Issue
Are employees engaged in foreign service for an employer contracted to provide support services to Australian Defence Force (ADF) personnel, other Australian Government agency employees and other personnel deployed as part of Operation ASTUTE, 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)?
Decision
No, employees engaged in such foreign service are 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.
Facts
Operation ASTUTE is the ADF's on-going contribution to the maintenance of peace and stability in East Timor. It was established in response to a request from the Government of Timor-Leste to the Australian Government. The ADF is deployed in East Timor to assist the Government of Timor-Leste and the United Nations maintain stability and security.
The taxpayers are Australian residents for income tax purposes who are employed by an Australian resident services company.
The service company has been subcontracted by a head contractor to provide support services to the ADF personnel, other Australian Government agency employees and other personnel deployed as part of Operation ASTUTE.
The head contractor had entered into a contract with the ADF to provide a broad range of support services and secured the services of the service company to provide some of those services.
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 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 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, the delivery of Australian official development assistance by the person's employer.
Delivery of Australian official development assistance by the person's employer
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 paragraph 23AG(1AA)(a) 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.
The examples in the EM reveal that paragraph 23AG(1AA)(a) of the ITAA 1936 is intended to restrict the section 23AG exemption to foreign earnings derived by: • Australian Public Service (APS) employees providing assistance that is classified as Australian official development assistance and 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 that is administered by AusAID or DFAT.
The ordinary meaning of 'assistance' in the Macquarie Dictionary is 'the act of assisting; help; aid'. Therefore, adopting its ordinary meaning, 'assistance' for the purposes of section 23AG of the ITAA 1936 would encompass the provision of money, goods or services capable of affording help or aid.
The taxpayers are not APS employees. Nor are the taxpayers employees of employers contracted by the Australian Government to assist in the delivery of Australian official development assistance that is administered by AusAID or DFAT. Rather, the employees are providing support services on behalf of the service company (which of itself is not Australian official development assistance) to the ADF personnel, other Australian Government agency employees and other personnel deployed as part of Operation ASTUTE.
Accordingly, the employees engaged to provide the support services to the ADF personnel, other Australian Government agency employees and other personnel deployed as part of Operation ASTUTE are not entitled to claim an exemption for the foreign earnings derived from their foreign service under section 23AG of the ITAA 1936.