Edited version of private advice

Authorisation Number: 1051780637706

Date of advice: 24 November 2020

Ruling

Subject: International income

Question

Is your employment income whilst undergoing a quarantine period exempt from taxation in Australia under Section 23AG of the Income Tax Assessment Act 1936?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2021

The scheme commenced on:

1 July 2018

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You have been deployed to Country A as part of a disciplined force. You arrived in Country A in mid- 20XX to commence your deployment.

Your formal end of Overseas Mission (inclusive of accrued annual leave entitlements) for this deployment ends in early 20ZZ. You will commence work in a new business area at that time.

You left Country A recently to return to Australia where you entered mandatory quarantine. After completing quarantine, you had an official travel day (a workday) before commencing leave which was accrued on your posting. This will complete your posting.

During your quarantine period you worked remotely for the Country A Mission using a work provided laptop, mobile phone and security device to access databases. Your work included duties as required including bookwork, finances, telephone conversations in Country A and Australia and other duties which did not require face-to-face meetings.

You will have been working in Country A for a period greater than 91 days. You have spent approximately more than 91 days in mission and have accumulated approximately Y days of Overseas Annual Leave (OAL).

You will not be remaining in Country A after your departure to enter quarantine. At this point you are not expecting to return to Country A however other force members currently deployed there may require relief due to family commitments. If so, you may be asked to return for a short period.

Your employer did not withhold tax to remit to the ATO while you were working overseas as your employer determined that this deployment is covered by section 23AG of the Income Tax Assessment Act 1997.

Australia does not have a double tax agreement (DTA) with Country A.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AG

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

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

Reasons for decision

Assessable income - general

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, whether in or out of Australia, during the income year.

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

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

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

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

Subsection 23AG(1AA) of the ITAA 1936 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;

•         the activities of the individual's employer being a prescribed institution that is exempt from Australian tax; or

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

Before your quarantine period you were employed to work in a foreign country by the Australian Government as a member of a disciplined force. You therefore satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936.

However, subsection 23AG(2) of the ITAA 1936, prevents the exemption under subsection 23AG(1) of the ITAA 1936 where the income is exempt from income tax in the foreign country only because of one or more of the following conditions:

•         a double tax agreement or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b));

•         the foreign country exempts from income tax, or does not provide for the imposition of income tax on, income derived in the capacity of an employee, income from personal services or similar income (paragraphs 23AG(2)(c) and (d)); or

•         a law or international agreement dealing with diplomatic or consular privileges and immunities, or privileges and immunities of persons connected international organisations (paragraphs 23AG(2)(e), (f) and (g)).

In your case, it is evident that your employment income is not exempt from tax in Country A for any of the above reasons that are listed in subsection 23AG(2) of the ITAA 1936. This has been determined in a relevant Class Ruling

Therefore, subsection 23AG(2) of the ITAA 1936 will not apply to deny an exemption under subsection 23AG(1) of the ITAA 1936.

Meaning of Foreign Service

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

(6) For the purposes of this section, a period during which a person is engaged in foreign service includes any period during which the person is, in accordance with the terms and conditions of that service:

(a) absent on recreation leave, other than:

(i) leave wholly or partly attributable to a period of service or employment other than that foreign service;

(ii) long service leave, furlough, extended leave or leave of a similar kind (however described); or

(iii) leave without pay or on reduced pay; or

(b) absent from work because of accident or illness.

(6A) 2 or more periods in which a person has been engaged in foreign service are together taken to constitute a continuous period of foreign service until:

(a) the end of the last of the 2 or more periods; or

(b) a time (if any), since the start of the first of the 2 or more periods, when the person's total period of absence exceeds 1 / 6 of the person's total period of foreign service;

whichever happens sooner.

Subsection 23AG(7) of the Income Tax Assessment Act 1936 (ITAA 1936 provides that foreign service means service in a foreign country as the holder of an office or in the capacity of an employee

Section 2 of the Acts Interpretation Act 1901 provides that this Act applies to all Acts unless a contrary intention appears. Section 2B of the Act defines foreign country as follows:

foreign country means any country (whether or not an independent sovereign state) outside Australia and the external Territories.

There is nothing contained in either section 23AG or the ITAA 1936 more generally which would suggest that there is a contrary meaning and that this meaning should not apply.

Australia is not a foreign country for the purposes of the application of section 23AG of the ITAA 1936. Therefore, service undertaken in Australia cannot be regarded as foreign service.

Indeed, in paragraph 9 of Chaudhri v Commissioner of Taxation [2001] FCA 554 (the Chaudhri case) the Full Federal Court made it clear that it should apply in this way.

At paragraph 26 of the Chaudhri case the court considered the meaning of country. It stated:

Ultimately, we think that we should return to the ordinary English use of the word "country" in the context of that being a place where personal service such as employment may be engaged in and where income may be derived. In that context, ordinary usage would not suggest that the high seas, or for that matter some parts of them, were in a composite sense to be regarded as a country, or for that matter a series of countries. Rather the ordinary meaning of the expression "foreign country" in modern usage looks to a political entity, be that a tract of land, a district, or a group of islands. It does not extend to an ocean or region of the sea.

Therefore, in line with the Chaudhri case the words foreign service are construed to be within their strict meaning, that is it is service in a foreign country where that country is not Australia.

Refer also to ATO Interpretive Decision ATO ID 2003/907 as an example where this approach has been applied in practice.

If the term 'foreign service' is replaced with its definition, subsection 23AG(1) of the ITAA 1936 reads:

Where a resident, being a natural person, has been engaged in [service in a foreign country as the holder of an office or in the capacity of an employee] for a continuous period of not less than 91 days, any foreign earnings derived by the person from that [service in a foreign country...] are exempt from tax

It is therefore not to the point that the individuals have not been absent from work or that they are continuing the same service. Once they have returned to Australia, they are not engaged in service in a foreign country.

Further, you will not be on leave that is treated as foreign service under subsection 23AG(6)(a).

You will also not be absent from work due to an illness or injury under subsection 23AG(6)(b) as you are neither sick, nor injured. Further, during your time in quarantine you will be working for your employer.

The 1/6 rule referred to in subsection 23AG(6A) may apply to treat as one period of foreign service the period of time you were in Country A with the time spent on leave in terms of the leave you accrued. However, it does not change the status of the period of absence, in this case, your quarantine period in a hotel in Australia. It is still not taken to be foreign service as outlined above.