Overseas employment exemption: employee engaged by a subcontracted company to implement a component of RAMSI

Is an employee engaged in foreign service for an employer subcontracted by a company which is contracted by the Australian Agency for International Development (AusAID) to implement a component of the Regional Assistance Mission to the Solomon Islands (RAMSI), entitled to claim an exemption for the foreign earnings derived from this foreign service pursuant to paragraph 23AG(1AA)(a) of the Income Tax Assessment Act 1936 (ITAA 1936)?

No, an employee engaged in such foreign service is not entitled to claim an exemption for the foreign earnings derived from this foreign service pursuant to paragraph 23AG(1AA)(a) of the ITAA 1936.

RAMSI is an Australian Government initiative that is intended to strengthen the Solomon Island's law and justice system by improving its capacity to provide timely, affordable and equitable access to justice. Under the program, Australia provides technical assistance (including prosecution and defence lawyers); support in the corrections system to improve both security and conditions in prisons; and funds for upgrading court and prison infrastructure.

The Commonwealth of Australia acting through AusAID contracted the implementation of one component of RAMSI to a head contractor.

The head contractor has subcontracted an activity relating to this component to the taxpayer's employer.

The taxpayer is an Australian resident for income tax purposes employed by an Australian resident consulting company.

The taxpayer is employed by the consulting company to carry out services in relation to the activity under the subcontractor agreement between the consulting company and the head contractor.

The taxpayer's foreign service is directly related to the performance of that subcontractor agreement.

This foreign service is performed on or after 1 July 2009 and the earnings from this foreign service were derived on or after 1 July 2009.

Subsection 23AG(1) of the ITAA 1936 provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from tax in Australia. However, new subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to, amongst other things, the delivery of Australian official development assistance by the person's employer (paragraph 23AG(1AA)(a)).

The term 'Australian official development assistance' is not defined for the purposes of section 23AG of the ITAA 1936. However, the Explanatory Memorandum (EM) which accompanied Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 introducing subsection 23AG(1AA) of the ITAA 1936 provides guidance on the meaning of the phrase. The relevant paragraphs are below: Australian official development assistance 1.19 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. 1.20 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. 1.21 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. Example 1.1 Colin is an APS employee employed by AusAID. He is posted to the Cook Islands, for 120 continuous days, as a project advisor on an Australian ODA project aimed at improving the quality of early childhood education. Colin's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2). Example 1.2 Robert is an APS employee employed by the Commonwealth Department of Climate Change. He is posted to Tokelau for 150 continuous days, to work on a project aimed at minimising the impacts of rising sea levels in Tokelau. Robert is not an AusAID employee but the project is classified as Australian ODA by AusAID. Robert's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2). Example 1.3 Eli is a motor mechanic employed by Emu Engineering Pty Ltd, a private company contracted by AusAID to provide vocational training in Vanuatu. He is posted to Vanuatu for 180 continuous days. Eli's foreign service is directly attributable to the delivery of Australian ODA by his employer and his foreign earnings are therefore eligible for exemption pursuant to section 23AG, subject to the conditions contained in subsection 23AG(2). 1.22 Foreign service directly attributable to the delivery of Australian ODA does not include diplomatic or consular duties carried out by Australian residents. (Emphasis added.)

The EM and the examples in the EM reveal that paragraph 23AG(1AA)(a) of the ITAA 1936 is intended to restrict the section 23AG of the ITAA 1936 exemption to foreign earnings derived by: • Australian Public Service (APS) employees providing assistance that is classified as Australian official development assistance and is delivered through the Australian Government's aid program which is administered by AusAID or the Department of Foreign Affairs and Trade (DFAT); or • other employees delivering Australian official development assistance on behalf of their employers who in turn have been contracted by the Australian Government to assist in the delivery of Australian official development assistance under the aid program that is administered by AusAID or DFAT.

Accordingly, for non-APS employees to be eligible for exemption pursuant to paragraph 23AG(1AA)(a) of the ITAA 1936, their employer must have been contracted directly by the Australian Government to assist in the delivery of Australian official development assistance under the overseas aid program that is administered by AusAID or DFAT. In this case, the taxpayer's employer has not been contracted directly by AusAID or the Australian Government to assist in the delivery of Australian official development assistance. Rather, the employer has been contracted by the head contractor under a separate subcontractor agreement.

Therefore, the employee engaged by the consulting company to carry out services in relation to the activity under the subcontractor agreement between the consulting company and the head contractor to implement one component of RAMSI is not entitled to claim an exemption for the foreign earnings derived from their foreign service under section 23AG of the ITAA 1936.