Private ruling: Foreign employment income – 23AG
Date of advice: 2 October 2017
Published: February 2018
Ruling period: Year ended 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: DDMMYY

Ruling: Q1: Is the income you earn while working overseas exempt under 23AG of the Income tax Assessment Act 1936 ? | A1: No | Q2: Is your income earned while working overseas exempt under 23AF of the Income Tax Assessment Act 1936 ? | A2: No

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You went overseas to work in the 2017 income year. You are engaged by an organisation as an independent contractor as per clause XX of the general terms and conditions of your engagement. Clause XX also states that This Agreement does not create a relationship between the organisation and the Adviser of employer and employee, principal and agent, partnership or joint ventures. Clause XX of the general terms and conditions states: The Adviser will not represent in any manner that the Adviser is an agent employee or partner of the organisation, or the Client/Donor nor that the Adviser has any authority to enter into any contract, binding legal arrangement or commitment on behalf of the organisation or the Client/Donor. Clause XX of the general terms and conditions states the Adviser is required for the Duration, to take out and maintain in force all necessary insurance at its own expense and for amounts acceptable to the organisation as determined from time to time, including (without limitation): a) Adequate professional indemnity insurance; b) Adequate public liability insurance (the “Insurance Policies”) in respect of the Services. The Adviser must maintain the necessary insurance until the expiration of three years after the full term of the Head Contract or earlier termination of the Head Contract. The letter of engagement states that you agreed to provide your knowledge and expertise on a consultancy basis. The position is for XX months with the possibility of extension. The letter of agreement states In the event the Services are performed to a standard which, in the reasonable opinion of the organisation ,is unsatisfactory, the Adviser may have to work longer than these months without further payment to bring the standard of performance of the Services to a satisfactory standard as determined by the organisation. You will undertake Official Development Assistance which is funded by the department of Foreign Affairs and Trade (DFAT) overseas. You do not pay tax overseas as you believe that you are a non-resident of the overseas country because you are there for less than 183 days and the source of your income is not the overseas country. Your work overseas is not an approved project and does not have a project number as it is funded by DFAT.

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

Reasons for decision: Summary: Subsection 23AG(1) of the Income Tax Assessment Act 1936 (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 were engaged overseas as an independent contractor for the organisation . 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 organisation to be exempt under 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 2005/16 (TR2005/16) 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: 1. The control test 2. The integration test 3. The results test 4. The delegation test 5. The terms of engagement test 6. The risk test The classic 'test' 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 an independent contractor will not meet the definition of foreign service for the purposes of 23AG of the ITAA 1936. Your contract clearly states you are an independent contractor and that your engagement does not create an employer and employee relationship, principal and agent partnership or joint ventures. You are responsible for all relevant insurances while providing services to the organisation. You will not be exempt under 23AG of the ITAA 1936. Accordingly, the salary you receive during your service overseas is not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Exemption of Certain Income Derived In Respect Of Approved Overseas Projects: Subsection 23AF(1) of the Income Tax Assessment Act 1936 (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 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 for the organisation is not exempt from tax under either 23AG or 23AF of the ITA 1936 and therefore must be included in your Australian tax return.