Edited version of private advice

Authorisation Number: 1052060813543

Date of advice: 28 November 2022

Ruling

Subject: PAYG withholding - exemption of foreign earnings

Question

Is Entity A required to withhold tax under section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from salaries and wages paid to employees who perform their services in foreign countries under the funding agreements between the Commonwealth of Australia represented by the Department of Foreign Affairs and Trade (DFAT) and Entity A for the deployment or provision of personnel to support programs in various countries?

Answer

No.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Entity A is a resident of Australia for tax purposes.

Entity A is a humanitarian agency which selects, trains and deploys personnel for short-term international emergency and disaster relief work.

Entity A assigns technical professional personnel to United Nations (UN) agencies for surge capacity.

Entity A undertakes its work by deploying its employees to undertake assignments in emergency situations in developing countries. The foreign services of Entity A's employees is directly related to the provision of this aid or charitable work.

Entity A's deployment services are primarily underpinned by the Australian Government's Australia Assists Contract and a Foreign, Commonwealth & Development Office-UK Government (FCDO) Accountable Grant.

From the 20XX financial year onwards, the majority of Entity's A operations are funded by the Australia Assists program (AA Program). The AA Program deploys individuals into a multitude of specific projects via various agencies such as UNHCR, UNICEF etc.

The majority of Entity As operations are funded by the AA Program facilitated with Australian Official Development Assistance funding. There are however some instances where deployments are funded entirely by UN agencies, and in other situations there is an element of both UN agency funding and Australian Official Development Assistance funding.

An average or typical duration of deployment overseas is 7.5 months.

The employees are residents of Australia for taxation purposes.

Remuneration paid by Entity A to employees while on deployment is made up of both fixed and variable components, with the fixed components including base salary, superannuation and annual leave entitlements.

Potential variable components of remuneration paid by Entity A to employees fall under a daily service allowance (DSA) and are designed to cover meals, lodging and other related expenses incurred during deployment.

The Funding Agreement Deed between the Commonwealth of Australia represented by DFAT and Entity A for Provision of Integrated Deployment Civilian Capability (Global) sets the terms under which a single Integrated Deployable Civilian Capability (IDCC) is to be provided by Entity A.

The services provided by Entity A form the AA Program.

The deployments which are the subject of this ruling are solely funded by DFAT (part of the AA Program).

Assumption

It is assumed that the other conditions for exemption under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) are satisfied by the employees of Entity A.

Relevant legislative provisions

Taxation Administration Act 1953 section 12-35 of Schedule 1

Taxation Administration Act 1953 subsection 12-1(1) of Schedule 1

Income Tax Assessment Act 1936 section 23AG

Reasons for decision

Question

Summary

Entity A is not required to withhold tax under section 12-35 of Schedule 1 to the TAA from salary and wages paid to employees who perform their services in foreign countries under funding agreements between DFAT and Entity A for the deployment or provision of personnel to support humanitarian relief programs in various countries.

Detailed reasoning

Section 12-35 of Schedule 1 to the TAA provides that under the PAYG Withholding system an entity must withhold amounts from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

Subsection 12-1(1) of Schedule 1 to the TAA however, provides that an entity need not withhold an amount under section 12-35 of Schedule 1 to the TAA from a payment if the whole of the payment is exempt income of the recipient.

Therefore, in order to work out whether an amount needs to be withheld from a payment, it is necessary to determine whether the payment is exempt income of the payee.

Section 11-15 of the Income Tax Assessment Act 1997 (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.

Section 23AG of the ITAA 1936

Subsection 23AG(1) of the ITAA 1936 provides that where Australian resident individuals are engaged in foreign service for a continuous period of no less than 91 days, foreign earnings derived from that foreign service are exempt from tax in Australia.

For the purposes of this exemption, 'foreign earnings' include salary, wages, commission, bonuses, allowances or amounts included in a person's assessable income under employee share acquisition schemes. However, Employment Termination Payments and transfers from foreign superannuation funds are not included.

Paragraph 23AG(1AA)(a) of the ITAA 1936

Further, paragraph 23AG(1AA)(a) of the ITAA 1936, states that:

However, those foreign earnings are not exempt from tax under this section unless the continuous period of foreign service is directly attributable to any of the following:

a)     The delivery of Australian official development assistance by the persons employer (except if that employer is an Australian government agency (within the meaning of the Income Tax Assessment Act 1997).

Key phrases in paragraph 23AG(1AA)(a) of the ITAA 1936 are discussed below.

'Directly attributable'

The opening words of subsection 23AG(1AA) of the ITAA 1936 contain a requirement applicable to all the employment activities in that subsection. That is, they state that the relevant foreign service must be 'directly attributable to' any of the employment activities listed in the subsection.

Section 23AG of the ITAA 1936 does not specify what this means. However, the Explanatory Memorandum (EM) which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 introducing subsection 23AG(1AA) provides guidance on this (see subparagraph 15AB(1)(b)(i) and paragraph 15AB(2)(e) of the Acts Interpretation Act 1901).

The words 'attributable to' have commonly been interpreted to require a causal connection (see Federal Commissioner of Taxation v. Sun Alliance Investments Pty Ltd (in Liquidation) (2005) 225 CLR 488 at 514-515; (2005) 60 ATR 560; 2005 ATC 4955).

However, these paragraphs in the EM suggest they bear a different meaning in this context.

Specifically, they suggest that the words 'attributable to' in the context of subsection 23AG(1AA) of the ITAA 1936 mean 'related to'. Accordingly, for paragraph 23AG(1AA)(a) of the ITAA 1936 to apply, a person's foreign service must be directly (that is, in a direct manner) related to the delivery of Australian official development assistance by the person's employer.

'Delivery of Australian official development assistance by the person's employer'

The term 'Australian official development assistance' (ODA) is not defined for the purposes of section 23AG of the ITAA 1936. However, the EM which accompanied Tax Laws Amendment (2009 Budget Measures No.1) Bill 2009) introducing paragraph 23AG (1AA)(a) provides guidance on the meaning of the phrase.

The relevant paragraphs are below:

Australian official development assistance

1.19 Australian official development assistance (ODA) is assistance delivered through the Australian Government's overseas aid program, as administered by the Department of Foreign Affairs and Trade and/or the Australian Agency for International Development (AusAID). Australian ODA aims to reduce poverty and achieve sustainable development in developing countries, in line with Australia's national interest.

1.20 In addition to providing Australian ODA directly, AusAID also competitively contracts aid work to Australian and international entities. Thus, in practice, individuals involved in the delivery of Australian ODA can include both Australian Public Service (APS) employees and non-APS employees.

1.21 For the purposes of subsection 23AG(1AA) the delivery of Australian ODA must be undertaken by the person's employer, which includes AusAID and an entity contracted by AusAID to assist in the delivery of Australian ODA.

'Assistance'

The ordinary meaning of 'assistance' in the Macquarie Dictionary is 'the act of assisting; help; aid'. Therefore, adopting its ordinary meaning, 'assistance' for the purposes of section 23AG of the ITAA 1936 would encompass the provision of money, goods or services capable of affording help or aid.

As detailed above where Entity A is contracted by DFAT to deploy or provide personnel to support humanitarian relief programs in various countries, we consider that Entity A has been contracted by DFAT to assist in the delivery of Australian ODA as outlined in paragraphs 1.19 to 1.21 of the EM which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009) introducing paragraph 23AG(1AA)(a) of the ITAA 1936.

Application to Paragraph 23AG(1AA)(a) of the ITAA 1936

The Commissioner considers that, in this case, the foreign service is directly attributable to the delivery of ODA, thus satisfying paragraph 23AG(1AA)(a) of the ITAA 1936.

Application to Section 23AG of the ITAA 1936

As paragraph 23AG(1AA)(a) of the ITAA 1936 is considered to be satisfied, the employees of Entity A who are deployed to various countries by Entity A under the funding agreements between the Commonwealth of Australia represented by DFAT are entitled to claim an exemption from tax on the foreign earnings derived from such foreign service under section 23AG of the ITAA 1936.

As the foreign earnings of the employees of Entity A are exempt under section 23AG of the ITAA 1936 under these circumstances, there will be no requirement for tax to be withheld, under section 12-35 of Schedule 1 to the TAA, from the salary and wages paid to the employees by Entity A.