Issue
Does an employee's foreign service, performed in a developing country for an overseas charitable non-profit organisation, satisfy paragraph 23AG(1AA)(b) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No, the employee's foreign service does not satisfy paragraph 23AG(1AA)(b) of ITAA 1936 as the employer does not operate a public fund of the type 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 (ITAA 1997).
Facts
The employee is an Australian resident for taxation purposes.
The employee is employed by a charitable non-profit organisation which is based in the United Kingdom.
The employee is engaged in foreign service for the charitable organisation.
The foreign service was performed in Mali on or after 1 July 2009 for a continuous period of not less than 91 days and the foreign earnings from this foreign service were derived on or after 1 July 2009.
Mali is a country declared by the Foreign Affairs Minister to be a developing country for the purposes of the Overseas Aid Gift Deduction Scheme established by the ITAA 1997.
The employer does not operate a public fund declared by the Treasurer to be a developing country relief fund covered by item 9.1.1 of the table in subsection 30-80(1) of the ITAA 1997.
Reasons for Decision
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 this foreign service are exempt from Australian tax. However, new subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that those foreign earnings will not be exempt under section 23AG unless the continuous period of foreign service is directly attributable to amongst other things, activities of the taxpayer's employer in operating certain public funds.
Subsection 23AG(1AA) of the ITAA 1936 relevantly states: However, 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: ... (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 Income Tax Assessment Act 1997 (international affairs deductible gift recipients);
Subsection 30-80(1) of the ITAA 1997 provides: This table sets out general categories of international affairs recipients. International affairs - General Item Fund, authority or institution Special conditions 9.1.1 a public fund declared by the Treasurer to be a developing country relief fund see section 30-85 9.1.2 a public fund established and maintained by a public benevolent institution solely for providing money for the relief (including relief by way of assistance to re-establish a community) of people in a country other than: (a) Australia; and (b) a country declared by the Foreign Affairs Minister to be a developing country who are in distress as a result of a disaster to which subsection 30-86(1) applies see section 30-86
International affairs - General
Item | Fund, authority or institution | Special conditions
9.1.1 | a public fund declared by the Treasurer to be a developing country relief fund | see section 30-85
9.1.2 | a public fund established and maintained by a public benevolent institution solely for providing money for the relief (including relief by way of assistance to re-establish a community) of people in a country other than: (a) Australia; and (b) a country declared by the Foreign Affairs Minister to be a developing country who are in distress as a result of a disaster to which subsection 30-86(1) applies | see section 30-86
And sections 30-85 and 30-86 of the ITAA 1997 in turn relevantly provide: 30-85 Developing country relief funds (1) You can deduct a gift that you make to a public fund covered by item 9.1.1 of the table in subsection 30-80(1) only if the declaration is in force at the time you make the gift. (2) The Treasurer may, by notice in the Gazette , declare a public fund to be a developing country relief fund if he or she is satisfied that the fund: ... 30-86 Developed country disaster relief funds (1) For the purposes of item 9.1.2 of the table in subsection 30-80(1), a disaster is one to which this subsection applies if the Minister has recognised it as a disaster. The Minister may do so if satisfied that: ...
The Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 (the 2009 EM), which introduced paragraph 23AG(1AA) of the ITAA 1936 provides some guidance on the meaning of paragraph 23AG(1AA)(b). The relevant paragraphs appear below: 1.23 A person's foreign earnings will be eligible for exemption if they are directly attributable to their employer's activities 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. [Schedule 1, item 1, paragraph 23AG(1AA)(b)] 1.24 Item 9.1.1 of subsection 30-80(1) of the ITAA 1997 applies to a public fund declared by the Treasurer to be a developing country relief fund. Item 9.1.2 of subsection 30-80(1) applies to a public fund operated by a public benevolent institution solely to provide relief to people of a developing country who are in distress as a result of a disaster (a public disaster relief fund). Gifts or donations made to these public funds are tax deductible for income tax purposes to the donor. 1.25 A developing country relief fund is a fund established by an organisation solely for the purpose of providing relief to people of a developing country. The organisation must be an approved organisation as declared by the Minister for Foreign Affairs and the country must be a developing country as declared by the Minister for Foreign Affairs. These conditions are contained in paragraphs 30-85(2)(a) and (b) of the ITAA 1997 respectively. 1.26 A public disaster relief fund is a fund established and operated by a public benevolent institution in response to an event recognised as a disaster by the Minister for Foreign Affairs. The recognition requirement is contained in section 30-86 of the ITAA 1997. 1.27 Paragraph 23AG(1AA)(b) ensures that employees of recognised organisations that undertake aid or charitable activities, that do not form part of Australian ODA, are eligible for exemption on their relevant foreign employment income. ... (Emphasis added.)
However, the words emphasised immediately above are at odds with the plain language of item 9.1.2. Specifically, item 9.1.2 refers to a country other than Australia and one declared by the Foreign Affairs Minister to be a 'developing country'. Its wording suggests that it only applies to developed countries. This interpretation is consistent with the heading to section 30-86 of the ITAA 1997 which, as appears above, states that it applies to disaster relief funds in 'developed' countries (see paragraphs 15AB(1)(a) and 15AB(2)(a) of the Acts Interpretation Act 1901 which permit regard to be had to the heading of a provision in order to confirm its ordinary meaning as conveyed by its text).
Further support for this interpretation is provided by the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 3) Bill 2006 (the 2006 EM) which introduced item 9.1.2 in subsection 30-80(1) of the ITAA 1997. Relevant paragraphs appear below: 11.6 This measure allows taxpayers to claim an income tax deduction for certain gifts of money or property to the following types of organisations that are endorsed as DGRs: ... • public funds established and maintained by a public benevolent institution solely to provide money to assist in providing relief to people (including assistance to re-establish a community) in distress as a result of declared natural or man-made disasters in a developed country , and public funds established and maintained for charitable purposes solely to provide money for relief of people and re-establishing a community in distress as a result of declared disasters which occur in Australia; ... 11.19 DGR status through the disaster relief category is only extended to developed countries, where a developed country is one that has not been declared by the Minister for Foreign Affairs as a developing country . Disasters which occur in countries classified by the Minister for Foreign Affairs as developing countries may be eligible for DGR support under the international affairs DGR general category (section 30-80 of the ITAA 1997). [Schedule 11, item 8, item 9.1.2 in the table in subsection 30-80(1)] (Emphasis added.)
Accordingly, the second sentence of paragraph 1.24 of the 2009 EM introducing paragraph 23AG(1AA) of the ITAA 1936 erroneously states that item 9.1.2 of subsection 30-80(1) of the ITAA 1997 applies to a public fund operated to provide relief to people of a 'developing' country. It should state that it applies to a public fund operated to provide relief to people of a 'developed' country instead.
As the employee's foreign service was performed in Mali, a country declared by the Foreign Affairs Minister to be a 'developing country', the employer does not operate a public fund to provide relief to the people of a 'developed' country as required by item 9.1.2. Paragraph 23AG(1AA)(b) of the ITAA 1936 is therefore not satisfied and the employee of the overseas charitable organisation is not entitled to claim exemption for the earnings derived from their foreign service in Mali under section 23AG of the ITAA 1936.
Amendment History
Date of Amendment Part Comment 13 April 2017 Reasons for decision Amended for clarity.
Date of Amendment | Part | Comment
13 April 2017 | Reasons for decision | Amended for clarity.