Private ruling: Foreign employment income and section 23AG/23AF
Date of advice: 30 October 2017
Published: March 2018
Ruling period: Year ended 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the income earned while working in Country X exempt under section 23AG of the Income tax Assessment Act 1936 (ITAA 1936)? | A1: No | Q2: Is the income earned while working in Country X exempt under section 23AF of the ITAA 1936? | A2: No | Q3: If the income is exempt, are you required to submit GST and lodge BAS in regards to this income? | A3: Not Applicable. The income is not exempt income.

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You are a self-employed contractor based in Country X. Your spouse is a diplomatic officer of the Country X. You are travelling on a diplomatic passport, however, you do not have a diplomatic role and are not employed by the Department of Foreign Affairs and Trade (DFAT). You have been issued a work permit. You are engaged by Company A as a Short Term Advisor (Consultant) in Country X. The work is a DFAT funded program under the relevant Australian Assistance program. The work is managed by Company A on behalf of the Commonwealth of Australia. You are contracted under the Australian Government’s relevant Remuneration Framework to support the delivery of Australia’s development assistance. The initial contract was for 60 days and it was followed up by a second contract for a term of 2 years. The Short Adviser Agreement (the Agreement) provides that the Advisor may, with the prior written consent of Company A, engage a person approved by Company A (a Nominated Representative), as an employee or consultant, to provide any part of the Service for or on behalf of the Advisor, on terms consistent with the Engagement Conditions. The Agreement states that if the Advisor fails to supply the Services in accordance with the Engagement Conditions, the fees will be reduced to reflect the reduced level of Services provided to Company A or the loss suffered by Company A as a consequence of that failure, as is reasonably assessed by the company. The Agreement states that the Professional Fee and Management Fee are calculated monthly and the fee for a particular month will be paid in arrears on the 21 st day of the month following the month in which Company A receives and accepts a properly rendered tax invoice from the Advisor. Your work in Country X is not an approved project and does not have an approved project number as it is funded by DFAT.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG | Income Tax Assessment Act 1936 Section 23AF

Reasons for decision: Summary: 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 self-employed contractor based in Country X. You are engaged by Company A as a Short Term Advisor (Consultant). 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 Company A to be exempt under section 23AG of the ITAA 1936, you must either hold an office or be an employee. While FC of T V Jayasinghe (2017) is in relation to the International Organisations (Privileges and Immunities) Act 1963 , the principles can be applied to your circumstances. The High Court made the following observations in relation to “holds an office”: The phrase "a person who holds an office in an international organisation" directs attention to the structure of the organisation and the place of the person within it. The holder of an "office" in such an organisation may be expected to have a position to which certain duties attach, duties relating to the performance of the organisation's functions and a level of authority with respect to the organisation. By comparison, a person whose terms of engagement place them outside the organisational structure, and do not provide that person with any defined duties or authority with respect to the organisation and its functions, could hardly be said to hold an office within the organisation. Taxation Ruling TR 2005/16 Income tax: Pay As You Go - withholding from payments to employees considers who is an employee and what factors are taken into consideration when determining who is an employee. The relationship between an employer and employee is a contractual one. It is often referred to as a contract of service. Such a relationship is typically contrasted with the principal/independent contractor relationship that is referred to as a contract for services. An independent contractor typically contracts to achieve a result whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result). The Courts have considered the common law contractual relationship between parties in a variety of legislative contexts, including income tax, industrial relations, payroll tax, vicarious liability, workers compensation and superannuation guarantee. As a result, a substantial and well-established body of case law has developed on the issue. There are often many relevant facts and circumstances, some pointing to a contract of service, others pointing to a contract for services. In determining who is an employee there are 6 main things to take into consideration: ● the control test ● the integration test ● the results test ● the delegation test ● the terms of engagement test ● the risk test The control test is for determining the nature of the relationship between a person who engages another to perform work and the person so engaged is the degree of control which the former can exercise over the latter. A common law employee is told not only what work is to be done, but how and where it is to be done. The mere fact that a contract may specify in detail how the contracted services are to be performed does not necessarily imply an employment relationship. In fact, a high degree of direction and control is not uncommon in contracts for services. The results test indicates where the substance of a contract is to achieve a specified result; there is a strong (but not conclusive) indication that the contract is one for services. The power to delegate or subcontract (in the sense of the capacity to engage others to do the work) is a significant factor in deciding whether a worker is an employee or independent contractor. If a person is contractually required to personally perform the work, this is an indication that the person is an employee. If an individual has unlimited power to delegate the work to others (with or without the approval or consent of the principal), this is a strong indication that the person is engaged as an independent contractor. Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, he or she is more likely to be an employee. On the other hand, an independent contractor bears the commercial risk and responsibility for any poor workmanship or injury sustained in the performance of work. An independent contractor often carries their own insurance and indemnity policies. Your foreign engagement as a contractor will not meet the definition of Foreign Service for the purposes of section 23AG of the ITAA 1936. You are a self-employed contractor; your engagement with Company A does not create an employer and employee relationship, principal and agent partnership or joint ventures. Accordingly, the income earned while working in Country X is not exempt under section 23AG of the ITAA 1936. Subsection 23AF(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 qualifying foreign service, ● the foreign service is for a continuous period of at least 91 days, ● you derive eligible foreign earnings from that foreign service, ● the foreign service is directly attributable to an approved project by the Trade Minister or a delegate of the Trade Minister, and is allocated an official project number, and ● the income is not excluded by 23AG of the ITAA 1936 or any other provision listed in subsection 23AF(17) of the ITAA 1936. Your income is not exempt from tax in Australia under section 23AF of the ITAA 1936 as you are not engaged in an approved project and a project number has not been officially allocated to the role you are undertaking. Accordingly, the income you derive while carrying out services as an independent contractor is not exempt from tax under either section 23AG or 23AF of the ITA 1936 and therefore must be included in your Australian tax return. This question is not applicable as the income earned while working in Country X is not exempt under section 23AF/23AG of the ITAA 1936. For more information in relation to GST, please go to www.ato.gov.au and search QC 22411.

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