Edited version of private advice

Authorisation Number: 1051566334702

Date of advice: 27 November 2019

Ruling

Subject: Assessability of foreign income

Question

Is the income from your role with an international organisation exempt from taxation in Australia?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2019

Year ending 30 June 2020

The scheme commenced on:

1 July 2018

Relevant facts and circumstances

You are an Australian resident for taxation purposes.

You commenced working in Country A in mid-2019 on a project (the project) funded by an overseas organisation (the overseas organisation), with the expected finish date being in late 2019 in Country A, however following this you will then spend a further short period working on the project in Australia completing final administration.

You are contracted to work on the project by an overseas company (the overseas company) whose head office is located in Country B.

You have advised that as you are not an employee for this work assignment, you will be an independent contractor.

Your work assignment is up to a fixed number of working days, over 91, (not including weekends or public holidays in Country A), which cannot be extended, and you are also contracted and paid per working day.

After commencing working on the project in Country A in mid-2019, you returned to Australia for a holiday. Following this you then returned to Country A to work on the project, with the intention of working on the project in Country A until late in 2019, and then returning to Australia to work to complete the final project administration.

You have provided a month-by-month breakdown of the actual number of days and expected days you will spend working on the project.

You are not liable to tax in Country A, as no income tax is levied on non-residents if the source of income is derived from Country A.

You have also been advised that assistance provided to the Government of Country A is not taxable in Country A, however you have been unable to find the relevant legislation for this.

You have advised that your foreign service is not directly attributable to the delivery of Australian official overseas development assistance by the overseas company.

You have advised that your foreign service is not directly attributable to the activities of the overseas company in operating a country relief fund or a public disaster relief fund.

The project is designed to encourage dialog between the overseas organisation and Country A across a variety of policy areas through the provision of expertise and resources.

The project is funded by the overseas organisation and implemented by the overseas company.

Each month you are required to send your timesheets and reports on your progress that are compiled by the overseas company and sent to the delegation of the overseas organisation.

You are contracted and paid per working day in an overseas currency. You also receive a living allowance for accommodation and travel paid to you in a different overseas currency.

The overseas company is a private company.

You do not have any people reporting to you.

You are not able to engage any other persons to perform any part of the work.

You do not have a choice regarding where the work is being performed.

The work will mostly be performed in Country A.

You estimate that you will be working on the project in Australia for a few days completing final administration.

You have supplied a signed contract agreement between you and the overseas company (the agreement) which indicates that you will be working for the overseas company as a freelance contractor.

You do not have a diplomatic passport, and you do not receive diplomatic privileges.

You have an official Gratis Diplomatic Courtesy Visa.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-20

Income Tax Assessment Act 1997 Section 50-5

Income Tax Assessment Act 1997 Section 50-50

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Section 23AF

Income Tax Assessment Regulations 1997 Regulation 50-50.01

Income Tax Assessment Regulations 1997 Regulation 50-50.02

Diplomatic Privileges and Immunities Act 1967

Diplomatic Privileges and Immunities Regulations 1989

International Organisations (Privileges and Immunities) Act 1963

Specialized Agencies (Privileges and Immunities) Regulations 1986

Reasons for decision

Assessable income - general

The assessable income of an individual who is a resident of Australia for taxation purposes will generally include all the income they earn from all sources, in or out of Australia. However, in some cases a provision of Australia's tax law or of another Commonwealth law might apply to provide an exemption from taxation on income such as salary and wages earned from certain types of employment.

In cases where an individual is employed overseas on Foreign Service, the provisions of either section 23AG or 23AF of the Income Tax Assessment Act 1936 may provide an exemption from taxation in Australia on the salary and wages earned from that Foreign Service.

In cases where an individual's foreign service relates to employment with or contracted work for an international organisation, an exemption from taxation may also be provided under section 6-20 of the Income Tax Assessment Act 1997 (ITAA 1997) by the provisions of the International Organisations (Privileges and Immunities) Act 1963 (IO(P&I)Act)or the Diplomatic Privileges and Immunities Act 1967 (DP&I Act).

Exempt income under section 23AG of the Income Tax Assessment Act 1936

Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings of an Australian resident derived during a continuous period of foreign service of not less than 91 days employment in a foreign country are exempt from income tax in Australia.

Foreign earnings includes income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936).

You have advised that you are not an employee for this work assignment. As such you are not an employee of the overseas company no exemption is available under section 23AG of the ITAA 1936.

However, even if you were an employee of the overseas company, you would need to have met the requirements of subsection 23AG(1AA) of the ITAA 1936, which provides that foreign earnings are not exempt from tax unless the continuous period of foreign service is directly attributable to any of the following:

the delivery of Australia's overseas aid program by the individual's employer (except if that employer is an Australian Government Agency);

·        the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund that:

(i)               is covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the Income Tax Assessment Act 1997 (international affairs deductible gift recipients): and

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

·        the activities of the individual's employer being a prescribed institution that is exempt from Australian tax (because of paragraphs 50-50 (c) or (d) of the ITAA 1997) ; or

·        the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force.

In your case you do not meet any of the conditions of subsection 23AG(1AA) of the ITAA 1936, for the reasons explained below.

Delivery of Australian official development assistance by an employer

Taxation Ruling TR 2013/7 - Income tax: foreign employment income: interpretation of subsection 23AG(1AA) of the Income Tax Assessment Act 1936 (TR 2013/7)provides guidance on what constitutes delivery of Australian official development assistance (ODA) by an employer.

Paragraph 5 of TR 2013/7 provides that 'Australian official development assistance' refers to activities or programs in respect of which the funding has been (or would properly be) classified, in whole or in part, by the Australian government as official development assistance (ODA) for the purposes of reporting to the Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC). The Australian government bases its classification of funding as Australian ODA solely on the directives of the OECD DAC.

Paragraph 6 of TR 2013/7 also provides that in the context of paragraph 23AG(1AA)(a) 'delivery of Australian ODA' means the act of providing, giving or sending forth the relevant Australian ODA by the employer. The 'delivery of Australian ODA by the person's employer' is the doing of the activities which are carrying out or sending forth the Australian ODA. The term 'delivery' includes activities which are necessary for or facilitate carrying out the Australian ODA.

Therefore, an employer is delivering Australian ODA for the purposes of section 23AG where they are undertaking activities necessary for or which facilitate the carrying out of Australian ODA even though the expenditure on those particular activities may not be classified as Australian ODA by the Australian government.

Delivery of Australian ODA does not necessarily require an employer to undertake all activities associated with the Australian ODA.

In your case, the project you are working on is funded by the overseas organisation, and you have been contracted by the overseas company (a private overseas company) to carry out the work on the project.

You have also advised that your foreign service is not directly attributable to the delivery of Australian ODA.

As such your appointment with the overseas company is not directly attributable to the delivery of Australian ODA.

Activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund

You have not provided any information which would demonstrate that the overseas company is operating a public fund established to provide monetary relief to people in a developing foreign country who are distressed as a result of a disaster.

As such your period of Foreign Service is not directly attributable to activities of your employer in operating a developing country relief fund or a public disaster relief fund.

Activities of the individual's employer being a prescribed institution that is exempt from Australian tax

The exemption also applies where the continuous foreign service period of a resident individual is directly attributable to the activities of the individual's employer if the employer is exempt from income tax because of paragraphs 50-50(c) or (d) of the ITAA 1997.

This applies to a prescribed charitable or religious institution that is exempt from Australian income tax pursuant to item 1.1 or 1.2 of section 50-5 of the ITAA 1997.

A list of prescribed institutions for the purposes of paragraph 50-50(c) of the ITAA 1997 is contained in regulation 50-50.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997).

A list of prescribed institutions for the purposes of paragraph 50-50(d) of the ITAA 1997 is contained in regulation 50-50.02 of ITAR 1997.

In your case, the overseas company is not on the list of charitable and religious institutions contained in regulations 50-50.01 or 50-50.02 of the ITAR 1997.

As such, the overseas company is not a prescribed institution exempt from income tax by virtue of paragraphs 50-50(c) or (d) of the ITAA 1997.

Individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force

Taxation Ruling TR 2013/7 Income tax: foreign employment income: interpretation of subsection 23AG(1AA) of the Income Tax Assessment Act 1936 provides that the phrase 'disciplined force' refers to the Australian Defence Force (ADF), Australian Federal Police (AFP) and the State and Territory police forces. A person is 'deployed' 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.

From mid- 2019 you have been working for the overseas company in Country A on a project funded by the overseas organisation.

You have not been deployed by the ADF, AFP or a State or Territory police force.

Therefore your position as is not classed as being deployed as a member of a disciplined force.

In addition, you would not have gained the exemption under section 23AG even if you had have been engaged by your own Company which then contracted to the overseas company. This is because the exemption does not apply to personal services income.

Paragraph 4 of Taxation Ruling TR 2005/3W - Income tax: attributed personal services income that is foreign income - allowance of a foreign tax credit to an individual where foreign tax paid by a personal services entity provides that Subsection 23AG(1AA) of the ITAA 1936 applies to foreign earnings derived on or after 1 July 2009 from foreign service performed on or after 1 July 2009, and limits the types of employment to which section 23AG can apply. Following the introduction of subsection 23AG(1AA), section 23AG will not apply to the types of employment which lead to attributed personal services income. This means that section 23AG will not apply to attributed personal services income because of the operation of subsection 23AG(1AA), as well as for the reasons set out in this Ruling.

Exempt income under section 23AF of the Income Tax Assessment Act 1936

Subsection 23AF(1) of the ITAA 1936 provides that where an Australian resident has been engaged on a qualifying service on a particular approved project for a continuous period of not less than 91 days, any eligible foreign remuneration derived by the person is exempt from tax in Australia.

Eligible foreign remuneration

Subsection 23AF (18) of the ITAA 1936 defines 'eligible foreign remuneration', in relation to a person, as income that is derived by the person who is resident of Australia for taxation purposes, consisting of salary, wages, commission, bonuses or allowances derived by the person in his or her capacity as an employee of an eligible contractor.

Subsection 23AF of the ITAA 1936 also defines 'eligible contractor' as:

-        a resident of Australia (for taxation purposes),

-        the Commonwealth, a State, a Territory, the Government of a country other than Australia or an authority of the Commonwealth, of a State, of a Territory or of the or of the government of a country other than Australia;

-        an organisation of which Australia and a country or countries other than Australia are members; or

-        an organisation that is constituted by a person or persons representing Australia and a person or persons representing a country or countries other than Australia, or an agency of an organisation to which this applies.

Approved project

Subsections 23AF (18) and (11) of the ITAA 1936, also clarify that an approved project must be a project that, the Trade Minister is satisfied is an eligible project and will be, in the national interest and the Minister, has signed approval for the project.

The granting of approved project status is currently administered by Austrade, as delegated by the Trade Minister.

In this instance the project you are working on is funded by the overseas organisation, and you have been contracted by the overseas company (an overseas private company) to carry out the work on the project.

You have not provided any information to confirm that the project you are working on is an approved project for the purpose of Section 23AF of the ITAA 1936.

In addition, the overseas company is not an 'eligible contractor' as it is not an entity that is an Australian resident for taxation purposes, an Australian Government, an international organisation of which Australia is a member, or a Government of a country other than Australia.

Furthermore you have also advised that you are not an employee for this work assignment. As such you are not an employee of the overseas company.

As such, as the approved project, eligible contractor and eligible foreign remuneration status have not been met. The other conditions of this section will therefore not need to be considered.

Therefore you are not eligible for the exemption under Section 23AF of the ITAA 1936.

Exemption from taxation under the provisions of the International Organisations (Privileges and Immunities) Act 1963 (IOPIA)

Draft Taxation Ruling TR 2019/D1 considers income of international organisations and persons connected with them that is made exempt from income tax under section 6-20 of the ITAA 1997 by section 6 of the IOPIA.

The IOPIA is a Commonwealth Act under which an international organisation, and persons engaged by it, may be given certain privileges and immunities including tax exemptions.

The IOPIA applies to an international organisation if regulations declare it to be an international organisation for the purposes of the IOPIA.

An organisation is an international organisation if a regulation made under the IOPIA declares it to be an international organisation. For this purpose a separate regulation is made for each organisation or group of organisations.

No such regulation has been made for the overseas company. Therefore the provisions of the IO(P&I)A (including any potential for exemption from taxation) do not apply to the overseas company and persons engaged by it.

For further guidance, paragraph 16 of TR 2019/D1 provides that where a person is connected to an international organisation to which the IOPIA applies, an income tax exemption may apply where a person is connected with the international organisation in the capacity as an office holder or a person performing a mission, expert or consultant that is directly engaged by that organisation.

Furthermore, the exemption would not be available even if funding came from an organisation that was declared by a regulation under the IOPIA to be an international organisation. This is because, the person needs to be directly connected with the international organisation in a personal capacity. The exemption does not flow through intermediary entities, such as the overseas Company who you have been engaged by.

This is because a government or company themselves cannot be connected with an international organisation meaning that the 'connection' to the international organisation is lost. Section 2C of the Acts Interpretation Act 1901 provides that in any Act, expressions used to denote persons generally include a body politic or corporate as well as an individual. However a body politic or a corporate, including both a government and a company, are not able to do the things itself required to make them a person connected with an international organisation in their own capacity. For example they cannot themselves occupy a position and do the things required to be a holder of an office or be an expert or a consultant.

This principle of direct employment requirement from the relevant international organisation itself is set out in Macoun v Commissioner of Taxation [2015] HCA 44, paragraphs 50-52 (in that case the payments were received from a pension fund rather than the intrenational organisation itself).

Exemption from taxation under the provisions of the Diplomatic Privileges and Immunities Act 1967

The DP&I Act is an Act relating to Diplomatic Privileges and Immunities, and for other purposes and in some cases it provides an exemption from taxation for certain international organisations and employees of such organisations.

Section 5A of the DP&I Act deals with the application of the Act in relation to certain international organisations.

Subsection 5A(1) of this Act provides that the Act only applies to an international organisation that is declared by the regulations to be an international organisation for the purposes of section 5A of the Act, and for this purpose an international organisation is an organisation whose membership is made up of:

-        overseas countries in a particular geographical location;

-        an organisation constituted by persons who represent overseas countries in a particular geographical region; or

-        an organisation or group of organisations whose membership is constituted by organisations whose members are overseas countries in a particular geographical region or organisations that are constituted by persons representing overseas countries in a particular geographical location.

The relevant regulations are the Diplomatic Privileges and Immunities Regulations 1989 (DP&I Regs).

The DP&I Act generally provides that staff of a mission, excluding locally engaged staff, receive the specified privileges and immunities, which may include an exemption from taxation. The staff receiving privileges and immunities have to be directly employed or engaged by the relevant international organisation, they cannot be engaged by another organisation who may do work for the overseas country.

The overseas company (a private overseas Company), is not declared under the DP&I Regs as an international organisation for the purpose of section 5A of the DP&I Act, and is also unlikely to be declared to be an international organisation for the purposes of the DP&I act as its membership does not satisfy the requirements of section 5A of the DP&I Act.

As such, the provisions of the DP&I Act (including any potential for exemption from taxation) do not apply to the overseas company and persons engaged by it.

Conclusion

The income from your role is not exempt from taxation in Australia under the provisions of:

• section 23AG of the Income Tax Assessment Act 1936,
• section 23AF of the Income Tax Assessment Act 1936,
• the International Organisations (Privileges and Immunities) Act 1963, or
• the Diplomatic Privileges and Immunities Act 1967.

Accordingly, that income will be included in your assessable income in Australia.