Private ruling: Foreign employment income
Date of advice: 2 November 2017
Published: March 2018
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the income you derived while working in Country A, exempt from tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No

Relevant facts and circumstances: You are an Australian resident for tax purposes. You are employed by a multi-lateral international organisation. The Commonwealth of Australia, represented by the Department of Foreign Affairs and Trade (DFAT) provides funding to the international organisation, which is reportable to the Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC) as official development assistance (ODA). A number of other countries also provide funding to the international organisation. You manage evaluations of the international organisation’s programs in developing countries to assess whether donor ODA funds are being spent in an efficient and effective manner, and achieving their intended results. Based on these evaluations you prepare reports which are shared with the management, board, donors and others. You are not liable for tax in Country A due to an agreement with the Government of Country A which grants the international organisation staff exemption from local taxes. You visit developing countries a few times a year to visit the programs and gather information for your reports. They are generally short trips, usually a week long.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 23AG

Reasons for decision: Summary: Your role is only generally related to the delivery of Australia ODA, and not directly attributed to it; therefore you do not qualify for the exemption under section 23AG of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the person from that foreign service are exempt from tax. However, subsection 23AG(1AA) states those foreign earnings are not exempt from tax under this section unless the continuous period of foreign service is directly attributable to any of the following: (a) the delivery of Australian official development assistance by the person's employer (except if that employer is an Australian government agency (within the meaning of the Income Tax Assessment Act 1997 )); (b) the activities of the person's employer in operating a public fund that: (i) is covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the Income Tax Assessment Act 1997 (international affairs deductible gift recipients); and (ii) meets the special conditions mentioned in that item; (c) the activities of the person's employer, if the employer is exempt from income tax because of paragraph 50-50(1)(c) or (d) of the Income Tax Assessment Act 1997 (prescribed institutions located or pursuing objectives outside Australia); (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. Taxation Ruling TR 2013/7 Income tax: foreign employment income: interpretation of subsection 23AG(1AA) of the Income Tax Assessment Act 1936 considers what is the 'delivery of Australian official development assistance by the person's employer' within the meaning of paragraph 23AG(1AA)(a) and when foreign service is 'directly attributable' to the activities listed in subsection 23AG(1AA). | 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 Australian ODA' means the act of providing, giving or sending forth the relevant Australian ODA by the employer. The 'delivery of Australian ODA by the person's employer' is the doing of the activities which are carrying out or sending forth the Australian ODA. The term 'delivery' includes activities which are necessary for or facilitate carrying out the Australian ODA. Therefore, an employer is delivering Australian ODA for the purposes of section 23AG where they are undertaking activities necessary for or which facilitate the carrying out of Australian ODA even though the expenditure on those particular activities may not be classified as Australian ODA by the Australian government. Delivery of Australian ODA does not necessarily require an employer to undertake all activities associated with the Australian ODA. The international organisation is partially funded by Australia in furtherance of the Australian Government's overseas aid program. This expenditure is reportable by DFAT to the OECD DAC as Australian ODA. The international organisation also receives contributions from other OECD donor countries. The funding from all countries is pooled. Therefore the international organisation is delivering an aspect of Australian ODA. | 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. Paragraphs 103 to 107 of TR 2013/7 further explain the term ‘directly attributable’. The term 'directly attributable to' is not defined for the purpose of section 23AG. The words 'attributable to' have commonly been interpreted to require a causal connection. For example, in Commissioner of Taxation (Cth) v. Sun Alliance Investments Pty Ltd (In Liq) , the High Court said: It is the concept of causation, rather than source, with which s160ZK(5) is concerned. In determining whether the plaintiff's loss of employment was 'attributable to' the provisions of the Local Government Act 1972 (UK), Donaldson J in Walsh v. Rother District Council said: '[T]hese are plain English words involving some causal connection between the loss of employment and that to which the loss is said to be attributable. However, this connection need not be that of a sole, dominant, direct or proximate cause and effect. A contributory causal connection is quite sufficient.' In Repatriation Commission v. Law , the Full Federal Court said: It seems clear the expression 'attributable to' in each case involves an element of causation. The addition of the word 'directly' describes the quality that connection must have. The High Court, in Federal Commissioner of Taxation v. Dixon said, of the phrase 'directly or indirectly' in former paragraph 26(e) of the ITAA 1936 that 'in relation directly... to, any employment' means 'where employment is the proximate cause of the payment'. Conversely, an indirect relation was 'one where the employment is a cause less proximate or, indeed, only one contributory cause.' Paragraphs 23AG(1AA)(a) to (c) require that it is the 'foreign service' that must be directly attributable to the listed activities of the person's employer. The term 'foreign service' is defined in subsection 23AG(7) to mean 'service in a foreign country as the holder of an office or in the capacity of an employee'. Thus, in this context, 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. Example 10 of TR 2013/7 is similar to your circumstances. | Detailed Reasoning - Example 10 - Employee of an organisation funded by multiple governments: 46. The Australian government contributes funds to an international development fund in furtherance of the Australian Government's overseas aid program. This expenditure is reportable by DFAT to the OECD DAC as Australian ODA. The fund also receives contributions from other OECD donor countries. The funding from all countries is pooled. 47. Bill is a resident of Australia for income tax purposes and is employed in a foreign country as managing director of the international development fund. As managing director, Bill oversees the entire operation of the fund, which includes overseeing how each country's ODA contribution is spent. 48. Bill's employer is delivering an aspect of Australian ODA in that the employer is carrying into effect Australia's contribution to development efforts in specific countries. However, Bill's foreign service is not directly attributable to this. The immediate and controlling reason for his foreign service is his employment as the managing director of the development fund. The receipt of the funding in furtherance of the Australian aid program, and the subsequent oversight of those funds, is not the immediate and controlling reason why Bill is engaged in his foreign service. Bill's foreign earnings will not be exempt under section 23AG. Paragraphs 115 and 116 provide further explanation of example 10. 115. In example 10, the delivery of Australian ODA is but one part of the international development fund's activities, which are carried out in respect of the combined funds. The delivery of the Australian ODA by the fund in this instance is not the immediate and controlling reason for Bill being engaged in foreign service. Bill is engaged as a result of the fund's activities in respect of all its projects and just because a portion of the funding comes from the Australian government does not mean that Bill's foreign service then becomes directly attributable to the delivery of Australian ODA. 116. Similarly, an employee working overseas for a multi-lateral organisation, for example a Development Bank which is in receipt of Australian aid, will not qualify for exemption. Their most immediate reason for their foreign service is not the delivery of Australian ODA by their employer. However, if DFAT send an employee overseas to specifically oversee the distribution of these funds, as in example 9, this foreign service would be directly attributable to the delivery of Australian ODA by DFAT. You work for the international organisation, a multi-lateral international organisation. The delivery of Australian ODA is only one part of the development activities undertaken by the fund. Your role is to compile reports and evaluations of the international organisation’s programs in developing countries to assess whether donor ODA funds are being spent in an efficient and effective manner, and achieving their intended results. As your role is only generally related to the delivery of Australia ODA, and not directly attributed to it, you therefore do not qualify for the exemption under section 23AG of the ITAA 1936.