Buggins and Commissioner of Taxation - [2011] AATA 698

Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2011] AATA 698
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2010/1437;

TAXATION APPEALS DIVISION ) 2011/0405; 2011/0406

Re SCOTT BUGGINS

Applicant

And

COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Deputy President P E Hack SC
Senior Member Bernard J McCabe
Date10 October 2011
PlaceBrisbane

Decision
In each application, the decision under review is affirmed.

..............Signed...................
Deputy President

CATCHWORDS
TAXATION – income tax – taxation ruling 96/15 – characterisation of ruling – applicant international pilot - whether applicant employed in foreign service for purposes of s 23AG of the Income Tax Assessment Act 1936 (Cth) - decision under review affirmed
Income Tax Assessment Act 1936 (Cth) ss 23AG(1), 23AG(6), 23AG(6A), 23AG(6B) 23AG(7)
Taxation Administration Act 1953 (Cth) ss 357-60 and 358-5
Taxation Ruling 96/15
Bellinz Pty Ltd v Commissioner of Taxation [1998] FCA 284; (1998) 38 ATR 350; 98 ATC 4,399
Bellinz Pty Ltd v Commissioner of Taxation [1998] FCA 615; (1998) 84 FCR 154
Overseas Aircrew Basing Limited v Commissioner of Taxation [2009] FCA 7; (2009) 175 FCR 449
REASONS FOR DECISION

10 October 2011 Deputy President P E Hack SC
Senior Member Bernard J McCabe

Introduction

The foreign earnings of an Australian resident engaged in “foreign service” continuously for not less than 91 days are exempt income. That is the effect of s 23AG(1) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).
The applicant, Mr Scott Buggins is, and at all material times has been, a pilot employed by Overseas Aircrew Basing Limited (OABL), a subsidiary of Cathay Pacific, an international airline based in Hong Kong. In these proceedings Mr Buggins contends that his earnings from his employment with Cathay Pacific in the 2006, 2007 and 2008 income years should be exempt, not because s 23AG(1) of ITAA 1936 operates to make it exempt (and Mr Buggins seems to accept that the decision of Graham J in Overseas Aircrew Basing Limited v Commissioner of Taxation[1] stands as authority to the contrary) but because the Commissioner of Taxation has made and published a ruling which Mr Buggins says treats people in his position as being engaged in foreign service. Thus, says Mr Buggins, the Commissioner is bound to treat him as if he had been engaged in foreign service in the period in question.
[1] [2009] FCA 7; (2009) 175 FCR 449.
That being so, Mr Buggins contends, the days spent by him in Australia on rest days of various kinds did not interrupt the continuity of his foreign service despite the fact that the Commissioner’s ruling would treat the extent of those days as creating a break to foreign service. That part of the ruling is wrong according to Mr Buggins.
The facts
There is no dispute about the facts. Mr Buggins commenced employment with OABL[2] in 1994 and remained employed by that company until March 2009. OABL is the employer of pilots engaged by Cathay Pacific. During all of the years in question Mr Buggins was an Australian resident. He lived in Brisbane with his family.
[2] Obviously enough, the applicant in the proceedings before Graham J.
Mr Buggins holds a pilot’s licence issued by the Hong Kong Civil Aviation Department. As is ordinarily the case with commercial pilots Mr Buggins is limited in the number of hours that he may fly in any given period and he is required to have time off at certain intervals. Those obligations have their source in Hong Kong subordinate legislation and are given effect to by Cathay Pacific’s Approved Flight Time Limitation Scheme (the Scheme), a part of the airline’s operations manual.
Mr Buggins was entitled to annual leave and sick leave but those matters aside his life was the subject of rosters prepared by Cathay Pacific to comply with the Scheme. Mr Buggins worked a duty cycle generally consisting of 7 to 10 days. That duty cycle started in Brisbane which was, for the purposes of the Scheme, his “Home Base”. When Mr Buggins was not on duty i.e. flying as pilot, he was on one or other of three types of “Rest Days” – G days, O days or A days.
A G day (also called a GDO) was a Guaranteed Day Off. It is described in the operations manual as,
“…a period at Home Base available for leisure and relaxation and free of all Duties.”
An O day is described as,
“…a period at, or away from, Home Base, free of all Duties.”
But, in contradistinction to a G day a crew member might be assigned duty on an O day provided that the limits otherwise prescribed by the Scheme were not exceeded. In practice, as Mr Buggins explained it, the day following his duty cycle was ordinarily designated an O day to avoid the necessity of finding a replacement crew if there were delays to the last flight in a duty cycle. An A day, or Available day, is,
“…a period at Home Base, free of all Duties, during which a crew member must be contactable for a specified period, and must be available to report for Duty at Home Base 10 hours after notification of a requirement.”
It is common ground that each of these Rest Days during the years in question was spent by Mr Buggins in Australia.
Mr Buggins says that his tax returns for the 2006, 2007 and 2008 income years were lodged (and, by inference, prepared) in reliance on taxation ruling TR96/15 on the basis that he was engaged in foreign service and that his income was exempt income.
The legislation
The operative provision in the present case is s 23AG(1) of the ITAA 1936. During the period in question[3] it provided,
“(1)Where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by that person from that foreign service is exempt from tax.”
The expression “foreign service” was defined by s 23AG(7) of the ITAA 1936 as meaning,
“service in a foreign country as the holder of an office or in the capacity of an employee”.
[3] Minor amendments, with effect from 26 March 2009, were made by the Tax Laws Amendment (2008 Measures No. 6) Act 2009 (Cth), No 14 of 2009.
It is also material to note s 23AG(6) of the ITAA 1936. It provides,
“(6)For the purposes of this section, a period during which a person is engaged in foreign service includes any period during which the person is, in accordance with the terms and conditions of that service:
(a)absent on recreation leave, other than:
(i)leave wholly or partly attributable to a period of service or employment other than that foreign service;
(ii)long service leave, furlough, extended leave or leave of a similar kind (however described); or
(iii)leave without pay or on reduced pay; or
(b)absent from work because of accident or illness.”
Further provision is made in ss 23AG(6A) and (6B) for the calculation of periods of foreign service. Up until 18 December 2005 they provided,
“(6A)For the purposes of this section, the absentee credit balance of a person at a particular time is the number of whole days (if any) by which the total of the absentee credits of the person arising before that time exceeds the total of the absentee debits of the person arising before that time.
(6B)For the purposes of this section, where a person has been engaged in foreign service for a whole day, there arises, at the end of that day, an absentee credit of the number of hours calculated in accordance with the following formula:
unless the absentee credit balance of the person, ascertained immediately after the end of that day, would exceed 31 days.”
Subsections 23AG(6A) and (6B) were amended with effect from 19 December 2005. They now provide, in relation to foreign service performed on and after that date, as follows,
“(6A)2 or more periods in which a person has been engaged in foreign service are together taken to constitute a continuous period of foreign service until:
(a)the end of the last of the 2 or more periods; or
(b)a time (if any), since the start of the first of the 2 or more periods, when the person’s total period of absence exceeds 1/6 of the person’s total period of foreign service;
whichever happens sooner.
Example:Kate is engaged in foreign service for 20 days, is absent for 2 days and is then engaged in foreign service for 10 days. These 2 periods of foreign service constitute a continuous period of foreign service, because the total period of absence is never more than 1/10 of the total period of foreign service.
Kate is then absent for 5 days before commencing a further period of foreign service. No matter how long the further period lasts, it can never constitute a continuous period of foreign service with the first 2 periods of foreign service, because on the fourth day of the second absence the total period of absence is 1/5 of the total period of foreign service.
(6B)In subsection (6A):
total period of absence, in relation to a particular time, means the number of days, in the period starting at the start of the first of the 2 or more periods and ending at that time, for which the person was not engaged in foreign service.
total period of foreign service, in relation to a particular time, means the number of days, in the period starting at the start of the first of the 2 or more periods and ending at that time, for which the person was engaged in foreign service.”
The public ruling
The public ruling regime has been in place in the taxation legislation for some time. Up until 19 December 2005 public rulings were made pursuant to Part IVAAA of the Taxation Administration Act 1953 (Cth) (the Administration Act) however that part was repealed from that date and replaced by Division 358 of Schedule 1 to the Administration Act. By virtue of transitional provisions[4] in the amending legislation a public ruling in force immediately before 1 January 2006 had effect, on and after that day, as if it were a public ruling made under Division 358 and was taken to have been made on the day on which it was originally made.
[4] Item 29 of Schedule 2 to the Tax Laws Amendment (Improvements to Self Assessment) Act (No 2) 2005 (Cth), No 161 of 2005.
It is unnecessary for present purposes to examine Division 358 (and related Divisions) of Schedule 1 to the Administration Act in any detail. It will suffice to note ss 357-60 and 358-5. They provide,
“357‑60 When rulings are binding on the Commissioner
(1)Subject to subsection (5), a ruling binds the Commissioner in relation to you (whether or not you are aware of the ruling) if:
(a)the ruling applies to you; and
(b)you rely on the ruling by acting (or omitting to act) in accordance with the ruling.”
“358‑5 What is a public ruling?
(1)The Commissioner may make a written ruling on the way in which the Commissioner considers a relevant provision applies or would apply to:
(a)entities generally or a class of entities; or
(b)entities generally, or a class of entities, in relation to a class of *schemes; or
(c)entities generally, or a class of entities, in relation to a particular scheme.
Note:Section 357‑55 specifies the relevant provisions.
(2)Such a ruling may cover any matter involved in the application of the provision.”
Taxation Ruling 96/15 was first issued on 22 May 1996. It is entitled “Income Tax: foreign tax credit system: issues relating to the practical application of section 23AG”. It is a public ruling as that term is used in the Administration Act. It was amended in July 2002 and again in December 2006 to take the December 2005 amendments to s 23AG of ITAA 1936 into account.
Given the reliance placed upon the ruling by Mr Buggins it is necessary to set out some detail of it. Paragraphs 2 to 4 deal with the class of person covered by the ruling in these terms,
“Class of person/arrangement
2. Section 23AG provides an exemption from Australian tax for foreign earnings derived by a resident individual taxpayer during a continuous period of foreign service exceeding 90 days. The purpose of this Ruling is to clarify certain aspects of the practical application of that section in relation to income derived in the 1990/91 and subsequent years of income. IT 2563 still applies in respect of earlier years.
3. The question has been raised whether section 23AG is capable of application where the residential status for Australian tax purposes of an individual taxpayer changes during a year of income from non-resident to resident and on or after that date the taxpayer receives foreign earnings in respect of a continuous period of foreign service performed whilst a non-resident. That question has been raised against the background of the well established principle that salary and wages income, whether for current or past services, is generally derived when received.
4. One of the key tests to be satisfied before foreign earnings may qualify for an exemption from Australian tax under section 23AG is that those earnings be derived in respect of a continuous period of foreign service. Taxation Ruling IT 2441 deals with certain aspects of the practical application of that test. This Ruling deals principally with other circumstances, and distinguishes between certain breaks in foreign service that may be treated as forming part of that service and others that do not qualify for that treatment.”
Commencing at paragraph 9 the ruling deals with “Temporary absences forming part of a period of foreign service”. Relevantly to the present case, paragraph 10 says,
“10. As subsection 23AG(6) does not cover the gamut of temporary absences, representations have been received seeking clarification of when section 23AG will be treated as applicable in circumstances where there is a temporary break within a person's commenced foreign service engagement as a consequence of visiting Australia (or another country):
(a)in the course of carrying out duties under a continuing foreign service engagement (i.e., business trips);
(b)on weekends, public holidays, rostered days off, or other approved paid time off; or
(c)compassionate leave.
11. In each case such visits fall to be treated as temporary absences related to a period of foreign service and are to be dealt with as follows:
...
Weekends, public holidays, etc.
(b)A period of foreign service is taken to include weekends, public holidays, rostered days off, 'compulsory lay off/over days', 'grounded days' and flexidays (which are not 'available days' spent in Australia),^[[5]] and days off in lieu of such, provided:
(i)such breaks are authorised by the terms and conditions of the foreign service employment or engagement; and
(ii)where such breaks are used by the person to visit or return to Australia they must not be excessive by comparison with the scheduled period of foreign service or, if the period of foreign service is ongoing, by comparison with the income year. As a guide, the Commissioner considers that where such breaks are used to visit or return to Australia, they will be excessive where the total of such breaks are more than one-sixth of the period of scheduled foreign service or, if the period of foreign service is ongoing, more than one sixth of the income year. Therefore, where the total of temporary absences is excessive in terms of this paragraph, each temporary absence will be taken to break the foreign service period, subject to section 23AG(6A) to (6E).
Rostered days off, compulsory lay off/over days, grounded days and flexidays are not considered to be recreation leave for the purposes of section 23AG(6). That is because such absences are not recreation days that are granted as a result of leave that has accrued while a person is actively engaged in foreign service.
Available days spent in Australia are not considered to be a period of foreign service. Where an employee spends available days in Australia, this period is considered to be a break in foreign service, unless subsections 23AG(6A) to (6E) apply. That is because such time is not recreation leave for the purposes of subsection 23AG(6), nor does it come within any of the temporary absences set out in paragraph 11 of this Ruling. If available days are spent in a foreign country, it is considered that those days will form part of the foreign service period.
…”
[5] The footnote in the Ruling reads, “’Compulsory lay off/over days' are those where an employee is prevented from working - possibly because of certain legal requirements. 'Grounded days' are those where an employee does not report for duty after being engaged in a series of long haul flights. 'Available days' (also known as 'grey days') are those where no work is allocated but the employee is available for duty. (The terminology may vary under different contracts with different employers and in different countries, but the nature of the periods is the same, irrespective of the way they are described.)”
Commencing at paragraph 30, the Ruling provides examples of the practical application of the Ruling. Paragraph 31A takes up the notion of “excessive” temporary absence referred to in paragraph 11(b)(ii). It says,
“31A. The following is an example where temporary absences spent in Australia would be regarded as excessive.
Pilots
An international pilot resides in Australia and is employed by a foreign airline on an ongoing basis. During the 2003 income year, the pilot flies for approximately 800 hours. She is entitled to six weeks annual leave and also has other days where she is not actively performing service, such as compulsory lay off days, grounded days and rostered days off, which in conjunction with her recreation leave she chooses to spend in Australia.
Typically, the pilot flies internationally (including stopovers and rests) for ten days and receives six days off. Assume that each six day period is spent in Australia and falls within the types of temporary absences set out in paragraph 11(b) of this Ruling. She also has an absentee credit balance - section 23AG(6B) - of three days at the start of the 2003 income year. Looked at over the 2003 income year, this means the pilot spends approximately 120 days (in addition to six weeks annual leave) in Australia on those absences covered by paragraph 11(b) of this Ruling.
In judging whether the 120 days spent in Australia during the income year is excessive in terms of paragraph 11(b) of this Ruling, the Commissioner considers that as a guide the total of such breaks spent in Australia should not be more than one-sixth of the income year (61 days) because there is ongoing foreign service. In this case, the number of days spent in Australia during the income year on temporary absences covered by paragraph 11(b) of this Ruling is 120 days and is clearly excessive.
This means that each time the pilot returns to Australia during the 2003 income year for the six day break, there is a break in foreign service, unless there are sufficient absentee credits accumulated in accordance with section 23AG(6B). In this case, the absentee credit of three days at the start of the year would be extinguished the first time the taxpayer returns to Australia during the 2003 income year for a six day break.
Moreover, throughout the year there would not be sufficient absentee credits that accumulate each time there is foreign service to cover the pattern of six day breaks. This means that each time the taxpayer returns from a ten day period of foreign service during the income year for a six day break, there is a break in foreign service.
As a result, there is no period during the income year where the foreign service period is for 91 continuous days or more. Therefore, the pilot will not be entitled to the exemption under section 23AG.”
In December 2006, and as a consequence of the December 2005 amendments to s 23AG of ITAA 1936, the Ruling was amended, with effect from 19 December 2005, to provide,
“hparagraphs 13 to 16, 30 and 31 of this Ruling do not apply to foreign service performed on or after 19 December 2005; and
hparagraphs 11(b) and 31A of this Ruling, to the extent that they refer to former subsections 23AG(6A) to (6E), do not apply to foreign service performed on or after 19 December 2005.”
The arguments of the parties

Mr Buggins says that TR96/15 applies to him. That ruling makes it clear that the Commissioner considered that international pilots in Mr Buggins’ position were engaged in foreign service for the purposes of s 23AG of the ITAA 1936 and that, given the demonstrated reliance on the ruling, the Commissioner is bound by his expression of opinion. Mr Buggins points, in particular, to paragraphs 11(b) (and its footnote) and 31A as demonstrating the view of the Commissioner that the class of taxpayers referred to in those paragraphs i.e. international pilots, are engaged in foreign service.
And, if that be accepted, Mr Buggins goes on to contend that all rest days are included in the period of foreign service because, in the case of G days and O days, the Commissioner’s ruling treats them as such, and, in the case of A days, they are, in reality, recreation leave which the legislation treats as such.
For his part the Commissioner submits that the ruling does not require him to treat Mr Buggins as having been engaged in foreign service. TR96/15 does not express the Commissioner’s views on when a person is to be taken as engaging in foreign service rather it is predicated on the taxpayer being actually engaged in foreign service and deals with the Commissioner’s views about the calculation of periods of foreign service and the treatment of breaks from it.
But, says the Commissioner, even if the ruling did have the result that Mr Buggins was to be regarded as being engaged in foreign service he was not, on the facts, so engaged for a continuous period of not less than 91 days.
Does the ruling have application?
In our view it does not. The submissions of the Commissioner are to be preferred.
The Commissioner’s submissions drew attention to some observations of Merkel J in Bellinz Pty Ltd v Commissioner of Taxation[6]. In that case the Commissioner had made public rulings about the tax treatment of leases with an option to purchase as part of a leveraged sale and leaseback arrangement however the transactions entered into were different in some respects to those described in the public rulings. The taxpayer, in an appeal against the refusal to make a private ruling favourable to the taxpayer, argued that the Commissioner was bound by the public rulings to apply the principles on which the public rulings were founded. In rejecting that argument his Honour noted,
“Relevantly, a public ruling will only be binding in the sense that the Commissioner cannot depart from it in making an assessment where the ruling relates to ‘an arrangement’ and the tax law relates to ‘that arrangement’ in a different way. The ruling is binding as to the way in which a tax law applies to a person or class of persons in relation to an arrangement or class of arrangements. It is not binding in relation to the principles or reasoning stated in it. This distinction is significant in the present case.”
[6] [1998] FCA 284; (1998) 38 ATR 350; 98 ATC 4,399.
On appeal, the Full Court said[7]:
“The binding quality which the legislation gives to a public ruling applies to the tax consequences of the arrangement or class of arrangements to which the ruling relates, and not, as the appellants contend, to the underlying philosophy behind the ruling. That this is so follows inexorably from the language of s 14ZAAE to which reference has already been made.”
Section 14ZAAE of the Administration Act (now repealed) allowed the Commissioner to,
“…make a public ruling on the way in which, in the Commissioner’s opinion, a tax law or tax laws would apply to any person in relation to a class of arrangements.”
The language is similar in substance to that now found in s 358-5 of Schedule 1 to the Administration Act.
[7] [1998] FCA 615; (1998) 84 FCR 154 at 169.
But the fundamental question is whether, in the language of s 357-60(1)(a) of Schedule 1 to the Administration Act, the ruling applied to Mr Buggins. That depends on the proper characterisation of the ruling. Is it, as Mr Buggins suggests, a ruling about the way in which the Commissioner considered that s 23AG of the ITAA 1936 applied to a specific class of taxpayers, namely, international pilots who reside in Australia employed by a foreign airline on an ongoing basis. Or is it, as the Commissioner contends, a ruling about the way in which the Commissioner consider that s 23AG of the ITAA 1936 applied to a specific class of taxpayers, those engaged in foreign service.
There are aspects of the ruling which deal with the question whether a taxpayer is engaged in foreign service. Paragraph 19 sets out the Commissioner’s view that service on a foreign ship in international waters does not constitute foreign service. But those aspects relied on by Mr Buggins are of an entirely different character. It is evident from a reading of the ruling as a whole and, in particular, from the reference in paragraph 4 of TR 96/15 to “breaks in foreign service that may be treated as forming part of that service and others that do not qualify for that treatment”, that those parts of the ruling assume the fact of foreign service and deals with temporal aspects of that service. Similarly, paragraph 11(b), on which Mr Buggins places emphasis, deals with the manner in which “temporary absences related to a period of foreign service” are to be dealt with.
The ruling contemplates that an international pilot, resident in Australia, and returning to Australia on breaks might be engaged in foreign service. But it does not determine that the pilot is so engaged. We are satisfied that the ruling did not apply to Mr Buggins and that the Commissioner was not bound to treat Mr Buggins as having been engaged in foreign service.
In the circumstances we do not find it necessary to consider the interesting question whether a taxpayer may rely on part only of a ruling while rejecting, as Mr Buggins did, another part of the same ruling. That question can be left for another day.
Was Mr Buggins, in fact, engaged in foreign service?
Mr Jones did not seek to distinguish the decision in Overseas Aircrew Basing Limited v Commissioner of Taxation[8] nor suggest that we were not bound by the conclusions reached by Graham J. The case concerned fringe benefits tax payable by the company. In its objection to the Commissioner’s assessment of fringe benefits tax the company contended that the earnings derived by its pilot employees, whose circumstances appear to have been identical to those of Mr Buggins, were exempt from tax under s 23AG of the ITAA 1936. Justice Graham concluded that they were not. In circumstances where we are bound by his Honour’s conclusions we need not consider the reasoning in any great length. It will suffice to note these observations of his Honour,
“93Section 23AG exempts salaries from tax in Australia where they are derived by persons engaged in service in a particular foreign country and the particular foreign country is the base from which they derive those salaries. The section was not directed at exempting earnings of international airline aircrew based in Australia from tax.
94It is fallacious to say that a person who is a resident of Australia, whose home is in Australia, whose Home Base or Preferred Port is in Australia and whose duty cycles begin and end in Australia is engaged in service in a foreign country in the capacity of an employee within the meaning of s 23AG of the 1936 Act. The section is concerned with persons who are ‘actually on the job’ in the particular overseas country in which their foreign earnings are derived.
The Explanatory Memorandum to the Bill that became the Tax Laws Amendment (2005 Measures No. 5) Act 2005 (Cth) (Act No. 162 of 2005) made it clear that s 23AG(6A) and (6B) were directed at preserving continuity in respect of a period of engagement in foreign service where the relevant employee took ‘time away’ from his or her foreign service or ‘short breaks’ from his or her foreign service or ‘absences’, none of which terms sit comfortably with the situation of aircrew who derive their salaries from their service in the cockpits of aircraft and on the ground in numerous countries, including Australia and in international airspace as well.
95I am unable to conclude that when a member of aircrew employed by the applicant and assigned by it to operate Cathay Pacific aircraft flying into or out of that member’s Home Base or Preferred Port in Australia, he or she is engaged in service in a foreign country or is taking ‘time away’ from foreign service or a ‘short break’ from foreign service or an ‘absence’. When in Australian airspace or landing at or taking off from an Australian Airport, no question of an engagement in service in a foreign country arises nor does any question of taking a break from such an engagement.”
[8] Supra, footnote 1.
Consistent with his Honour’s conclusion in that case, Mr Buggins was not engaged in foreign service during the years in question. That is sufficient to lead us to conclude that the objection decision ought to be affirmed. We need not decide whether the various rest days would preclude continuous service were it to have been held that Mr Buggins was engaged in overseas service.
I certify that the preceding 32 paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC and Senior Member Bernard J McCabe
Signed:         .....Signed.............................................................
  Associate
Dates of Hearing  11 August 2011
Date of Decision  10 October 2011
Counsel for the applicant               Mr BL Jones
Representative for the applicant    Grant Thornton
Counsel for the respondent           Mr RM Derrington SC
Solicitors for the respondent          ATO Legal Services Branch

TAXATION APPEALS DIVISION		) 2011/0405; 2011/0406
Re		SCOTT BUGGINS

10 October 2011	Deputy President P E Hack SC Senior Member Bernard J McCabe
Introduction