Private ruling: Foreign source income
Date of advice: 14 May 2019
Published: June 2019
Ruling period: 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Is the foreign income you derive in respect of an approved overseas project while its approval is in force, exempt from tax pursuant to section 23AF of the Income Tax Assessment Act 1936 ? | A1: Yes

Relevant facts and circumstances: You are a resident of Australia for income tax purposes. You are employed under contract by a construction company. You work on a project in a foreign country which involves the refurbishment of their public infrastructure. It is funded the international aid agencies as well as the Australian government. The Department of Foreign Affairs and Trade has granted Approved Project Status for this project. The project number is X. The project approval covers the income year of the ruling. You work full-time on the project on a cyclical arrangement. Your employment contract states you must work part of each month in Australia. While in Australia you work full time on the project. You also accrue leave for your work in the foreign country. For the income year of the ruling you spent more than 91 days in the foreign country; not counting leave accrued there or the time you spend in Australia on project related work. Your employer deducts tax from your salary/wages. The foreign country does not tax your income.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Subsection 6-15(2) | Income Tax Assessment Act 1997 Section 11-15 | Income Tax Assessment Act 1936 Section 23AF

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, whether in or out of Australia, during the income year. Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AF of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with income derived in respect of overseas approved projects. Section 23AF of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where an Australian resident has been engaged on a qualifying service on a particular approved project for a continuous period of not less than 91 days, any eligible foreign remuneration derived by the person that is attributable to the qualifying service is exempt from tax. However, section 23AF of the ITAA 1936 does not exempt excluded income. Subsection 23AF(17) of the ITAA 1936 provides income is excluded income if the income is exempt under section 23AG of the ITAA 1936 and exempt from tax in the overseas country. Qualifying service includes time spent outside Australia working on the project, reasonable travel time between Australia and the project, absences due to accident or illness while engaged on qualifying service, and time spent on leave which accrued during the qualifying service (subsection 23AF(3) of the ITAA 1936). All income directly attributable to qualifying service by the taxpayer on an approved project (for example, salary, wages, commission, bonuses, allowances, contractual payments and payments for recreation leave entitlements which accrue during the relevant period) is eligible for the exemption (subsection 23AF(18) of the ITAA 1936). Taxation Ruling IT 2015 looks at the determination of period of qualifying service for contractors that are employed on a cyclical basis. The determination states that leave that accrues in respect of a period, during which employees are engaged on qualifying service on an approved project, is regarded as qualifying service. In your situation, you spend time on project relate work in Australia. As such, your cyclical arrangement is considered part of your qualifying service. As you are an Australian resident who provides service on an approved project in the foreign country for a continuous period of not less than 91 days and your income is taxed in Australia, you satisfy the conditions under section 23AF of the ITAA 1936. Accordingly, the income you derive from the foreign country is exempt from income tax in Australia under section 23AF of the ITAA 1936. | Detailed Reasoning - Note:: Exempt foreign income is taken into account in calculating Australian tax payable on other income derived by the taxpayer. Tax on the non-exempt income is calculated by applying a notional average rate of tax payable on the sum of the exempt and non-exempt income.