

(i) the Commonwealth, a State or a Territory; or

(ii) an authority of the Commonwealth, a State or a Territory;

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

Delivery of Australian official development assistance (ODA) 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).

1.22 Foreign service directly attributable to the delivery of Australian ODA does not include diplomatic or consular duties carried out by Australian residents.

The EM reveals that paragraph 23AG(1AA)(a) of the ITAA 1936 is intended to restrict the section 23AG of the ITAA 1936 exemption to foreign earnings derived by other employees delivering ODA on behalf of their employers who in turn have been contracted by the Australian Government to assist in the delivery of ODA under the aid program that is administered by AusAID or DFAT.

Accordingly, for non-APS employees to be eligible for exemption pursuant to paragraph 23AG(1AA)(a) of the ITAA 1936, their employer must have been contracted directly by the Australian Government to assist in the delivery of ODA under the overseas aid program that is administered by AusAID or DFAT.

Company X has not been contracted directly by DFAT or the Australian Government to assist in the delivery of Australian ODA. Rather, Company X has been contracted by the Australian Government to provide support for specific capabilities.

You are not an APS employee. You are providing vehicle and maintenance services on behalf of Company X (which of itself is not Australian ODA) to CoA agencies that use the vehicles for various tasks and not specifically to deliver ODA.

Accordingly you would not be entitled to claim an exemption to Australian income tax under paragraph 23AG(1AA)(a) of the ITAA 1936 as neither you nor Company X are delivering Australian ODA.

Deployment outside Australia as a member of a disciplined force

Paragraphs 9 to 13 of Taxation Ruling TR 2013/7 Income tax: foreign employment income: interpretation of subsection 23AG(1AA) of the Income Tax Assessment Act 1936 considers the meaning of 'disciplined force', 'deployed' and 'member' in paragraph 23AG(1AA)(d) of the ITAA 1936.

Disciplined force

9. The phrase 'disciplined force' in paragraph 23AG(1AA)(d) refers to the Australian Defence Force (ADF), Australian Federal Police (AFP) and the State and Territory police forces.

Deployed

10. A person is 'deployed' within the meaning of paragraph 23AG(1AA)(d) if, and only if, they have been directed to perform duties overseas by the Commonwealth, a State or a Territory or an authority thereof in their capacity as a member of a disciplined force. This includes the member being sent overseas to undertake or participate in study or training activities in their capacity as a member of the relevant disciplined force.

Member

11. Any person subject to the strict code of conduct governing the above forces is a 'member' for the purposes of paragraph 23AG(1AA)(d). Employees of the ADF or AFP, State or Territory police forces who have undertaken the oath or affirmation required to perform operational duties are 'members'.

12. The term member includes employees referred to in paragraph 11 that are part of an international peacekeeping force in their capacity as an ADF, AFP or State or Territory police force member.

13. Australian Public Service (APS) and State and Territory Public Service appointees deployed alongside the disciplined force are 'members' of a 'disciplined force' where they are effectively integrated into the 'disciplined force' and are subject to the same command structure and the same rules of conduct as those persons described in paragraph 11.

Example 13 of TR 2013/7 is similar to your circumstances.

Example 13 - Contractor's employees acting in a support role to ADF

56. The Commonwealth Government enters into a contract with Service Co to provide support services to the ADF overseas. In this particular case the ADF is not delivering Australian ODA. The contract provides that Service Co's employees are to sign an official ADF document stating they are subject to defence force discipline during the course of the deployment giving them the status of 'defence civilians' under the Defence Force Discipline Act 1982. The contract also specifically provides that the employees are not deemed to be employees of the Commonwealth by virtue of the contract.

57. The employees of Service Co, while members of a disciplined force for the purposes of paragraph 23AG(1AA)(d), have not been deployed by the Commonwealth, a State or Territory (or an authority thereof). Their earnings are therefore not exempt under section 23AG.

Although you may be subject to a strict code of conduct, and were issued deployment orders from your Command you are not a member of the ADF, AFP or State of Territory forces who has undertaken the oath or affirmation required to perform operational duties. You are also not an employee of the APS and therefore not a member of a disciplined force.

Accordingly you would not be entitled to claim an exemption to Australian income tax under paragraph 23AG(1AA)(d) of the ITAA 1936.