Private ruling: Pay as you go (PAYG) withholding
Date of advice: 27 June 2018
Published: September 2018
Ruling period: 1 July XX to 30 June XX

Ruling: Q1: Are salary payments made by Company A to two employees working in Country X for more than 91 days subject to Pay As You Go Withholding tax under section 12-35 of Schedule 1 of the Taxation Administration Act 1953 ? | A1: No.

Relevant facts and circumstances: Company A, specialises in X services. Company B is the managing contractor of an international program. Company A has been awarded a contract with Company B for the delivery of X services in Country X under the “Overseas Development Assistance” (ODA). Training is to be funded through ODA funds. Company A will engage two resident staff employees in carrying out work in Country X for more than 91 consecutive days. The employees will be paid wages/salary and allowances in Australian dollars and employed under Australian employment contracts. Company A will invoice the Company B for the provision of X services. It is anticipated that the project will take a number of months to complete.

Relevant legislative provisions: Taxation Administration Act 1953 Schedule 1 | Section 12-1 | Section 12-35 | Income Tax Assessment Act 1997 Section 11-15 | Income Tax Assessment Act 1936 Section 23AG

Reasons for decision: Summary: Salary payments made by Company A to two employees working in Country X for more than 91 days are not subject to Pay As You Go Withholding tax under section 12-35 of Schedule 1 of the Taxation Administration Act 1953 . | Detailed Reasoning - Detailed Reasoning: Division 12 of schedule 1 of the Taxation Administration Act 1953 (TAA 1953) sets out the types of payments from which an amount must be withheld. However, this is subject to section 12-1 of schedule 1 of the TAA 1953 which sets out the general exceptions where withholding is not required. Included in the exceptions is a payment that is exempt income of the entity receiving the payment. In relation to these payments subsection 12-1(1) of schedule 1 of the TAA 1953 states: An entity need not withhold an amount under section 12-35, 12-40, 12-45, 12-47, 12-50, 12-55, 12-60, 12-80, 12-85, 12-90, 12-120 or 12-190 from a payment if the whole of the payment is *exempt income of the entity receiving the payment. Therefore, to work out whether an amount needs to be withheld from a payment it is necessary to determine whether the payment is exempt income of the payee. Section 11-15 of the Income Tax Assessment Act 1997 (ITAA1997) lists those provisions dealing with income that may be exempt. Included in the list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with exempt foreign employment income. Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings of an Australian resident derived during a continuous period of foreign service of not less than 91 days employment in a foreign country are exempt from income tax in Australia. Foreign earnings includes income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936). The basic test for the exemption of foreign employment income in subsection 23AG(1) of the ITAA 1936 are: ● your employee must be a resident of Australia; ● your employee must be engaged in foreign service; ● the foreign service must be for a continuous period of not less than 91 days; ● your employee must derive foreign earnings from that foreign service; ● the foreign service must be directly attributable to an activity that is listed in subsection 23AG(1AA) of the ITAA 1936; and ● the foreign earnings that meet the test in subsection 23AG(1) of the ITAA 1936 may not be exempt because of provisions subsection 23AG(2) of the ITAA 1936. Subsection 23AG(1AA) of the ITAA 1936 states that foreign earnings are not exempt from tax under subsection 23AG(1) of the ITAA 1936 unless the continuous period of foreign service is directly attributable to the delivery of Australian official development (ODA) assistance by the person’s employer. | Detailed Reasoning - Resident of Australia: A determination of a person’s residency status depends on that person’s circumstances and is made in relation to each year of income. | Detailed Reasoning - Foreign Service: To qualify for the exemption the foreign earnings must be derived from foreign service. That does not mean that the foreign earnings need to be derived at the time of engaging in foreign service. The important test is that the foreign earnings, when derived, need to be derived as a result of the undertaking of that foreign service. 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. The term employee is defined within subsection 23AG(7) of the ITAA 1936 to include a person employed by a government or an authority of a government or by an international organisation. | Detailed Reasoning - For a continuous period of not less than 91 days: Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings of an Australian resident derived during a continuous period of foreign service of not less than 91 days employment in a foreign country are exempt from income tax in Australia. | Detailed Reasoning - Derived ‘from that foreign service’: The definition of ‘foreign earnings’ is contained in subsection 23AG(7) of the ITAA 1936, which provide that: Foreign earnings means income consisting of earnings, salary, wages, commission, bonuses or allowances, or of amounts included in a person’s assessable income under Division 83A of the ITAA 1997 (about employee share schemes). To qualify for the exemption the ‘foreign earnings’ must be derived ‘from that foreign service’. That does not mean that the foreign earnings need to be received at the time of engaging in foreign service. The important test is that the foreign earnings need to be attributable to that period of service in a foreign country rather than to a period before or after the period of foreign service. | Detailed Reasoning - Directly attributable to: For the purposes of paragraphs 23AG(1AA)(a) to (c) an employee’s foreign service is ‘directly attributable to the activities of the employer where the requisite activities of the employer are the immediate and controlling reason why the employee is engaged in that foreign service. This condition must be satisfied throughout the continuous period of foreign service in respect of which the foreign earnings are derived before the earnings can be eligible for exemption under section 23AG. | Detailed Reasoning - Delivery of Australian official development assistance by an employer: ‘Australian official development assistance’ refers to activities or programs in respect of which the funding has been (or would properly be) classified, in whole or in part, by the Australian government as official development assistance (ODA) for the purposes of reporting to the Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC). The Australian government bases its classification of funding as Australian ODA solely on the directives of the OECD DAC. In the context of paragraph 23AG(1AA)(a) ‘delivery of Australia ODA’ means the act of providing, giving or sending forth the relevant Australian ODA by the employer. The ‘delivery of Australian ODA by the persons employer’ is the doing of activities which are carrying out of sending forth the Australian ODA. The term ‘delivery’ includes activities which are necessary for or facilitate carrying out the Australian ODA. | Detailed Reasoning - Temporary absences: A period during which a person is engaged in foreign service for the purpose of section 23AG of the ITAA 1936 includes a temporary absence from that service, if the absence is within the scheduled period of foreign service and is both: ● in accordance with the terms and conditions of that foreign service (that is, the absence is permitted by the employer, whether in an employment contract or under a separate arrangement); and ● for any of the following reasons; ● recreation leave on fully pay that is attributable to the period of foreign service; ● because of an accident or illness of the taxpayer; ● because of an accident or illness of a person other than the taxpayer, including the death of another person; or ● in the course of carrying out either duties or training required by the employer under a continuing foreign service engagement (that is, work related trips directly related to the foreign service) provided the absences are not excessive by comparison with the scheduled period of foreign service. Paragraph 69 of Taxation Determination TD 2012/8 states: A person is treated as being engaged in foreign service on days such as weekends, public holidays, rostered days off, days off due to part-time arrangements, flex-days, ‘compulsory lay off/over days’, ‘grounded days’ and days off in lieu where those days are part of the normal working conditions for the foreign service. On such days, a person is either not required to work (in the case of weekends, public holidays and days off due to part-time arrangements) or is absent due to having already worked their required hours. Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available in circumstances where an amount of foreign earnings derived in a foreign country is exempt from tax in the foreign country solely because of: ● a double tax agreement or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b)); ● a law of that foreign country which generally exempts from, or does not provide for, the imposition of income tax income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and (d)); and ● a law or international agreement dealing with diplomatic or consular privileges and immunities, or privileges and immunities of persons connected with international organisations (paragraphs 23AG(2)(e), (f), and (g)). If your foreign employment income is exempt for a reason other than, or in addition to, the conditions listed above, then it will be exempt from taxation in Australia. | Detailed Reasoning - Application to your circumstances: Company A has been awarded a contract with Company B for the delivery of X service in Company X under Australia’s “Overseas Development Assistance” (ODA) program. Training is to be funded through ODA funds. Company A will engage two resident staff employees in carrying out work in Country X for more than 91 consecutive days. The employees will be paid wages/salary and allowances in Australian dollars and employed under Australian employment contracts. Company A will invoice the Company B entity for the provision of X services. The contract is expected to last a number of months. Accordingly, the employees meet the basic test for the exemption of foreign employment income in subsection 23AG(1) of the ITAA 1936. And the services performed by the employees meets subsection 23AG(1AA) of the ITAA 1936, that being the continuous period of foreign service is directly attributable to the delivery of ODA by the person’s employer. The Agreement grants a specific exemption from income or other taxes on salaries and allowances paid to Australian Program Personnel in Country X. Under subsection 23AG(1) of the ITAA 1936 an exemption is not available because an amount of foreign earnings derived in a foreign country is exempt from tax in the foreign country solely because of a law that foreign country which generally exempts from, or does not provide for, the imposition of income tax on income derived in the capacity of an employee. However, as the employees are not solely exempt from the imposition of tax under for a reason listed in subsection 23AG(2) they are exempt from taxation in Australia. Consequently, Company A is not required to withhold tax under section 12-35 of Schedule 1 to the TAA 1953 from salary and wages paid to employees who perform their services as part of the Project.