Private ruling: Assessability of foreign sourced income
Date of advice: 10 November 2015
Published: November 2015
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Question and answer: | Is the income that you derive as a contractor to the Government of Country Q assessable in Australia? | Yes.

Relevant facts and circumstances: You are an Australian resident for tax purposes. You are an independent contractor for the Government of Country Q and you have been contracted as a professional in a capability role for the Government of Country Q. The Australian government provides funding to the Government of Country Q who then uses these funds to pay you as a contractor. All your KPI's are set by DFAT whom you meet with every twice yearly to demonstrate outcomes that will eventually determine future funding. You arrived in Country Q to begin your contract. You contract will conclude after a number of years' service. Your foreign service for the Government of Country Q will be for a continuous period of greater than 91 days. A flat rate of tax is automatically deducted from your wages by your employer.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG | Income Tax Assessment Act 1936 Subsection 23AG(1) | Income Tax Assessment Act 1936 Subsection 23AG(1AA)

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia during an income year. Payments derived from working as a contractor is ordinary income according to ordinary concepts and therefore is assessable under subsection 6-5(2) of the ITAA 1997. Accordingly, the income that you derive from your contract with the Government of Country Q is assessable under section subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - 23AG of the Income Tax Assessment Act 1936 (ITAA 1936): 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 tax in Australia. In your case, you are an Australian resident individual engaged in Foreign Service for a continuous period of not less than 91 days. Therefore, your foreign earnings will be exempt under section 23AG of the ITAA 1936, provided that all of the conditions in that section are met. Subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that those 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: (a) delivery of Australian official development assistance by your employer; (b) 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); (c) 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; or (d) deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force. In your case, the only condition that is applicable is condition (a) delivery of Australian official development assistance by your employer. Your employer is the Government of Country Q. Taxation Ruling TR 2013/7 Income tax: foreign employment income: interpretation of subsection 23AG(1AA) of the Income Tax Assessment Act 1936 , provides the Commissioners view on the interpretation of this legislation that took effect from 1 July 2009. Paragraph 97 and 98 of Tax Ruling TR 2013/7 states: 97. Paragraph 23AG(1AA)(a), however, does not require that an Australian Government agency be the employer actually delivering the Australian ODA or in fact that a Government agency be directly involved. The employer may be a contractor (contracted by a Commonwealth Government body on behalf of the Commonwealth Government to assist in the delivery of the Australian ODA) or sub-contractor (contracted by the contractor previously identified, to assist in the delivery of the Australian ODA). 98. This is consistent with the Explanatory Memorandum (EM) to the Tax Laws Amendment (2009 Budget Measure No. 1) Bill 2009 (Cth) which provides the following: 1.20 In addition to providing Australian ODA directly, AusAID also competitively contracts aid work to Australian and international entities. Thus, in practice, individuals involved in the delivery of Australian ODA can include both Australian Public Service (APS) employees and non-APS employees. 1.21 For the purposes of subsection 23AG(1AA) the delivery of Australian ODA must be undertaken by the person's employer, which includes AusAID and an entity contracted by AusAID to assist in the delivery of Australian ODA. | Detailed Reasoning - Your circumstances: You have been contracted by the Country Q, therefore the Government of Country Q is your employer. Your employer is the recipient of Australian government aid rather than being an entity contracted by the Australian government to assist in the delivery of Australian ODA. Therefore consistent with the principles established in TR 2013/7, as your employer has not been contracted by the Australian government or another entity to assist in the delivery of Australian ODA, your employment does not satisfy subsection 23AG(1AA)(a) of the ITAA 1936. As you have not satisfy subsection 23AG(1AA) of the ITAA 1936, there is no need to consider the other conditions under section 23AG of the ITAA 1936. Accordingly, the income that you derive as a contractor from the Government of Country Q is assessable in Australia under subsection 6-5(2) of the ITAA 1997.