Private ruling: Foreign employment income – 23AG
Date of advice: 13 December 2018
Published: April 2019
Ruling period: For the financial year ended 30 June 2016 | For the financial year ended 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Q1: Is income from your employment on an Australian government aid program in Country A exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 ? | A1: No

Relevant facts and circumstances: You are a resident of Australia for taxation purposes. Your services as a specialist were contracted as a contractor in Country A. You are engaged by an organisation as an independent contractor as per clause X of the Contract for Services of your engagement. Clause X states that “Nothing express or implied in this agreement shall create the relationship of employer and employee between the organisation and the Contractor. This agreement is to operate as a contract for services.”

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 in Country A as an independent contractor for an 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. You will not be exempt under 23AG of the ITAA 1936. Accordingly, the salary you received from the organisation during your service overseas is not exempt from income tax in Australia under section 23AG of the ITAA 1936.