Edited version of private advice

Authorisation Number: 1051877877752

Date of advice: 05 August 2021

Ruling

Subject: Foreign income - section 23AG

Question

Is your foreign income whilst working in Country Y exempt from taxation in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2020

Year ended 30 June 2021

The scheme commenced on:

1 July 2019

Relevant facts and circumstances

You are a resident of Australia for taxation purposes.

You are a contractor for a company, and you provide services overseas.

You work 80 days on and 40 days off. Your contract states you work 8 weeks on, 4 weeks off, subject to operational requirements.

You spend your days off in Australia.

You state you are a contractor.

Your contract states you are a contractor in regards to the work you are doing overseas.

Your contract states:

(B) Nothing in this Agreement is intended to or should be deemed to create a partnership or a relationship of employer and employee between the Company and the Contractor or any of its employees, agents or subcontractors.

The company pays superannuation for you.

Your income has previously been exempt from tax in Australia under Section 23AF as your work was part of an approved project.

The company did not seek approval for further project exemption.

You have Country Y withholding tax deducted from your pay

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 23AG

Reasons for decision

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.

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 (1) of the ITAA 1936 provides that foreign earnings are exempt from income tax where all of the following requirements are satisfied:

•                 you are a resident of Australia and a natural person,

•                 you are engaged in foreign service,

•                 the foreign service is for a continuous period of at least 91 days,

•                 you derive foreign earnings from that foreign service,

•                 the foreign service is directly attributable to an activity that is listed in subsection 23AG(1AA) of the ITAA 1936, and

•                 the foreign earnings are not exempt from income tax in the foreign country only because of one of the reasons listed in subsection 23AG (2) of the ITAA 1936.

You are a contractor for a company providing services in Country Y.

Subsection 23AG (7) of the ITAA 1936 defines Foreign Service as service in a foreign country as the holder of an office or in the capacity of an employee.

Accordingly, for your payments from work with the company to be exempt under section 23AG of the ITAA 1936, you must either hold an office or be an employee.

You are a contractor and not the holder of an office or an employee. Therefore, your income will not be exempt under section 23AG.

In addition, you work 80 days on, 40 days off. A requirement of the section is that the foreign service you complete is for a continuous period of 91 days. This has not been met.

We have also received no evidence that any foreign service is directly attributable to the delivery of Australian official overseas assistance by your employer. As mentioned above, you are also a contractor and are not employed for the purpose of this provision. None of the other requirements in subsection 23AG(1AA) are met either.

Therefore, your foreign income is not exempt from taxation in Australia under 23AG of the ITAA 1936 and must be included in your Australian tax return.