Edited version of private advice

Authorisation Number: 1051824865468

Date of advice: 06 May 2021

Ruling

Subject: 23AG income tax exemption

Question

Is your employment income earned while working remotely from Australia instead of performing your work locally in the foreign country 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 20XX

The scheme commences on:

XX XXXX 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You have been posted to the foreign country as part of a disciplined force.

Your employer treated the salary or wage and allowances (your income) as if it were exempt in Australia whilst you were in the foreign country. Therefore, they did not apply Pay As You Go Withholding to it. They did so on the basis that you are deployed as part of a disciplined force and that your income is not taxable in because of a Memorandum of Understanding (MOU) between Australia and the foreign country which exempts your income from tax in that country during your deployment.

You were forced to return to Australia in early 20XX to seek minor medical treatment and were only meant to be in Australia for less than 2 weeks. A return ticket was booked for you to return to the foreign country.

After being in Australia for a few days, a ban came into effect that would force you to remain in Australia for an extended period as the Australian Government would not allow you to return to the foreign country due to border closures.

You ended up remaining in transit accommodation in Australia until mid 20XX until you were approved to return to the foreign country.

You continued to obtain routine medical treatment while performing your remotely. At no stage did you take up regular duties as you were fully occupied completing your role.

Your duties included all administration that would have been completed while overseas and conducting multiple video calls daily to provide technical advice to outstanding defects.

Your spouse also had to return to Australia sometime after your return.

All your accommodation was paid for by yourself then reimbursed by your employer.

You did not take any leave at all while in Australia, this includes sick leave as you were still required to work daily. You have not had any leave since late 20XX.

You continued doing your regular overseas role for the entire period while in Australia.

Once your spouse cleared quarantine they stayed with you for the majority of the time.

Your spouse remains in Australia as you are too close to the end of your deployment for your employer to approve their return to the foreign country.

Reasons for decision

Summary

As the work was not carried out in the foreign country the income is not exempt under 23AG.

Detailed reasoning

Assessable income - general

As a general rule, and under the provisions of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of an Australian resident taxpayer includes all the ordinary income they earn from all sources, in or out of Australia in an income year.

Income in the form of salary, wages and allowances are all types of ordinary income.

Although a payment may be considered ordinary income and will generally be assessable under the provisions of section 6-5 of the ITAA 1997, there are some instances where ordinary income may be excluded from an individual's assessable income in Australia. This will be the case for example if a specific provision of the tax law makes the income exempt from taxation in Australia.

Exemption can be provided under 23AG, specifically 23AG(1), for a continuous period of 91 days of foreign service when the conditions are met for exemption are met:

(a)             a person has been engaged in foreign service for a continuous period of not less than 91 days

(b)             the foreign service is directly attributable to service of the type outlined in subsection 23AG(1AA), e.g. for overseas development assistance

(c)             as per subsection 23AG(2) (and further explained in TDs 2005/14 and 2005/15) the foreign earnings derived in the foreign country are not exempt from income tax in the foreign country only because of one or more of the following:

•                 an income tax exemption that applies to employment income,

•                 the application of a double tax agreement,

•                 a law of the foreign country that has a similar effect to the International Organisations (Privileges and Immunities) Act 1963 and its regulations

•                 an international agreement to which Australia is a party that deals with diplomatic or consular privileges and immunities or privileges and immunities in relation to a person connected with international organisations.

Requirement (a), being the primary requirement, that a person has been engaged in foreign service for a continuous period of 91 days is considered first. Only if that requirement is satisfied will consideration be given to the other requirements.

At issue here is the taxation of the income earned while you were working remotely from Australia rather than on site in the foreign country. Therefore, the consideration of requirement (a) is restricted to this timeframe.

There are two ways in which time spent in Australia could satisfy requirement (a), that is:

•                 the time spent in Australia is an absence of work, either for leave or medical reasons, that is taken to be foreign service by subsection 23AG(6), or

•                 the time spent in Australia is foreign service in its own right

Consideration is given to both of these ways below. An explanation is also provided as to why, taking into account your situation, the time spent in Australia in your case cannot be treated as foreign service in these ways.

It is acknowledged that you initially returned for medical reasons unrelated to COVID-19 however you did not take any leave for medical or other reasons while working from Australia.

Subsection 23AG(6) deals with absence from work on various types of leave and because of accident or illness and whether this can be taken to be foreign service.

It says in part

23AG(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:

...

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

While you returned to Australia because of a medical condition you did not cease work - you simply worked on the same duties but remotely from Australia.

Therefore, this cannot be treated as an absence.

Is the work performed from Australia 'foreign service'?

Meaning of Foreign Service

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.

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 a foreign country along with the time spent on leave in or other absence from the foreign country. However, it does not change the status of the period of absence, in this case, your period working in Australia. Your period working from Australia is still not taken to be foreign service as outlined above.

Accordingly, the salary you receive during your remote employment in Australia working on your foreign duties is not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

As your income is not from foreign service and therefore does not satisfy (a) it is not necessary to consider whether the other requirements for exemption, (b) and (c) as outlined above, are met.