Private ruling: Temporary absences from foreign service
Published: June 2012

Ruling: Q1: Should Employer X withhold under section 12-35 of the TAA 1953 from the foreign service earnings of an employee deployed under Instrument Y, where that employee, during his or her deployment, returns to Australia taking five days of annual leave wholly accrued during the foreign service to cover an absence of seven days including the weekend? | A1: No. Employer X is not required to withhold under section 12-35 of the TAA 1953 from the foreign service earnings of an employee deployed under Instrument Y, where that employee, during his or her deployment, returns to Australia taking five days of annual leave wholly accrued during the foreign service to cover an absence of seven days including the weekend. | Q2: If the answer to question 1 is yes, would the answer be different if the employee is approved by a senior executive of Employer X to be unavailable or not available for duty for the weekend in question? | A2: Not Applicable. The answer to question 1 is in the negative. | Q3: If the answer to question 1 is yes, what components of the employee's salary should be subject to Pay As You Go (PAYG) withholding? | A3: Not Applicable. The answer to question 1 is in the negative.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Employer X deploys its employees to various overseas locations under the terms and conditions of various instruments issued from time to time. Instrument Y governs the terms and conditions applying to all the employees assigned duty overseas under that instrument. Instrument Y, among others, sets out the guidelines in respect of leave entitlements of the employees concerned. Instrument Y provides that the employees of Employer X, unless varied by that instrument, are entitled to the types of leave as specified in the relevant Employer X Agreement ('Employer Agreement'). Relevantly, the Employer Agreement defines 'operational requirements' as referring to the requirements of the role of an employee and any direction to perform other duties, and ''weekend' to mean any Saturday and Sunday from 0000 hours Saturday to 2400 hours Sunday.' The Employer Agreement provides for the accrual of an Annual Leave entitlement of Z weeks per annum on a monthly pro rata basis, for employees other than casual employees. However, an application for annual leave is subject to the operational requirements of Employer X and the concerned employee's annual leave balance. Further, paid annual leave may be taken for any period as agreed between an employee and their supervisor and all periods of annual leave count as service for all purposes. Instrument Y also provides that the concerned employees will, in consultation with their manager, organise their hours of work to perform their duties as necessary. In this regard, time off in lieu to leave the post will not apply.' The working pattern of employees deployed under Instrument Y is that, the employees are managed on a seven day a week basis. This means that they are available to be recalled to duty, if necessary, at all times, including the weekend. In light of this, employees are entitled to an overseas loading which is a certain % of the employee's base salary. Generally, Instrument Y members work a 'normal week', that is, Monday to Friday, 8am to 4pm. Where such members are called back to duty on a weekend or afterhours, they are not entitled to receive overtime or additional compensation. In particular, they are not entitled to time off in lieu of the additional hours worked. However, when employees, for instance, return to Australia for a week, they utilise only five days of annual leave corresponding to the week days, i.e. the weekend is not covered by annual leave accrued during the foreign service. Assumptions 1. The foreign service of employees of Employer X deployed under Instrument Y satisfies all the requirements, other than those imposed by subsection 23AG(6) of the ITAA 1936, under section 23AG of the ITAA 1936 for their foreign service earnings to be exempt under that section. 2. The recreation leave taken by an employee, for the purposes of the ruling request, is wholly attributable to the period of his or her overseas deployment.

Relevant legislative provisions: Section 12-35 - Taxation Administration Act 1953 | Subsection 12-1(1) - Taxation Administration Act 1953 | Section 23AG - Income Tax Assessment Act 1936 | Subsection 23AG(6) - Income Tax Assessment Act 1936

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Detailed Reasoning - Pay As You Go (PAYG) withholding: Section 12-35 of the TAA 1953 provides that, under the PAYG withholding system, an entity must withhold amounts from salary, wages, commission, bonuses or allowances it pays to an individual as an employee. However, subsection 12-1(1) of Schedule 1 to the TAA 1953 provides that, an entity need not withhold an amount under section 12-35 of the TAA 1953 from a payment if the whole of the payment is exempt income of the entity receiving the payment. Foreign earnings derived by a limited category of Australian resident individuals engaged in foreign service for a continuous period of not fewer than 91 days, subject to certain exceptions, are generally exempt from Australian income tax ('exempt') under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936). Accordingly, it needs to be determined whether the foreign service earnings of an AFP employee deployed overseas under Instrument Y is exempt income in the hands of the recipient pursuant to section 23AG of the ITAA 1936. | Detailed Reasoning - Temporary absences forming part of a period of foreign service: Subsection 23AG(6) of the ITAA 1936 deals with an employee's temporary absences from a period of foreign service to determine if that period of foreign service is continuous for the purposes of section 23AG of the ITAA 1936. Subsection 23AG(6) of the ITAA 1936 treats certain temporary absences from foreign service as forming part of a continuous period of foreign service to maintain the exemption otherwise available under section 23AG of the ITAA 1936. Broadly, subsection 23AG(6) of the ITAA provides that, a period during which a person is engaged in foreign service includes any period during which the person is, in accordance with the terms and conditions of that service, absent on recreation leave on full pay that is wholly attributable to that foreign service. | Detailed Reasoning - Recreation Leave - ATO view: Taxation Determination TD 2012/8, among other things, provides the Commissioner's opinion as to the practical application of section 23AG(6) of the ITAA 1936 to a variety of temporary absences from a period of foreign service. TD 2012/8, at paragraph 1, clarifies that, for the purposes of subsection 23AG(6) of the ITAA 1936, recreation leave is considered to have been taken in accordance with the terms and conditions of an employee's foreign service, if the absence is permitted by the employer whether in an employment contract or under a separate arrangement. In this regard TD 2012/8 provides at paragraph 54 that, annual leave that meets the requirements of subsection 23AG(6) is regarded as recreation leave. | Detailed Reasoning - Weekends in a period of recreation leave: At paragraph 6, TD 2012/8 provides that a person is not treated as absent from foreign service on days such as weekends, among others, irrespective of whether these days are spent in the country where the person is performing the foreign service or in Australia or a third country. In this regard, paragraphs 68 to 70 of TD 2012/8 further clarify that, a person is treated as being engaged in foreign service on days such as weekends, and other similar days when a person is not required to work, where those days are part of the normal working conditions for the foreign service. Such days are not recreation leave which must satisfy subsection 23AG(6) of the ITAA 1936 in order to be treated as foreign service. TD 2012/8 illustrates the application of section 23AG(6) of the ITAA 1936 in respect of weekends, using a specific example, Example 3, covered in paragraph 15. The example in question deals with an employee whose terms and conditions of foreign service require him or her to be available for work at all times, including weekends or equivalent days. Further, the employee is not entitled to time off in lieu for the additional hours worked. However, if the employee takes recreation leave as approved by the employer he or she is only required to use five days of leave to cover his or her absence for a full week, including a weekend. The recreation leave in question is accrued during the foreign service and is taken on full pay. The Commissioner's view at paragraph 16 of TD 2012/8 as to the outcome in respect of Example 3, is that, the full week will be treated as part of the employee's foreign service under subsection 23AG(6) of the ITAA 1936. This means that where an employee takes leave during his or her foreign service, he or she is only required to use five days of leave to cover an absence of a full week of seven days, even though he or she does not necessarily have weekends on which he or she is not required to work. The facts of this example are similar to the facts of the present case and accordingly, the outcome in that example is considered relevant in the circumstances of employees of Employer X deployed under Instrument Y. | Detailed Reasoning - Deployment under Instrument Y: In respect of the period covered by this ruling, the relevant Employer Agreement for employees of Employer X deployed under Instrument Y, provides for the accrual of an Annual Leave entitlement of Z weeks per annum on a monthly pro rata basis, so that paid annual leave may be taken for any period as agreed between an employee and their supervisor. All periods of annual leave count as service for all purposes. Based on the above, for the purposes of section 23AG(6) of the ITAA 1936, annual leave taken by an employee of Employer X deployed overseas under Instrument Y is recreation leave taken on full pay in accordance with the terms and conditions of the foreign service. Further, the recreation leave is wholly attributable to the period of the overseas deployment. In respect of an employee of Employer X who is deployed overseas for a period of over 12 months under Instrument Y, weekends that form part of the period of deployment are considered as part of the normal working conditions for the deployment and are therefore treated as part of the employee's foreign service, i.e. the days of a weekend do not have to separately satisfy subsection 23AG(6) of the ITAA 1936 to be treated as a period of foreign service. Accordingly, an employee deployed overseas under Instrument Y is only required to use five days of approved annual leave to cover an absence of a full week of seven days although the employee is available to be recalled to duty including on a weekend and is not entitled to time off in lieu of the additional hours worked. In conclusion, the full week of seven days spent in Australia will be treated as part of the employee's foreign service under subsection 23AG(6). The seven days spent in Australia do not constitute a break in the period of the foreign service in question. As a result, the employee's earnings from the foreign service are exempt pursuant to section 23AG of the ITAA 1936 so that Employer X is not required to withhold under section 12-35 of the TAA 1953 from the employee's foreign service earnings.

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. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'. | Reasons for decision: These reasons for decision accompany the Notice of private ruling for Employer X.