Private ruling: International – Income – 23AG
Date of advice: 5 February 2019
Published: May 2019
Ruling period: Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the settlement/resettlement allowance paid to you in relation to your volunteering in Country A included in your assessable income in Australia? | A1: Yes | Q2: Are the living and accommodation allowances paid to you in relation to your volunteering in Country A included in your assessable income in Australia? | A2: No

Relevant facts and circumstances: You are a resident of Australia for taxation purposes. You remained a resident of Australia for taxation purposes during the period you were in Country A. You were offered a contract as a volunteer for a period of greater than 91 days. The program is fully funded by the Department of Foreign Affairs and Trade (DFAT) and run by Organisation X. Due to a change in programs by DFAT, the program then changed to Organisation Y. You travelled to Country A, and returned to Australia after more than 91 days. You received various allowances to cover the costs associated with establishment, living a modest life whilst undertaking your assignment and relocation to Australia. The resettlement/settlement allowance is to assist with the costs of relocating to Country A and for settling back into Australia. The allowances were paid by Organisation X and Y. Country A does not impose income tax. As a volunteer under the program in Country A, you were covered by the Memorandum of Understanding between the government of Australia and the government of Country A on development cooperation (the MOU). The MOU provides, that the allowances paid to you in relation to your service as a volunteer for the program in Country A, are exempt from taxation in Country A.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5(2) | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 10-5 | Income Tax Assessment Act 1997 Section 15-2 | Income Tax Assessment Act 1936 Section 23AG

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 during the income year. Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income. Section 15-2 of the ITAA 1997 provides that the value of all allowances, gratuities, compensation, benefits etc. given or granted in respect of employment or services rendered are included in assessable income. Paragraph 2 of Taxation Ruling TR 92/15: Income tax and fringe benefits tax: the difference between an allowance and a reimbursement advises that a payment is an allowance when a person is paid a definite predetermined amount to cover an estimated expense. It is paid regardless of whether the recipient incurs the expected expense. The recipient has the discretion whether or not to expend the allowance. If a volunteer worker receives an allowance, with no regard to expenses actually incurred and with no requirement to repay unspent monies, this will generally treat the payment as assessable income. As an Australian resident, you are assessable on your worldwide income in Australia. The allowance you received in relation to your volunteer work in Country A is assessable income. Australia has entered into special tax treaties called ‘double taxation agreements’ with over 40 countries to prevent double taxation and to allow co-operation between Australia and overseas tax authorities in enforcing their respective tax laws. There is no double taxation agreement between Australia and Country A that would preclude the allowance from being assessed in Australia. Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) states that where a resident 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. You are an Australian resident and the period of foreign service you engaged in is nine continuous months. Therefore, you fulfil the requirements of residency and period of service. The tax exemption only applies to persons engaged in foreign service. Foreign service means service in a foreign country as the holder of an office or in the capacity of an employee (subsection 23AG(7) of the ITAA 1936). Therefore, to be engaged in foreign service there must usually be an employer / employee relationship. Subsection 23AG(7) of the ITAA 1936 states that the definition of employee includes a person employed by an international organisation. Taxation Ruling TR 2005/16 Income Tax: Pay As You Go – withholding from payments to employees provides some clarification in determining the employee status of the worker. Paragraph 6 states that the term ‘employee’ is not defined and whether a person is an employee is a question of fact determined by examining the terms and circumstances of the arrangement. Paragraph 21 states that the underlying reality of the relationship should be determined and that parties to an arrangement cannot deem the relationship to be something that it is not. Paragraph 26 of TR 2005/16 states that the classic ‘test’ for determining the nature of the relationship between a person who engages another to perform work and the person so engaged is the degree of control which the former can exercise over the latter. You were required to perform clearly outlined activities and services on a regular basis, despite your program information indicating you are not an employee, these clear assignment conditions indicate that the program organisers have a significant degree of control over your actions and as such the arrangement can be considered an employer / employee relationship. The true essence of your arrangement overrides any attempt by program organisers to label the arrangement otherwise. The ‘volunteer’ nature refers to the fact that you will not be paid a salary to work, and instead will receive a living allowance. Therefore, you fulfil the requirements for engagement in foreign service. The tax exemption only applies to foreign earnings derived from that foreign service. Any establishment allowance or resettlement allowance would not be attributable to a period where you are engaged in foreign service and would simply be compensation for expenses incurred prior to or after the completion of foreign service. These amounts would not be considered exempt under section 23AG of the ITAA 1936. The program provides a range of allowances in order to support you while you are on assignment. These allowances are not a salary; instead they cover the cost of establishing yourself on assignment and living in-country. These allowances include an establishment allowance, living and accommodation allowance, assignment support allowance and resettlement allowance. The establishment and resettlement allowances will not be attributable to the foreign service you are providing and therefore will not be exempt from taxation under section 23AG of the ITAA 1936. The living and accommodation allowance and the assignment support allowance was paid for the foreign service you were performing and would therefore be exempt from taxation under subsection 23AG(1) of the ITAA 1936. Subsection 23AG(1AA) of the ITAA 1936 imposes conditions on this tax exemption. The continuous period of foreign service must be directly attributable to any of the following: a) the delivery of Australian official development assistance by the person's employer b) the activities of the person's employer in operating a public fund covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the ITAA 1997 (international affairs deductible gift recipients) c) the activities of the person's employer, if the employer is exempt from income tax because of paragraph 50-50(c) or (d) of the ITAA 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. 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). In addition to providing Australian ODA directly, AusAID also competitively contracts aid work to Australian and international entities. Therefore, for the purposes of paragraph (a) of subsection 23AG(1AA) of the ITAA 1936 the delivery of ODA must be undertaken by the person’s employer, which includes AusAID and an entity contracted by AusAID in the delivery of Australian ODA. In your case, the program providers are entities contracted by DFAT to deliver Australian official development assistance. DFAT fully funds the program that you intend to participate in. It provides all funding of the program including paying you various allowances. It has been determined for the purposes of section 23AG of the ITAA 1936 that an employee / employer relationship does exist between you and the program providers. Therefore the continuous period of foreign service is directly attributable to the delivery of Australian official development assistance by your employer. Therefore, paragraph (a) is applicable to your situation and subsection 23AG(1AA) of the ITAA 1936 has been satisfied. Under subsection 23AG(2) of the ITAA 1936, 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). As a volunteer under the program in Country A you were covered by the Memorandum of Understanding between the government of Australia and the government of Country A on development cooperation (the MOU). The MOU provides that the allowances paid to you in relation to your service as a volunteer for the program in Country A were exempt from taxation in Country A. Therefore, the exemption from tax of your volunteer allowance in Country A is not caused by any of the reasons referred to in subsection 23AG(2) of the ITAA 1936 and thus the exemption is allowable. In conclusion, the living and accommodation and assignment support allowances are exempt from taxation under section 23AG of the ITAA 1936. Any establishment or resettlement allowances you receive will not be exempt from taxation as they are not derived directly from the performance of your foreign service. | Detailed Reasoning - Further issues for you to consider: It is important to note that foreign earnings exempt under section 23AG of the ITAA 1936 are taken into account in calculating the tax payable on other income derived by a taxpayer. This method of calculation referred to as exemption with progression prevents the exempt income from reducing the Australian tax payable on the other income. The living and accommodation allowance is to be included as exempt foreign income in your Australian tax return in the supplement section, Question 20 alpha label N. The settlement and resettlement allowance is assessable foreign source income and is included in your tax return at Question 20 alpha label E.