Private ruling: Foreign employment income
Published: August 2011
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014
Date scheme commenced: The scheme has commenced

Ruling: Q1: Will Employer X be excepted under section 12-1 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from the Pay As You Go withholding provisions under subdivision 12-B of the TAA in relation to employment income, bonuses and allowances paid to employees working in Country Y under a Memorandum of Understanding? | A1: No

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 is an Australian employer. The employees of Employer X are Australian residents. Employer X will provide two employees to be involved in joint projects under a Memorandum of Understanding (MOU) with an organisation in Country Y. The employees of Employer X involved in the joint projects will perform their duties in Country Y for a period of not less than 12 months, to a maximum period of two years. Employer X will continue to be responsible for the employment income, bonuses and allowances of its employees whilst they are involved in the joint projects. The MOU is silent in relation to the taxation treatment of the income derived by the employees when performing their duties under the MOU. Therefore, no basis for tax exemption is provided for in the MOU. There is no contract between Employer X and AusAid in relation to Australian Official Development Assistance (ODA) The employees will hold diplomatic passports and be based in the Australian embassy in Country Y whilst they are involved in the joint projects.

Relevant legislative provisions: Taxation Administration Act 1953 section 12-1, Schedule 1 | Taxation Administration Act 1953 subdivision 12-B, Schedule 1 | Income Tax Assessment Act 1936 section 23AG | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-15 | Income Tax Assessment Act 1997 section 11-15 | International Tax Agreements Act 1953 Vienna Convention on Diplomatic Relations 1961

Reasons for decision: Summary: Employer X employees are residents of Australia for taxation purposes during their foreign service in Country Y. Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived from all sources whether in or out of Australia during the income year. Therefore, salary and wages paid to Employer X employees is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. Subdivision 12-B of Schedule 1 to the TAA relates to Pay As You Go (PAYG) withholding for payments for work and services (unless an exception applies). Section 12-1 of Schedule 1 to the TAA contains the PAYG withholding general exception provisions. Subsection 12-1(1) of Schedule 1 to the TAA provides that an entity need not withhold an amount from a payment of salary and wages to an employee if the whole of the payment is exempt income of the employee receiving the payment. Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income it is not included in assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in the list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with overseas employment income. Subsection 23AG(1) of the ITAA 1936 provides that where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived from the foreign service will be exempt from tax in Australia. The term 'foreign service' means service in a foreign country as the holder of an office or in the capacity of an employee and the term 'foreign earnings' includes income consisting of salary and wages and allowances (subsection 23AG(7) of ITAA 1936). However, subsection 23AG(1AA) of the ITAA 1936 limits the exemption to the continuous foreign service that is directly attributable to any of the following: (a) the delivery of Australian development assistance by the person's employer; (b) the activities of the person's employer in operating a public fund; (c) activities of the person's employer, if the employer is exempt from income because of paragraph 50-50(c) or (d) of the ITAA 1997; (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. In other words, for the provisions of section 23AG of the ITAA 1936 to apply to Employer X employees, those employees must be involved in foreign service directly attributable to one of the paragraphs listed under subsection 23AG(1AA) of the ITAA 1936. The explanatory memorandum to Tax Laws Amendment (2009 Budget Measures No.1) Act 2009 (TLAA 2009), in relation to paragraph 23AG(1AA)(a) of the ITAA 1936 states: 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). Australian ODA aims to reduce poverty and achieve sustainable development in developing countries, in line with Australia's national interest, (paragraph 1.19). 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, (paragraph 1.20) 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, (paragraph 1.21). The MOU is silent in relation to any ODA duties. There is no contract between Employer X and AusAid in relation to ODA. Notwithstanding the involvement of AusAID in an administrative capacity, it is considered that Employer X employees providing services in Country Y under the MOU are not providing foreign services directly attributable to ODA duties. As such, the employees will not qualify for an exemption under paragraph 23AG(1AA)(a) of the ITAA 1936. An explanatory memorandum to TLAA 2009, in relation to paragraph 23AG(1AA)(d) of the ITAA 1936 referred to a specific area of Employer X. Employer X employees are providing services in Country Y under the MOU and not as part of this specific area. The roles undertaken will be of an advisory or consultative nature. Therefore, Employer X employees will not qualify for an exemption under paragraph 23AG(1AA)(d) of the ITAA 1936. In these circumstances, none of the other paragraphs contained in subsection 23AG(1AA) of the ITAA 1936 will apply. Therefore, Employer X employees providing services in Country Y under the MOU do not qualify for an exemption under subsection 23AG(1AA) of the ITAA 1936, so their employment income earned while providing services in Country Y will not qualify as exempt income under section 23AG of the ITAA 1936. Further, under subsection 23AG(2) of the ITAA 1936, the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the foreign earnings are exempt from income tax in the foreign country only because of any of the conditions set out in subsection 23AG(2). Subsection 23AG(2) states: 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: (i) diplomatic or consular privileges and immunities; or (ii) 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). In determining the liability to Australian income tax, it is necessary to consider not only the income tax laws but also any applicable Double Tax Agreements contained in the International Tax Agreements Act 1953 (the Agreements Act). Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the domestic law where there are inconsistent provisions (except for some limited provisions). Clauses 67 and 69 of Part 1 of the International Tax Agreements Amendment Act (No. 1) 2011 (45 of 2011) repealed the Schedules to the Agreements Act from 27 June 2011. This repeal has no effect on the law and the Agreements are now defined in section 3 and given force of law in section 5 of the Agreements Act . There is a current Double Tax Agreement between Australia and Country Y which was formerly contained in the Schedules to the Agreements Act (Country Y Agreement). The relevant article of the Country Y Agreement provides that the country which is responsible for payment of remuneration for the discharge of government functions is the country in which the income is taxable. So, in this case, the income earnt by Employer X employees will be exempt from income in Country Y unless the employee renders the services in Country Y and: (a) is a citizen or national of Country Y; or (b) did not become a resident of Country Y solely for the purpose of performing the services. Accordingly, in these circumstances the amount of foreign earnings by Employer X employees will not be exempt under section 23AG of the ITAA 1936 because of the operation of paragraph 23AG(2)(b) of the ITAA 1936. In addition, Employer X employees providing services in Country Y are travelling under Diplomatic Passports and have full diplomatic privileges under the Vienna Convention on Diplomatic Relations 1961 (Vienna Convention), which includes an exemption from all dues and taxes in Country Y on salary and wage income paid by Employer X. Accordingly, in these circumstances the amount of foreign earnings by Employer X employees will not be exempt under section 23AG of the ITAA 1936 because of the operation of subparagraph 23AG(2)(f)(i) of the ITAA 1936. In conclusion: (a) Employer X employees providing services in Country Y do not qualify for an exemption under subsection 23AG(1AA) of the ITAA 1936; and (b) foreign earnings derived by Employer X employees while performing services in Country Y are exempt only because of the application of the conditions for an exemption outlined in subsection 23AG(2) of the ITAA 1936, and for no other reason. Therefore, employment income earned by Employer X employees while performing services in Country Y will not qualify as exempt income under subsection 23AG(1) of the ITAA 1936. Accordingly, Employer X will not be excepted under subsection 12-1(1) of the TAA from PAYG withholding obligations in respect to the employment income paid to its employees while they are performing services in Country Y.

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