Edited version of private advice

Authorisation Number: 1052064315420

Date of advice: 28 November 2022

Ruling

Subject: Exempt income - salary from international organisation

Question

Is your employment income from A Organisation (earned when you were based in Australia) exempt for the XXXX income years?

Answer

Yes.

This ruling applies for the following period:

XXXX

The scheme commences on:

XXXX

Relevant facts and circumstances

1.         You are an Australian citizen who has lived and worked overseas, but currently live and work in Australia. You self-assess as an Australian resident for tax purposes.

2.         You currently work for A Organisation.

•                You were recruited as an international staff member when living and working in Country B.

•                You are a full-time employee, employed by A Organisation until age XX.

•                You began working for A Organisation in XXXX, based in its headquarters in Country C.

•                You were outposted to A Organisation's XXXX Office in Australia, starting Month XXXX.

3.         You are a specialist in A Organisation's XXXX Department. In this role, you lead A Organisation's investments in a particular public policy field (we'll call it field D) across a relevant region. You directly project manages field D projects in Country B, Country E, and several other countries. You are currently project managing two field D projects in Country B co-financed by the Australian Government from Department of Foreign Affairs and Trade grants.

4.         You were outposted to Australia in Month XXXX (for an X-year period) to allow you to carry out your work. This would allow you to:

•                be closer to clients in Country E and Country B (as more frequent travel to these countries was required)

•                build closer relationships with DFAT and other international organisations' offices in Australia.

However, Australian borders closed because of COVID-19 which meant that you could not travel overseas (eg, to Country E and Country B).

5.         Your outposting ends in the XXXX income year, when you are expected to return to A Organisation's headquarters in Country C. You will likely rotate to a new role within A Organisation when your outposting ends.

Assumption(s)

You are an Australian resident for Australian tax purposes.

Relevant legislative provisions

Income Tax Assessment Act 1936

Section 6

Section 23AF

Section 23AG

Income Tax Assessment Act 1997

Section 6-5

Section 6-15

Section 6-20

International Organisations (Privileges and Immunities) Act 1963

Section 5

Fourth Schedule

Fifth Schedule

F Regulations XXXX

Regulation G

Regulation H

Reasons for decision

Summary

6.         Yes. Tax laws exempt certain types of income connected with prescribed international organisations. Schedule 4 of the International Organisations (Privileges and Immunities) Act 1963 exempts salaries for officers in prescribed international organisations. A Organisation is prescribed as an international organisation by regulations. Broadly, ATO guidance suggests that people in permanent roles with significant functions will be treated as holding an office for this purpose. You are an A Organisation officeholder because you're a permanent employee with significant duties and responsibilities. Your income from this office is exempt.

Detailed reasoning

General principles about tax liability: Australian residents are assessed on income from all sources unless exemptions apply.

7.         We'll briefly paraphrase some basic principles about determining tax obligations.

•                Residency and source are important for determining your assessable income. Australian residents are assessed on ordinary income from all sources (in Australia or overseas): subsection 6-5(2). In contrast, foreign residents are assessed on ordinary income from Australian sources: subsection 6-5(3).

•                Exempt income isn't assessable. Subsection 6-15(2) says exempt income isn't assessable income. Section 6-20 says that income can be made exempt by specific provisions.

8.         While ordinary income isn't defined, ATO guidance restates propositions (derived from case law) for establishing whether receipts are ordinary income. Paragraph 85 of TR 2006/3[1] says that payments received periodically or regularly, or that are consideration for performing services, are generally income.

9.         ATO guidance says that the source of income from services depends on the facts, but is generally the place where the services are performed. See ATO ID 2007/9.[2]

10.      Here, you have self-assessed as being an Australian resident for tax purposes. We haven't determined your residency, but are treating residency as an assumption for the purposes of this ruling.

11.      Your employment salary from A Organisation is ordinary income. It's remuneration for performing services, and it's received regularly and periodically.

12.      We don't need to determine the source of your income because you have self-assessed as being an Australian resident.

13.      For completeness, it's possible that your income from A Organisation will have an Australian source for the duration of your posting. You are performing services in Australia from an A Organisation office for a X-year period. While your duties relate to projects in Country B, and A Organisation's head office is in Country C, those factors wouldn't necessarily make your income foreign sourced for Australian tax purposes.

14.      Your salary from A Organisation will be assessable under section 6-5 unless an exemption applies.

15.      The remainder of this ruling will address three possible exemptions.

•         Income from international organisations.

•         Section 23AF, about income from approved projects.

•         Section 23AG, about income from foreign service.

Exemptions for income from international organisations: salaries of officers are exempt. Broadly, you're likely to be holding an office if you hold a permanent position with established responsibilities.

16.      Income from international organisations can be made exempt through legislation and regulations. The International Organisations (Privileges and Immunities) Act 1963 exempts some salaries paid by an organisation from income tax if the organisation is covered by regulations.

•                Section 5 says the regulations may declare an organisation to be an international organisation to which this Act applies, and confer privileges and immunities on it or relevant people.

•                The Second and Third Schedules gives people holding high office, or people attending international conferences, the privileges and immunities accorded to diplomatic agents.

•                Item 2 of the Fourth Schedule exempts salaries of officers (other than high officers).

•                Item 2A of the Fifth Schedule exempts salaries of people serving on the organisation's committee, participating in its work, or performing a mission on its behalf.

17.      A Organisation is treated as an international organisation for exempt income purposes. One regulationapplies the exemptions in the International Organisations (Privileges and Immunities) Act 1963 to A Organisation and people connected with it. <We won't mention the regulation or specific provisions in it because the relevant regulation in this edited version because it will identify A Organisation.>

•                Regulation G applies the exemption in the Fourth Schedule to people holding an office in the Bank.

•                Subregulation H(X) applies the exemption in the Fifth Schedule to people who are serving on an A Organisation committee, participating in A Organisation's work, or performing a mission on behalf of A Organisation.

•                However, subregulation H(Y) qualifies this exemption. It says it doesn't apply to Australian residents for services rendered in Australia, unless they:

o      are not an Australian citizen, and

o      came to Australia solely for the purpose of serving on committee, participating in A Organisation's work, or performing an A Organisation mission.

18.      There's ATO guidance about when income for people working in International Organisations will be exempt. TR 2019/D1[3] makes these points about whether someone is 'holding an office'.

•                A high office holder usually means a Secretary-General, President, or Director. [19]

•                Whether someone is an office holder is a question of fact, determined by the substance of the terms of engagement, and the employment relationship. [24]

•                An office must have independent existence, identifiable duties, functions, and responsibilities, that attach to the office itself, rather than the individual who occupies it. [25]

•                A person isn't an office holder if their terms of engagement place them outside the organisational structure. Employees might be office holders, but probably not consultants paid at an hourly rate. [26-28]

•                Example 1 suggests a team leader with significant organisational responsibilities and functions (developing strategy and managing employees, able to enter contracts, make financial commitments) might be holding an office.

•                Example 2 suggests a contractor without responsibilities, in a role which doesn't exist before or after her engagement, isn't holding an office.

19.      The ruling also makes comments about people serving on a committee, participating in the organisation's work, or performing a mission. TR 2019/D1 says that their income is usually exempt, but the exemption may be limited by regulations where the person is an Australian resident rendering services in Australia. It makes this point at paragraph [33]:

Generally, Australia's approach to persons serving on a committee or participating in the work or performing a mission is that they are exempt from tax in Australia. However, this exemption may be limited or subject to conditions, particularly where the person is rendering the services in Australia and is a resident of Australia for taxation purposes. To the extent that the exemption is limited or subject to conditions in relation to a particular international organisation it will be specified in the regulations for that organisation.

Applying these principles: you are exempt, because you're holding an office for A Organisation. You have a permanent position with substantial responsibilities.

20.      You are exempt under Regulation G because you're holding an office. You're a field D specialist in a department within A Organisation, with clear responsibilities that include project managing field D projects. Those are identifiable duties, functions, and responsibilities which will survive changes in personnel. Like Example 1 in TR 2019/D1, you are a permanent employee with significant organisational responsibilities.

21.      For completeness, you wouldn't be made exempt by Regulation H. You're participating in A Organisation's work or performing a mission. But you're an Australian resident performing services in Australia, and an Australian citizen. Subregulation H(Y) excludes you from that exemption.

Section 23AF: eligible foreign remuneration from approved projects

22.      Very broadly, section 23AF exempts eligible foreign remuneration income from approved projects.

•                The taxpayer needs to be engaged on qualifying service on a particular approved project for a continuous period of at least 91 days. See subsection 23AF(1).

•                Subsection 23AF(3) deems a person to be engaged on qualifying service if they're outside Australia and engaged in the performance of personal service in connection with the approved project. Periods attributable to travel, leave, incapacity to work, might be included. See also subsections 23AF(4) and (5).

•                Subsection 23AF(6) treats periods as qualifying service where the Commissioner forms the opinion that the person would have been on qualifying service on the project but for unforeseen circumstances.

•                An approved project means an eligible project approved by the Trade Minister: see subsection 23AF(11).

•                An eligible project broadly includes building facilities, developing urban, regional, or agricultural areas, giving advice to governments, or otherwise approved by the Trade Minister: subsection 23AF(18).

23.      We don't have enough information to determine if section 23AF applies. We don't know if any of your Country B field D projects were approved by the Trade Minister. Even if they were, you didn't spend 91 days outside Australia in the relevant years. COVID-19 may have prevented you travelling to Country B, but we don't know for how long those trips would have been. We don't have enough information to form the opinion that you would have been on qualifying service but for COVID-19.

Section 23AG: exempt income from foreign service

24.      Section 23AG exempts income from certain foreign service where conditions are met. Broadly, the income needs to meet one of five positive conditions, and not be disqualified by any negative condition.

•                Subsection 23AG(1) says where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the person from that foreign service are exempt from tax.

•                This is qualified by subsection 23AG(1AA). This says that foreign earnings aren't exempt unless the continuous period of foreign service is directly attributable to any of five circumstances.

•                Broadly, subsection 23AG(2) says that amounts of foreign earnings aren't exempt if they are only exempt in the foreign country because of a double tax agreement, or a law giving privileges to diplomatic or international organisation staff.

25.      Foreign service isn't defined, but it clearly means performing duties overseas. Meanings of 'foreign' given by the Macquarie Dictionary which seem relevant here include 'dealings with other countries', 'external to one's own country,' or 'carried on abroad, or with other countries'.[4] 'Service' meanings include performing duties as a servant, or employment in any duties or work for another.

26.      Section 23AG won't apply. Your income wasn't from foreign service because you were performing duties in Australia, not overseas. While your employer's head office was in Country C, and your projects related to Country B, that's not enough to qualify as foreign service where you were required to attend an office in Australia and performed your duties there. In any event, it's possible that your income would be exempt in Country C under laws corresponding to the International Organisations (Privileges and Immunities) Act 1963.

Conclusion: your salary from A Organisation is exempt because you're holding an office in a prescribed international organisation.

27.      Your income from A Organisation while you were employed in Australia will be exempt. Schedule 4 of the International Organisations (Privileges and Immunities) Act 1963 exempts salary for officeholders in international organisations covered by regulations. Regulation G of the relevant regulationsextend that exemption to A Organisation. You are holding an office with A Organisation because you're a permanent employee with established responsibilities.

[1] Taxation Ruling TR 2006/3 Income tax: government payments to industry to assist entities (including individuals) to continue, commence, or cease business.

[2] ATO Interpretative Decision ATO ID 2007/9 Income Tax: Assessability of employment income received by a South African resident taxpayer.

[3] Draft Taxation Ruling TR 2019/D1 Income tax: income of international organisations and persons connected with them that is exempt from income tax.

[4] Macquarie Dictionary Publishers (2022) The Macquarie Dictionary online, (entries for 'foreign' and 'service') accessed at www.macquariedictionary.com.au on 15 November 2022.