Edited version of your written advice

Authorisation Number: 1051380977487

Date of advice: 1 June 2018

Ruling

Subject: Foreign Income

Question 1

Is your foreign income exempt from Australian Income Tax?

Answer 1

Yes

Question 2

Are you considered an employee for income tax purposes?

Answer 2

Yes

Question 3

Do you have a reportable fringe benefit amount in respect of the provision of the car during the period of your deployment?

Answer 3

No

This ruling applies for the following period:

Year ended 30 June 2017

Year ending 30 June 2018

The scheme commences on:

1 June 2017

Relevant facts and circumstances

You are an Australian resident for tax purposes

You are a member of a disciplined force

You have been deployed by the Commonwealth as a member of a ‘disciplined force’

You commenced your assignment in the 2016-17 income year

You will finish the assignment in the 2017-18 income year

You entered into a novated lease in the 2016-17 income year

Your Fringe Benefits Tax was reduced to nil by employee contributions

Tax was paid on the employee contributions

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23AG

Income Tax Assessment Act 1936 section 23L

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

Fringe Benefits Tax Assessment Act 1986 section 5E(2)

Fringe Benefits Tax Assessment Act 1986 section 135 P

Fringe Benefits Tax Assessment Act 1986 section 135 Q

Fringe Benefits Tax Assessment Act 1986 section 136-1

Fringe Benefits Tax Assessment Act 1986 section 148-1(a)

Taxation Administration Act 1953 section 12-35

Reasons for decision

Is your foreign income exempt from Australian Income Tax?

Section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) states that:

(1) Where a resident, being a natural person, 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.

(1AA) However, those foreign earnings are not exempt from tax under this section unless the continuous period of foreign service is directly attributable to any of the following:

(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;

It also states:

(2) 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:

(i) income derived in the capacity of an employee;

(ii) income from personal services;

(iii) 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).

As there is no Double Taxation agreement present between Country X and Australia we have to investigate the Income Tax Act Country X, as well as the Memorandum of Understanding (MOU) signed by the two governments.

Schedule three outlines the exemptions allowable under the Country X’s Tax Act, it states:

The emoluments —

(a) of any member of Her Majesty's Forces of a member country of the Commonwealth; or

(b) of any person in the public service of the Government of such member country in respect of his office under such Government where such person is resident in Country A solely for the purposes of performing the duties of his office, where such emoluments are payable from the public funds of such member country and are subject to income tax in such member country.

Article X of the MOU states that:

6. Members of the Visiting Contingent shall be exempt from taxation by the Government of Country A on their pay and other emoluments. They shall also be exempt from any other direct taxes (including death duties), fees and charges.

Through the application of the relevant legislation, it can be determined that your income is exempt from tax as your situation satisfies both paragraph 1 and 2 of section 23AG of the ITAA 1936. This is because you are a natural born citizen of Australia as well as being deployed as a member of a disciplined force of Australia.

Are you considered an employee for income tax purposes?

Section 23AG of the ITAA 1936 provides a definition of who is considered an employee for Income tax purposes. It states:

An employee includes:

(a) a person employed by a government or an authority of a government or by an international organisation; or

(b) a member of a disciplined force.

Through the application of the relevant legislation, it can be determined that your income is exempt from tax as your situation satisfies both paragraph 1 and 2 of section 23AG of the ITAA 1936. This is because you are a natural born citizen of Australia as well as being deployed as a member of a disciplined force of Australia.

Do you have a reportable fringe benefit amount in respect of the provision of the car during the period of your deployment?

A ‘reportable fringe benefits amount’ is defined in subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA) as having the meaning given by section 135P or 135Q of the FBTAA (as appropriate). Section 135Q of the FBTAA does not apply in your case. Therefore, this provision is not considered in these reasons. Generally, it requires certain employers to include the notional taxable value of certain benefits that are exempt in the reportable fringe benefits amount.

Section 135P of the FBTAA states that an employee has a ‘reportable fringe benefits amount’ if the employee’s ‘individual fringe benefits amount’ for the fringe benefits tax (FBT) year in respect of the employee’s employment by the employer is more than $2,000.

Subsection 136(1) of the FBTAA defines an employee’s ‘individual fringe benefits amount’ as having the meaning given by section 5E of the FBTAA.

Subsection 5E(2) of the FBTAA states that the ‘General Rule’ is that ‘the individual fringe benefits amount is the sum of the employee’s share of the taxable value of each fringe benefit that relates to the year of tax and is provided in respect of the employment other than an excluded fringe benefit’.

Therefore, for general purposes, an employee’s ‘individual fringe benefits amount’ for a FBT year is the sum of the employee’s share of the taxable value of all fringe benefits provided in respect of the employee’s employment, save for certain ‘excluded fringe benefits’. Accordingly, an ‘individual fringe benefits amount’ directly relates to the ‘taxable value(s) of relevant fringe benefit(s) provided in respect of the employment of the employee in the FBT year. Thus, it will not include benefits that are not fringe benefits.

Is the provision of the car during the period of deployment a ‘fringe benefit’?

In general terms, section 136(1) of the FBTAA provides that a fringe benefit will arise where in a year of tax there is a benefit to an employee provided by an employer in respect of the employment of the employee that is not an exempt benefit or excluded from the definition under paragraphs (f) to (s). Fringe benefits tax (FBT) is a tax paid by employers on fringe benefits provided to their employees (or their associates) in respect of their employment.

Of relevance to the definition of fringe benefit is the meaning of employee for FBT purposes. Subsection 136(1) of the FBTAA bases the definition of employee on the receipt of salary and wages. Broadly, subsection 136(1) defines salary and wages to mean a payment from which an amount must be withheld.

The Taxation Administration Act 1953 (TAA) states at section 12-35 that, 'an entity must withhold an amount from salary, wages, commissions, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

So, the obligations on employers for fringe benefit tax purposes hinge on the application of the PAYG withholding provisions. A fringe benefits tax liability will only arise when PAYG withholding is triggered for an employer in respect of an employee.

Taxation Determination TD 2011/1 Income tax and fringe benefits tax: can a non-resident entity be (a) required to withhold amounts form salary and wages paid to an Australian resident employee for work performed overseas under section 12-35 of Schedule 1 of the Taxation Administration Act 1953? (b) subject to obligations under the Fringe Benefits Tax Assessment Act 1986 in relation to benefits provided to an Australian resident employee in relation to work performed overseas? provides guidance in relation to the interaction between PAYG withholding and FBT:

4. If there is a withholding obligation, obligations under the Fringe Benefits Assessment Act 1986 (FBTAA) will arise in relation to benefits provided to an Australian resident employee in respect of the employment of the employee. If there is no withholding obligation, amounts paid to the employee by the non-resident entity for work performed overseas will not be ‘salary and wages’ as defined in subsection 136(1) of the FBTAA and no obligations under the FBTAA can arise for the non-resident in relation to benefits provided to that employee.

Therefore, for FBT to apply it is first necessary to determine whether the PAYG withholding provisions apply.

Section 12-1(l) of Schedule 1 of the TAA provides that an entity need not withhold an amount under section 12-35 of the TAA from a payment if the whole of the payment is exempt income of the entity receiving the payment.

Section 11-15 of the Income Tax Assessment Act 1997 (ITAA 1997) lists those provisions dealing with income that may be exempt. Included in the list is section 23AG of the ITAA 1936 which deals with exempt foreign income.

Amendments to section 23AG of the ITAA 1936 took effect on 1 July 2009. The accompanying Explanatory Memorandum provides guidance on the obligations regarding FBT in relation to exempt foreign income at paragraph 1.17. It states:

In addition, fringe benefits tax (FBT) obligations may arise in respect of benefits provided by employers to their foreign-based employees, pursuant to the Fringe Benefits Tax Assessment Act 1986. For FBT purposes, a person is regarded as an employee if the person receives salary and wages, which is in turn defined to include a payment from which an amount is withheld under the PAYG withholding rules. Thus, fringe benefits provided to employees whose foreign employment income is exempt under section 23AG are not subject to FBT, but fringe benefits provided to employees whose foreign employment income is not exempt under section 23AG may be subject to FBT.

The position was stated by the ATO in NTLG FBT Sub-committee Minutes 1 December 1994 at Agenda Item 15:

15 Exempt income and fringe benefits

The TIA sought clarification as to how section 23AG of the ITAA interacts with the FBTAA. They point out that whilst section 23AG applies (ie. the income of an employee is exempt as it is foreign earnings of the employee who has been engaged in foreign service for a continuous period of not less than 91 days), the person is not an employee and, thus not subject to FBT. The TIA expressed concern that where an employee has a broken period of section 23AG (ie outside Australia) and assessable income (ie. inside Australia), then the ATO may use the "former" employee or "future" employee concept to tax benefits derived during the foreign service period.

The ATO stated that benefits received in respect of employment which resulted in the person receiving exempt income under section 23AG are not being provided in respect of the employment of an employee, thus, by definition no FBT arises. The ATO also emphasised that the passage of time does not change the fact that, at that time, the person was not an employee, and cannot be a former employee in respect of that time. FBT can only be raised on benefits provided in respect of employment as an employee.

For the reasons set out above, you are not considered an employee for FBT purposes during your period of deployment as the foreign income is exempt under 23AG and therefore your employer has no withholding obligation under the PAYG withholding rules. This means, you do not fall within the definition of employee under the FBTAA during your period of deployment.

The provision of the car to you by your employer during your period of deployment is not a fringe benefit as you are not considered to be an employee for FBT purposes during this time. Therefore, the benefit provided during this period is not subject to fringe benefit tax and will not be included in your reportable fringe benefits amount for the relevant income years.