Edited version of private advice

Authorisation Number: 1051527532246

Date of advice: 28 June 2019

Ruling

Subject: International - Exempt Income - PAYG

Question

Is the remuneration that Company A receives for the Project exempt income?

Answer

No

Question

Are the salary payments made by Company A to its Australian Staff working in Country X on the Project subject to Pay As You go withholding tax under subdivision 12 - B of the Taxation Administration Act 1953?

Answer

Yes

Question

Where Company A receives "Out-of-Pocket" and "reimbursement" payments for the project (including where you have employed sub-contractors) are the payments received taxable income, and the expenses deductible?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commences on:

1 July 2017

Relevant facts and circumstances

This ruling relates to Company A.

Company A was engaged by the Government of Country X to provide services of an experienced engineering specialist to design and implement a Project.

The Project was funded by a BANK and the Australian Government Department.

The Agreement between the Government of Country X (the executing agency - EA) and Company A (The Agreement) was signed on the XXXX.

The Agreement states your remuneration is made up of Remuneration, Out-of-Pocket (OPE) expenses, and Reimbursable expenses.

At the time of claiming advances substantiation was not required. However, substantiation of how the funds had been used was required, as part of final invoicing at the end of the project after delivery of all reports.

The BANK paid Company A for services provided for the Project (payments).

Company A's services were performed in Country X and in Australia.

Neither Company A or its staff or sub-contractors were provided with an identity card or a certificate from the BANK.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 6-15(2)

Income Tax Assessment Act 1997 Subsection 6-20(1)

Income Tax Assessment Act 1997 Section 11-15

Relevant Development Bank (Privileges and Immunities) Regulations 1967

International Organisations (Privileges and Immunities) Act 1963

Tax Administration Act 1953 Section 12-1

Tax Administration Act 1953 Section 12-35

Reasons for decision

Is the remuneration that Company A receives for the Project, from the BANK, exempt?

Answer

No: Neither Company A or its staff or sub-contractors were provided with an identity card or a certificate from the BANK. The income is not exempt.

Detailed reasoning

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

Income from consultancy services is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

However, subsection 6-15(2) of the ITAA 1997 provides 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.

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

The International Organisation (Privileges and Immunities) Act 1963 (IOPIA) is a Commonwealth Act under which an international organisation, and persons engaged by it, may be accorded certain privileges and immunities including an exemption from tax.

The Commissioner's views on the application of IOPIA are set out in Taxation Ruling TR 92/14 Income tax: taxation privileges and immunities of prescribed International Organisations and their staff (including Addendum). Paragraph 6 of TR 92/14 states that persons engaged by an international organisation including expert or consultant 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 IOPIA. However, it is necessary to examine the regulations of the particular International Organisation to ascertain a person's entitlement for taxation exemption.

The BANK is an international organisation to which IOPIA applies.

BANK (Privileges and Immunities) Regulations state that where the person is an Australian experts performing missions for BANK, will enjoy the privileges and immunities except where the services are rendered in Australia

However, experts performing missions for BANK, will be provided by the Government with an identity card which will identify the holder and certify that the holder enjoys the privileges and immunities."

In your circumstances, even though the Project was funded by the BANK and an Australian Government Department the contract is between you and the Government of Country X.

Neither you or your staff or sub-contractors have an identity card to certify that you are an expert performing missions for the BANK. Therefore the remuneration income from the Project is not tax exempt.

Question 2

Are the salary payments made by Company A to its Australian Staff working in Country X on the Project subject to Pay As You go withholding tax under subdivision 12 - B of the Taxation Administration Act 1953?

Answer

Yes Company A has a requirement under Section 12-35 to withhold amounts it pays to individuals as employees.

Detailed reasoning

Taxation Ruling TR 2005/16 Income Tax: Pay As You Go - withholding from payments to employees provides guidance as to whether an individual is paid as an employee for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).

Section 12-1 of the TAA 1953 says that an entity need not withhold an amount if the whole of the payment is exempt income.

Section 12-35 of Schedule 1 of the TAA 1953 to the states an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

The term 'employee' is not defined in the TAA. Therefore, for the purposes of withholding under section 12-35 (Of TAA 1953) the term 'employee' has its ordinary meaning. Staff are the people employed by a particular organisation. Therefore the Australian Staff of Company A are considered employees.

In your situation the income received as remuneration from the Project is not exempt income. Therefore Company A has a requirement under Section 12-35 of the TAA 1953 to withhold amounts it pays to individuals as employees.

Question 3

Where Company A receives "Out-of-Pocket Expenses" and "Reimbursable Expenses" payments from the Project, (including where you have employed sub-contractors) are the payments received taxable income, and the expenses deductible?

Answer

No the "Out-of-Pocket Expenses "and "Reimbursable Expenses" payments are reimbursements rather than allowances and as such not assessable income, and the corresponding expenses are not deductible.

Detailed reasoning

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

Income from consultancy services is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

However, subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.

Taxation ruling TR 92/15 Income tax and fringe benefits tax: the difference between an allowance and a reimbursement explains the difference between an allowance and a reimbursement for the purposes of determining whether a payment is a fringe benefit, or whether that payment is assessable income. Other than living-away-from-home allowances, most allowances will fall for consideration under the ITAA 1997. On the other hand, most reimbursements will fall for consideration under the Fringe Benefits Tax Assessment Act.

A payment is a reimbursement when the recipient is compensated exactly (meaning precisely, as opposed to approximately), whether wholly or partly, for an expense already incurred although not necessarily disbursed. In general, the provider considers the expense to be its own and the recipient incurs the expenditure on behalf of the provider. A requirement that the recipient vouch expenses lends weight to a presumption that a payment is a reimbursement rather than an allowance. A requirement that the recipient refunds unexpended amounts to the employer adds further weight to that presumption.

In Case 153 10 TBRD 480 the Board of Review said at 484:

Our view is that, as between employer and employee, there is a marked difference between a reimbursement and an allowance. A reimbursement transfers from the employee to the employer the burden of expenses actually incurred in the course of employment. An allowance is designed to compensate the employee because the employer does not wish to be under an obligation of meeting such expenses directly or indirectly.

Where a taxpayer receives a reimbursement for an expense the payment does not generally constitute assessable or exempt income. It is an affair of capital and therefore corresponding expenses are not allowable deductions.

Where the reimbursement only contributes to part of the actual costs you may be entitled to a deduction for expenses less the contribution where it is allowable.

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. Allowances are generally assessable income and the equivalent expenses may be deductible.

In this situation Company A is required to vouch for its Out-of-pocket expenses (OPE) and reimbursable expenses and are compensated precisely. The Agreement provides that the EA will pay OPE for actual costs substantiated by receipts of purchase or other supporting docs.

When advances were received under substantiation was not required. However substantiation of how the funds had been used was required, as part of final invoicing at the end of the project after delivery of all reports.

On that basis, the reimbursements appear to be 'true' reimbursements, and therefore not assessable income (with the outgoings not deductible).