Issue
Are the salary and wages received by an Australian resident taxpayer for services provided in a number of countries under the terms of an employment contract, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The salary and wages received by an Australian resident taxpayer for services provided in a number of countries under the terms of an employment contract are assessable under subsection 6-5(2) of the ITAA 1997. The salary and wages are not exempt under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) as the taxpayer has not been engaged in foreign service for a continuous period of not less than 91 days.
Facts
The taxpayer is a resident of Australia for income tax purposes.
The taxpayer is employed by an Australian resident company.
The taxpayer receives salary and wages from the employer.
Under the terms of the employment contract, the taxpayer performs services in Australia and various foreign countries as directed by the employer.
The number of days spent in each foreign country varied (from 1 day to 10 days) depending on the work assignment.
In total, the taxpayer spent less than 90 days in the foreign countries.
The taxpayer is eligible for 20 days of recreation leave per annum.
The taxpayer also accrues 1 day of additional recreation leave for every 1 day of service performed in a foreign country.
The taxpayer returns to Australia and utilises the additional recreation leave entitlement after every overseas assignment.
While present in Australia, the taxpayer attends the office of the employer. The taxpayer uses the company's offices and facilities located in a capital city.
The pattern of the taxpayer's foreign service means that subsections 23AG(6A) to 23AG(6E) of the ITAA 1936 do not apply to deem the taxpayer's periods of foreign service to be continuous.
Reasons for Decision
Subsection 6-5(2) of the 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.
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 23AG of the 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 will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' include income consisting of salary and wages (subsection 23AG(7) of the ITAA 1936).
Paragraph 23AG(6)(a) of the ITAA 1936 provides that for the purposes of section 23AG of the ITAA 1936, a period during which a person is engaged in foreign service includes any period during which the person, in accordance with the terms and conditions of that service, is absent on recreation leave.
Under subparagraph 23AG(6)(a)(ii) of the ITAA 1936, the absence on recreation leave excludes long service leave, extended leave, or leave of a similar kind.
Paragraph 7 of Taxation Ruling IT 2441 states that where an Australian resident taxpayer is employed in a project in a foreign country, leave taken in circumstances similar to those mentioned in Taxation Ruling IT 2015 would be treated as recreation leave forming part of a period of foreign service under subsection 23AG(6) of the ITAA 1936.
Taxation Ruling IT 2015 refers to the application of paragraph 23AF(3)(d) of the ITAA 1936 where employees are engaged in uninterrupted cycles of 5 weeks on site on an onshore oil drilling project and 5 weeks leave in Australia, without any entitlement for additional annual leave, and are not required to attend the company offices in Australia. IT 2015 states that the employees will be taken to have been engaged on an approved project for a period of qualifying service equal to the total number of days they are engaged under the 5 weekly cyclical arrangements.
Paragraph 9 of Taxation Ruling TR 96/15 states that additional recreation leave entitlements granted to employees posted overseas are not considered to constitute extended leave for the purpose of subparagraph 23AG(6)(a)(ii) of the ITAA 1936 where the additional leave is reasonable. TR 96/15 provides an example of additional leave considered reasonable where the employer grants five weeks annual leave instead of the usual four weeks leave provided to employees working in Australia.
The taxpayer's circumstances are not similar to that discussed in paragraph 7 of Taxation Ruling IT 2441 as the taxpayer is not engaged in uninterrupted cycles of work. The taxpayer is also entitled to separate recreation leave and attends the offices of the employer while present in Australia.
The additional recreation leave granted to the taxpayer is not reasonable and therefore does not form part of the taxpayer's period of foreign service under paragraph 23AG(6)(a) of the ITAA 1936.
As the taxpayer has not been engaged in foreign service for a continuous period of not less than 91 days, the salary and wages are not exempt from tax under subsection 23AG(1) of the ITAA 1936.
Accordingly, as the taxpayer is a resident of Australia, the salary and wages received forms part of their assessable income under subsection 6-5(2) of the ITAA 1997.