Private ruling: Assessability of allowances
Published: August 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Question and answer | Are the allowances you received in relation to an overseas aid program exempt income? | Yes.

Relevant facts and circumstances: You are a resident of Australia for taxation purposes. You worked overseas on an aid program. The program was funded as part of Australia's International Development Assistance Program. You undertook the program for more than 91 days. You received a number of allowances. You were required to write a report after you ceased the program. There is a Memorandum of Understanding (MOU) between Australia and the overseas country.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 15-2 | Income Tax Assessment Act 1936 Section 23AG

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income. Section 15-2 of the ITAA 1997 provides that the value of all allowances, gratuities, compensation, benefits etc. given or granted in respect of employment or services rendered are included in assessable income. Paragraph 2 of Taxation Ruling TR 92/15: Income tax and fringe benefits tax: the difference between an allowance and a reimbursement advises that a payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance. If an aid worker receives an allowance, with no regard to expenses actually incurred and with no requirement to repay unspent monies, this office will generally treat the payment as assessable income. As an Australian resident, you are assessable on your worldwide income in Australia. The allowance you received in relation to your work is assessable income. Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) states that where a resident 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. You are an Australian resident and the period of foreign service you undertook was more than 91 days. Therefore, you fulfil the requirements of residency and period of service. The tax exemption only applies to persons engaged in foreign service. Foreign service means service in a foreign country as the holder of an office or in the capacity of an employee (subsection 23AG(7) of the ITAA 1936). Therefore, to be engaged in foreign service there must usually be an employer / employee relationship. Subsection 23AG(7) states that the definition of employee includes a person employed by an international organisation. Taxation Ruling TR 2005/16 Income Tax: Pay As You Go - withholding from payments to employees provides some clarification in determining the employee status of the worker. Paragraph 6 states that the term 'employee' is not defined and whether a person is an employee is a question of fact determined by examining the terms and circumstances of the arrangement. Paragraph 21 states that the underlying reality of the relationship should be determined and that parties to an arrangement cannot deem the relationship to be something that it is not. Paragraph 26 of TR 2005/16 states that 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. You were required to perform activities and services on a regular basis and to write a report at the end of the program. Despite your program information indicating you are not an employee, these clear assignment conditions indicate that the program organisers had a significant degree of control over your actions and as such the arrangement can be considered an employer / employee relationship. The true essence of your arrangement overrides any attempt by program organisers to label the arrangement otherwise. The nature refers to the fact that you will not be paid a salary to work, and instead will receive a living allowance. Therefore, you fulfil the requirements for engagement in foreign service. Subsection 23AG(1AA) of the ITAA 1936 imposes conditions on this tax exemption. The continuous period of foreign service must be directly attributable to any of the following: a) the delivery of Australian official development assistance by the person's employer b) the activities of the person's employer in operating a public fund covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the ITAA 1997 (international affairs deductible gift recipients) c) the activities of the person's employer, if the employer is exempt from income tax because of paragraph 50-50(c) or (d) of the ITAA 1997 (prescribed institutions located or pursuing objectives outside Australia) d) the person's deployment outside Australia as a member of a disciplined force by (i) the Commonwealth, a State or a Territory; or (ii) an authority of the Commonwealth, a State or a Territory e) an activity of a kind specified in the regulations. 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 (AusAID). In addition to providing Australian ODA directly, AusAID also competitively contracts aid work to Australian and international entities. Therefore, for the purposes of paragraph (a) of subsection 23AG(1AA) of the ITAA 1936 the delivery of ODA must be undertaken by the person's employer, in the delivery of Australian ODA. In your case, the program was funded to provide Official development Assistance. It has been determined for the purposes section 23AG of the ITAA 1936 that an employee / employer relationship does exist between you and the program organizers. Therefore the continuous period of foreign service is directly attributable to the delivery of Australian official development assistance by your employer. Therefore, paragraph (a) is applicable to your situation and subsection 23AG(1AA) of the ITAA 1936 has been satisfied. Under subsection 23AG(2) of the ITAA 1936, an amount of foreign earnings derived in a foreign country is not exempt from tax under this section if the amount is exempt from income tax in the foreign country only because of any of the following: a) a law of the foreign country giving effect to a double tax agreement b) a double tax agreement c) provisions of a law of the foreign country under which income covered by any of the following categories is generally exempt from income tax: (i) income derived in the capacity of an employee (ii) income from personal services (iii) similar income d) the law of the foreign country does not provide for the imposition of income tax on one or more of the categories of income mentioned in paragraph (c); e) a law of the foreign country corresponding to the International Organisations (Privileges and Immunities) Act 1963 or to the regulations under that Act f) an international agreement to which Australia is a party and that deals with: (iv) diplomatic or consular privileges and immunities; or (v) privileges and immunities in relation to persons connected with international organisations g) a law of the foreign country giving effect to an agreement covered by paragraph (f). Australia has a MOU with the overseas country. Therefore, the exemption from tax of your allowances in the overseas country is not caused by any of the reasons referred to in subsection 23AG(2) of the ITAA 1936 and thus the exemption is allowable. Accordingly, the allowances you received as part of the Aid program will be exempt under section 23AG of the ITAA 1936.