Private ruling: Exempt Foreign Employment Income
Published: June 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ending 30 June 2012
Date scheme commenced: On or after 1 January 2008

Ruling: Q1: Is the income you derived in Country A from Corporation A under secondment to Corporation B on the A Project exempt from tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: Is the income you derived in Country A from Corporation B on the A Project exempt from tax in Australia under section 23AG of the ITAA 1936? | A2: Yes. | Q3: Is the income you derived in Country A from the Organisation in developing B Program exempt from tax in Australia under section 23AG of the ITAA 1936? | A3: No. | Q4: Is the income you derived in Country A from Corporation C in your position as an advisor to the Department exempt from tax in Australia under section 23AG of the ITAA 1936? | A4: Yes.


Relevant legislative provisions: Subsection 6-5(2) of the Income Tax Assessment Act 1997 | Subsection 6-15(2) of the Income Tax Assessment Act 1997 | Section 6-20 of the Income Tax Assessment Act 1997 | Section 23AG of the Income Tax Assessment Act 1936

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (the "ITAA 1997") provides that the assessable income of an Australian resident will include ordinary income derived from all sources whether in or out of Australia, during the income year. Income you derived from the various contracts performed by you in Country A is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. However, subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income. Section 6-20 of the ITAA 1997 provides that an amount of ordinary income is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law. | Detailed Reasoning - Foreign sourced income: Subsection 23AG(1) of the ITAA 1936 provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from income tax in Australia. 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, and "foreign earnings" include salary, wages, commission, bonuses or allowances. | Detailed Reasoning - Australian Official Development Assistance: From 1 July 2009, subsection 23AG(1AA) of the ITAA 1936 came into effect and provides that foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the following: · delivery of Australian official development assistance by your employer · activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund) · activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia · deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force. The term 'Australian official development assistance' is not defined for the purposes of section 23AG of the ITAA 1936. However, the Explanatory Memorandum which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009) introducing paragraph 23AG(1AA)(a) of the ITAA 1936 provides guidance on the meaning of the phrase. 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 ("Aid organisation"). Australian ODA aims to reduce poverty and achieve sustainable development in developing countries, in line with Australia's national interest. For the purposes of subsection 23AG(1AA) the delivery of Australian ODA must be undertaken by the person's employer, which includes Aid organisation and an entity contracted by Aid organisation to assist in the delivery of Australian ODA. Your foreign service with Corporation A and your work under the contracts with Corporation B, the Organisation and Corporation C are all directly attributable to the delivery of Australian ODA by each of your respective employers. | Detailed Reasoning - Where Section 23AG exemption does not apply: Subsection 23AG(2) of the ITAA 1936 provides that the exemption under subsection 23AG(1) of the ITAA 1936 will not apply where a person's income is exempt from tax in the foreign country only because of any one of the reasons listed in that subsection. One of the listed reasons is where the income earned by a person in the foreign country is made exempt by the operation of a tax treaty, as provided in paragraph 23AG(2)(b) of the ITAA 1936. Australia has a tax treaty with Country A. The Tax Agreement operates to avoid the double taxation of income received by residents of Australia and Country A. Article 15(1) of the Tax Agreement provides that salary and wages income of an Australian resident will be taxable only in Australia unless the employment is exercised in Country A. If the employment is exercised in Country A then Country A may tax the income. As the employment income you receive while on posting in Country A is exempt from tax in Country A because of the operation of a tax treaty, subsection 23AG(2) of the ITAA 1936 would normally apply and the income would not be exempt from tax under subsection 23AG(1) of the ITAA 1936. However, the income you earn while on posting is also exempt from tax in Country A because of the terms of the MOU entered into between Australia and Country A. The exemption provided by the MOU does not fall under any of the other exemption categories under subsection 23AG(2) of the ITAA 1936, therefore you satisfy the conditions for exemption. | Detailed Reasoning - Employment with Corporation A: Subsection 23AG(6) of the ITAA 1936 provides that the period of a person's foreign service will include recreation leave (which is accrued as a result of the foreign service), other than long service leave or leave without pay or reduced pay, and will not constitute a break in a period of foreign service. Therefore, the recreation leave that accrued during your employment with Corporation A as an employee, including the period of your secondment to Corporation B, will form part of your period of foreign service in Country A. Accordingly, the income including overseas allowances that you received from your employment in Country A with Corporation A as an employee, including the period of your secondment to Corporation B, is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. As your relationship with Corporation B, the Organisation and Corporation C are not as well defined, we will now consider whether you worked as an employee or as a contractor for each of these companies. | Detailed Reasoning - Contractor vs employee: Taxation Ruling TR 96/15 provides at paragraph 20 that foreign earnings derived from independent personal services fail to qualify for exemption under section 23AG of the ITAA 1936 because they are not rendered during the course of a period of foreign service as the holder of an office or in the capacity as an employee. Therefore, to qualify for exemption under section 23AG of the ITAA 1936, the foreign service must be provided as the holder of an office or in the capacity of an employee and satisfies the qualification under section 23AG(2) of the ITAA 1936. We will consider each of your three remaining contractual relationship while you were working in Country A to determine whether the income from each source is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Holder of an officer: The meaning of the term "holder of an office" has been often considered by the courts. A number of cases are of assistance in defining the nature of the holder of an office for the purposes of section 23AG of the ITAA 1936. In Federal Commissioner of Taxation v. Sealy (1987) 19 ATR 582 at 286; ATC 5076 at 5079, Pincus J said: The word office has a range of meanings. In some contexts, it refers to a position of authority in a governmental or other public organisation. Presumably, no one would dispute that the position of a managing director of a public company could be regarded as an office. In Grealy v. Federal Commissioner of Taxation (1989) 20 ATR 403 at 408; 89 ATC 4192 at 4197, which concerned a university lecturer, the Full Federal Court held: The word office usually connotes a position of defined authority in an organisation, such as a director of a company or tertiary educational body, president of a club or holder of a position with statutory powers. Holders of professional employments are not made an office holder merely because his position has a name. Therefore, the term holder of an office connotes a person who holds a position of authority and not a person engaged under a contract to provide professional services. In your case, your subcontractor agreement with Corporation B, contract with the Organisation and subcontractor agreement with Corporation C were all for the provision of professional services. The scopes of services as contained in these contracts did not place you in a position of defined authority in each of the relevant organisation. Accordingly, the services provided under your contracts are not considered to be provided as the holder of an office. | Detailed Reasoning - In the capacity of a employee: The expression employee is not defined in either the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997). Therefore it has its ordinary meaning. Taxation Ruling TR 2005/16 discusses who is an employee within the ordinary meaning of that expression. The courts have examined the meaning of the word in a substantial and well-established body of case law, identifying many relevant factors to be considered when determining whether a contract is one of service (an employer/employee relationship) or one for services (a principal/contractor relationship). A clause purporting to characterise the relationship between the parties as one between a principal and contractor cannot receive effect according to its terms if it contradicts the effect of the agreement as a whole: paragraph 21 of TR 2005/16. Whether a contract is one of service or one for services is a question of law. The totality of the relationship between the parties must be considered to determine whether, on balance, the worker is an employee or an independent contractor. Considerations must be given to the various indicators identified in judicial decisions which have considered the employee/independent contractor distinction, keeping in mind that no list of factors is exhaustive. In determining the nature of the contractual relationship, it is important to consider all the terms and conditions between he parties, whether expressed or implied, in light of the circumstances surrounding the making of the contract. The weight given to particular facts will vary according to the circumstances: paragraphs 19 and 20 of TR 2005/16. Therefore, despite the wordings of "subcontractor" and "contractor" used throughout the three contracts, we must examine the contents of the contracts individually, giving due regard to each of the factors set out in TR2005/16 as well as any other relevant factors, in order to determine whether each of the contracts you were party to was a contract of service or a contract for services. The features below have been regarded as key indicators of whether an individual is an employee or contractor at common law. | Detailed Reasoning - Control test: This is the classic 'test' for determining whether a worker is an employee or a contractor. A common law employee is told not only what work is to be done, but how and where it is to be done. A contractor, on the other hand, is free to exercise his discretion outside of the boundaries of the terms specified in the contract. The importance of control lies not so much in its actual exercise, but in the right of the employer to exercise it. Clause 3.2 of the B contract provides that you shall provide your service to the standards, at the time and in the frequency, quantity and manner specified by the contract or as further or alternately directed by Corporation B. This indicates that, on top of the requirements set out in the scope of the contract, Corporation B retained the power to give direction and control the way in which you worked. Furthermore, Schedule 6 of the B contract provides that your work would receive overall management and policy direction from the Department project manager. The level of control Corporation B had over your work would indicate that you were engaged under a contract of service (employee). | Detailed Reasoning - Integration test: The integration test looks at whether a person is serving his employer in the employer's business or carrying on a trade or business of his own. Schedule 6 of Attachment A requires you to work closely as part of a team and to report directly to the leader of the team. You submitted that you were integrated into that team rather than operating on your own account. Based on this we determine that you were integrated as part of Corporation B's business and you were not independently running your own business. This would indicate that you were engaged under a contract of service (employee). | Detailed Reasoning - 'Results' contract: If the substance of the contract for work is one for the delivery of a specified result, there is a strong but inconclusive indication that the contract is one for services. A number of factors, such as whether the worker is free to employ his own means in achieving the contractually specified outcome, whether the consideration is a fix sum payable on the completion of the particular job as opposed to an amount paid by reference to hours worked and whether remuneration is payable when, and only when, the contractual obligation is fulfilled, will determine whether the contract is one for the delivery of a specified result. Having regard to the true essence of the contract, the manner in which the payment is structured will not of itself exclude genuine result based contracts. Schedule 2 of Attachment B of the B contract contains a clause which specifies the conditions precedent to you becoming entitled to payment of an invoice. It requires that the deliverable items for which payment is claimed have been achieved or completed in accordance with the scope of the contract and to the satisfaction of Corporation B. However, you were subject to ongoing approval and reporting, as opposed to a review of specified deliverables at specific times and dates. You lodged invoice on a monthly basis, rather than on the completion of specific tasks. These factors would indicate that you were engaged under a contract of service (employee). | Detailed Reasoning - Delegation of work: Whether a worker can delegate or subcontract the work required from him under the terms of the contract or not is the next factor to consider. If he is required by contract to personally perform the work, this is an indication that the person is an employee. On the other hand, if the individual retains the power to delegate or subcontract the work to another person, with or without the consent of the principal, this is a strong indicator that the person is engaged as a contractor. Throughout the contract there is mention of you being able to delegate and employ persons to assist you in achieving the outcome of the contract. There is no specific clause within your contract that would prevent this. You claim that you were expected to carry out your role personally, notwithstanding any contrary term in the contract. On balance, we accept that you were expected to carry out your role personally. These factors would indicate that you were engaged under a contract of service (employee). | Detailed Reasoning - Risk: Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, he 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 policy. An employee, in contrast, is not personally liable to third parties for any defective work. Schedule 5 of Attachment A of the B contract requires you to take out and maintain public liability insurance as well as professional indemnity insurance. You claim that, notwithstanding anything to the contrary in the B contract, you were not expected to provide any insurance of your own. The B contract and the C contract are identical in both form and content except for their attachments. Corporation C is a subsidiary of Corporation B. The C contract does not require you to undertake your own insurance. Given this discrepancy between the two substantially identical contracts provided by the same corporate group, we do not accept on balance that you were not expected to maintain your own insurance policies. These factors would indicate that you were engaged under a contract for services (contractor). | Detailed Reasoning - Provision of tools and equipment and payment of business expenses: Where a person provides his own assets, equipment and tools and incurs expenses and other overheads on his own account when carrying out work for another, it is likely that that person is a contractor. However, the provision of tools and equipment alone is not necessarily inconsistent with an employment relationship. The provision and maintenance of tools and equipment and payment of business expenses should be significant for the individual to be considered an independent contractor. You submitted that you provided your own office equipment including laptop, printer-scanner and mobile phone and that you worked from your own apartment, unless otherwise required by your duties. On balance, we do not consider that this is an indicator of a contract for services. Investment in capital is minimal and no special skills or training are required to operate these tools and equipment. The work you were required to do was not dependent upon these tools and equipment, but rather on your expertise and skills. As such the weight of this factor is minimal in context. | Detailed Reasoning - Other indicators: There is no exhaustive list of indicators for determining whether a person is engaged under a contract as an employee or a contractor. One other factor that can be considered is whether the worker is entitled to allowances and reimbursements for expenses incurred. Schedule 1of Attachment B of the B contract provides that you were entitled to an accommodation allowance when you were absent from the nominated home base. You were also entitled to claim reimbursements for any accommodation or travelling expenses incurred relating to work on the project. These factors would indicate that you were engaged under a contract of service (employee). Taking all these factors together, a holistic view of your contract indicates that you worked for Corporation B as an employee rather than a contractor. Accordingly, the income including overseas allowances that you received from your employment in Country A with Corporation B as an employee while working on the A Project is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Control test: Subclause 32.1 of the Organisation contract provides that during the term of the contract, the Organisation is entitled to issue from time to time a Tasking Note which will determine the scope, time period and financial limitation for a particular assignment. Clause 2 of the contract also provides that you must work to the set of standards expressed, including adhering to a specific set of standards and values. These clauses indicate that Organisation exercised a substantial degree of control over your work. This would indicate that you were engaged under a contract of service (employee). | Detailed Reasoning - Integration test: You were required to work in a team, but there is no detail regarding whether you were required to report to any particular structure in the body of the contract. Tasking Note Number 1 provided only that you were to work with a team of education consultants, with no specific reporting structure provided. There is little evidence of integration available. This would indicate that you were engaged under a contract for services (contractor). | Detailed Reasoning - 'Results' contract: Subclause 7.1 of the contract provides that you were to submit reports in accordance with the terms of the contract, and the reports are used to asses your progress under the contract. Subclause 7.3 of the contract and Subparagraph 6.1 of Tasking Note 1 provides that if your report did not satisfactorily meet the requirements set by the Organisation, it was entitled to reject and withhold payment of fees. Additionally, Clause 32 of the contract provides that the Organisation may issue from time-to-time a Tasking Note which will determine additional tasks that you must complete under the contract. Even though the contract provides that your fee is calculated based on an hourly basis, subparagraph 2.2 of Schedule 2 sets out the limits on the amount payable to you, which suggests that the contract price was calculated based on an estimate of the time or labour cost that is necessary to complete the task. This conclusion is supported by Table 1 in subparagraph 6.1 of Tasking Note Number 1, where each report you were required to submit have a specified, limited number of 'days input' on which your pay is calculated. Taken together, these factors indicate that the contract is a result-based one, and you were engaged under a contract for services (contractor). | Detailed Reasoning - Delegation of work: Throughout the contract references to subcontractors employed by you are variously made in relation to insurance and employee entitlements. This would indicate that you were engaged under a contract for services. Subclause 29.5 of the contract also provides that you may assign or subcontract an obligation under the contract provided that the Organisation gives its consent. However, paragraph 2 of Schedule 1 of the contract requires you to personally attend and participate in certain reviews and provide inputs to the B Program Concept Note and Design. On balance, these factors indicate that you were engaged under a contract of service (employee). | Detailed Reasoning - Risk: While you were not required to undertake any insurance in relation to your work, you were to bear any costs that may arise as a result of any unsatisfactory report submitted by you to the Organisation, as provided in subclause 7.2 of the contract. This risk borne by you is a strong indicator that you were engaged under a contract for services (contractor). | Detailed Reasoning - Provision of tools and equipment and payment of business expenses: Paragraph 3 of Schedule 2 of the contract provides that certain costs are reimbursable. This indicates that you were engaged under a contract of services (employee). | Detailed Reasoning - Other indicators: Subparagraph 1.2 of Schedule 2 of the contract provides that you are entitled to a superannuation guarantee contribution of 9% of your fee up to $10,800. A contractor is expected to pay his own superannuation and superannuation guarantee contribution made by the Organisation would indicate that you were an employee. This is an indicator that you were engaged under a contract of service (employee). We consider that the result-based nature of the contract and the risk you bore are defining characteristics of the Organisation contract. Their importance in characterising this contract out-weighs the other elements suggesting that this is a contract of service. On balance, we determine that the Organisation contract is one for services. As you were a contractor for the Organisation and not an employee, the income that you received from your contract in Country A with the Organisation as a contractor while working on the B Program is not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Control test: Clause 3.2 of the C contract provides that you shall provide your service to the standards, at the time and in the frequency, quantity and manner specified by the contract or as further or alternately directed by Corporation C. The level of control Corporation C had over your work would indicate that you were engaged under a contract of service (employee). | Detailed Reasoning - Integration test: Schedule 6 of Attachment A required you to work closely as part of a team and to report to the Chief Adviser to the Department. You submitted that you were integrated into that team rather than operating on your own account. Based on this we determine that you were integrated as part of Corporation C's business and you were not independently running your own business. This would indicate that you were engaged under a contract of service (employee). | Detailed Reasoning - 'Results' contract: Schedule 2 of Attachment B of the C contract contains a clause which specifies the conditions precedent to you becoming entitled to payment of an invoice. It requires that the deliverable items for which payment is claimed have been achieved or completed in accordance with the scope of the contract and to the satisfaction of Corporation C. However, you were subject to ongoing approval and reporting, as opposed to a review of specified deliverables at specific times and dates. You lodged invoice on a monthly basis, rather than on the completion of specific tasks. These factors would indicate that you were engaged under a contract of service (employee). | Detailed Reasoning - Delegation of work: Throughout the contract there is mention of you being able to delegate and employ persons to assist you in achieving the outcome of the contract. There is no specific clause within your contract that would prevent this. You claim that you were expected to carry out your role personally, notwithstanding any contrary term in the contract. On balance, we accept that you were expected to carry out your role personally. These factors would indicate that you were engaged under a contract of service (employee). | Detailed Reasoning - Risk: There is no requirement for you to take on your own insurance policy nor any does the contract contain any other requirements for you to bear your own risks. This would indicate that you were engaged under a contract for services (contractor). | Detailed Reasoning - Provision of tools and equipment and payment of business expenses: You submitted that you provided your own office equipment including laptop, printer-scanner and mobile phone and that you worked from your own apartment, unless otherwise required by your duties. On balance, we do not consider that this is an indicator of a contract for services. Investment in capital is minimal and no special skills or training are required to operate these tools and equipment. The work you were required to do was not dependent upon these tools and equipment, but rather it was dependent on your expertise and skills. As such the weight of this factor is minimal in context. | Detailed Reasoning - Other indicators: Schedule 1of Attachment B of the C contract provides that you were entitled to a sundry and incidental expenses allowance subsidizing all non-accommodation costs. You were also entitled to claim reimbursements for any accommodation or travelling expenses incurred relating to work on the project. These factors would indicate that you were engaged under a contract of service (employee). Taking all these factors together, a holistic view of your contract indicates that you worked for Corporation C as an employee rather than a contractor. Accordingly, the income including overseas allowances that you received from your employment in Country A with Corporation C as an employee while working as an Advisor for the Department is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You are an Australian resident for taxation purposes. | You were employed by Corporation A. | You were seconded from Corporation A through their international department, Corporation A international, to work with Corporation B in Country A. | During your secondment to Corporation B you occupied the role of an Advisor for The A Project. | The A Project was implemented to improve quality and access to education in a region of Country A, and is funded and managed by aid organisation. | During your employment in Country A with Corporation A, including the period of your secondment to Corporation B, you accrued recreation leave which you utilised throughout your period of employment in this role. On the occasions that you returned to Australia while on recreation leave, you did not perform any work-related duties. | Due to restructuring of the organisation, your employment with Corporation A ceased after 30 June 2009. | Immediately after your employment with Corporation A ceased, you commenced work with Corporation B under a subcontractor agreement (the "B contract") with a commencement date of after 30 June 2009 and a completion date of 2010, in the role of an Advisor for the A Project. | The B contract was extended. | In 2010 you entered into a contract with the Organisation (the "Organisation contract") as a Specialist for the B Program. You were contracted to "develop the concept and detailed design of the B Program to allow for Australian and Country A Government approvals and subsequent mobilisation". | The Organisation contract provided that the services were to be completed by no later than X 2011. In X 2010 you ceased work for the Organisation. | In X 2010 you commenced work with Corporation C under a subcontractor agreement (the "C contract") with a commencement date of X 2010 and a completion date of late 2011, in the role of Advisor to the Department. | Your income is exempt from tax in Country A in accordance with the General Agreement between the Government of Country A and the Australian Government (the "MOU"). | There is a tax treaty between Australia and Country A for the elimination of double taxation (the "Tax Agreement"). | Explanatory Memorandum of the Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 | Does Part IVA, or any other anti-avoidance provision, apply to this ruling?