McCabe and Commissioner of Taxation
[2008] AATA 904
•6 October 2008
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2008] AATA 904
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2007/3100-3104
TAXATION APPEALS DIVISION ) Re PETER McCABE Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr A Sweidan Date6 October 2008
PlacePerth
Decision The Tribunal:
a) affirms the decisions under review in application numbers 2007/3100, 2007/3101, 2007/3102 and 2007/3104;
b) sets aside the decision under review in application number 2007/3103 and remits the matter to the respondent with a direction that the income tax assessment of the applicant for the year ended 30 June 2004 be amended if this is found appropriate after having regard to any information to be provided by the applicant (such information to be in writing within 30 days of a request by the respondent) as to:
i. the amount of foreign earnings derived by the applicant for the period 11 January to 14 April 2004; and
ii. any foreign tax paid on those foreign earnings.
.......(sgd) Mr A Sweidan..............
Senior Member
REASONS FOR DECISION
6 October 2008 Mr A Sweidan BACKGROUND – DECISION UNDER REVIEW
1. The applicant seeks review pursuant to section 14ZZ(a)(i) of the Taxation Administration Act 1953 (TAA) of the respondent’s decision dated 14 May 2007 in respect of income tax assessments for the years ended 30 June 2001 to 2005, inclusive (the relevant years).
2. The applicant, by notice of objection dated 1 May 2007, sought to have his assessments for the relevant years amended to exempt his foreign earnings from tax pursuant to section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936).
3. At issue before the Tribunal is whether the foreign earnings of the applicant in the relevant years are exempt from tax pursuant to section 23AG of the ITAA 1936.
TRIBUNALS FINDINGS ON MATERIAL QUESTIONS OF FACT
Based on the evidence provided to the Tribunal by the applicant the Tribunal makes the following material findings of fact:
4. For the relevant years the applicant was a resident of Australia for taxation purposes.
5. Throughout the relevant years the applicant was intermittently employed by Canyon Offshore International Corporation (the Company). Initially his employment was purportedly governed by an Employment Agreement dated 13 May 1999.
6. Although Clause 1 of that agreement provides, inter alia, that the “Employee hereby agrees to render Employee’s exclusive and full time service to the Company...” the applicant’s evidence was that he was never a full-time employee, but that he worked “from contract to contract” when work was available and that when a contract was finished he was “unemployed”.
7. This was confirmed by a letter from the Company which the applicant tendered in evidence.
8. That letter, exhibit “A2” is dated 3 January 2008 and reads relevantly as follows:
“This letter serves to confirm your employment status with Canyon from 9 May 1999.
·You are employed on a “at will” basis. That is you can discontinue working for Canyon at any time. Equally Canyon can discontinue using your services at any time.
·You accrue no holiday or vacation days while working for Canyon.
·You accrue no sick day allowance while working for Canyon.
·Your employment is considered “casual” as it is dependent on contracts won by Canyon.
Canyon does not provide any firm commitment with regard to days of work in a year for you. “
9. The Tribunal finds that the applicant was a casual employee of the Company in the relevant years.
10. For the year ended 30 June 2001 the applicant worked for the Company for the following periods:
(a)23 July 2000 to 31 August 2000 in Singapore and Philippines (40 days)
(b)13 September 2000 to 30 September 2000 in Singapore (18 days)
(c)20 October 2000 to 15 November 2000 in the USA (27 days)
(d)27 November 2000 to 17 January 2001 in Singapore and Japan (52 days)
(e)13 February 2001 to 9 April 2001 in Singapore, London and USA (56 days)
(f)25 April 2001 to 30 May 2001 in Singapore (36 days)
(g)11 June 2001 to 30 June 2001 in Singapore (20 days).
11. For the year ended 30 June 2002 the applicant worked for the Company for the following periods:
(a)1 July 2001 to 5 July 2001 in Singapore and Indonesia (5 days)
(b)7 July 2001 to 13 August 2001 in Singapore and South Africa (38 days)
(c)20 August 2001 to 29 September 2001 in Singapore and Indonesia (41 days)
(d)14 October 2001 to 8 December 2001 in Singapore and Indonesia (56 days)
(e)18 January 2002 to 9 March 2002 in Singapore and Vietnam (51 days)
(f)24 March 2002 to 27 March 2002 in Singapore (4 days)
(g)7 April 2002 to 25 April 2002 in Singapore (19 days)
(h)6 May 2002 to 16 May 2002 in Singapore and Vietnam (11 days)
(i)18 June 2002 to 29 June 2002 in Singapore (12 days).
12. For the year ended 30 June 2003 the Applicant worked for the Company for the following periods:
(a)3 July 2002 to 25 July 2002 in Singapore and Vietnam (23 days)
(b)13 August 2002 to 10 September 2002 in Singapore (29 days)
(c)27 September 2002 to 4 November 2002 in Vietnam, Malaysia and Singapore (39 days)
(d)24 November 2002 to 13 December 2002 in Singapore and Thailand (20 days)
(e)2 January 2003 to 18 January 2003 in Singapore (17 days)
(f)29 January 2003 to 9 March 2003 in Indonesia and Singapore (40 days)
(g)1 April 2003 to 3 May 2003 in Vietnam and Singapore (33 days)
(h)16 May 2003 to 30 June 2003 in Vietnam and Singapore (46 days).
13. For the year ended 30 June 2004 the Applicant worked for the Company for the following periods:
a.3 July 2003 to 26 July 2003 in Vietnam and Singapore (24 days)
b.4 August 2003 to 23 August 2003 in Vietnam and Singapore (20 days)
c.12 September 2003 to 14 September 2003 in Singapore (3 days)
d.17 October 2003 to 14 December 2003 in the Singapore, London and USA (59 days)
e.11 January 2004 to 26 March 2004 in Oman, Singapore and Vietnam (76 days)
f.29 March 2004 to 14 April 2004 in Singapore (17 days)
g.21 April 2004 to 15 May 2004 in Vietnam and Singapore (25 days)
h.18 May 2004 to 12 June 2004 in Vietnam and Singapore (26 days)
i. 16 June 2004 to 30 June 2004 in Vietnam and Singapore (15 days).
14. For the year ended 30 June 2005 the Applicant worked for the Company for the following periods:
- 1 July 2004 to 1 July 2004 in Vietnam and Singapore (1 day)
- 4 July 2004 to 10 July 2004 in Singapore and China (7 days)
- 1 August 2004 to 14 October 2004 in Singapore and Vietnam (75 days)
- 21 October 2004 to 1 November 2004 in London (11 days)
- 25 November 2004 to 23 December 2004 in Indonesia (27 days)
- 17 January 2005 to 22 March 2005 in Indonesia and Vietnam (65 days)
- 31 March 2005 to 21 April 2005 in Vietnam (22 days)
- 30 April 2005 to 29 May 2005 in Philippines (30 days)
i.2 June 2005 to 30 June 2005 in Vietnam (29 days).
15. Each of the periods in the relevant years set out above were periods of “foreign service” as defined in ss23 AG(7) of ITAA 1936 (page below)
BURDEN OF PROOF ON APPLICANT
16. Section 14ZZK of the TAA states:
On an application for review of a reviewable objection decision:
(a) the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates; and
(b) the applicant has the burden of proving that:
(i) if the taxation decision concerned is an assessment (other than a franking assessment) – the assessment is excessive; or
(ii) if the taxation decision concerned is a franking assessment – the assessment is incorrect; or(iii) in any other case – the taxation decision concerned should not have been made or should have been made differently.
RELEVANT STATUTORY PROVISIONS
17. Section 6-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides:
(1) Assessable income consists of ordinary income and statutory income.
(2) Some ordinary income, and some statutory income, is exempt income.
(3) Exempt income is not assessable income.
(4) Some ordinary income, and some statutory income, is neither assessable income nor exempt income.
18. Subsection 6-5(1) of ITAA 1997 provides:
Your assessable income includes income according to ordinary concepts, which is called ordinary income.
19. Subsection 6-5(2) of ITAA 1997 provides:
If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
20. Subsection 23AG(1) of ITAA 1936 provides:
[Foreign service not less than 91 days] 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 the person from that foreign service is exempt from tax.
21. Subsection 23AG(6) of the ITAA 1936 provides:
[Extended meaning of “engaged in foreign services”] 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.
22. Subsection 23AG(7) provides:
Foreign earnings means income consisting of earnings, salary, wages, commission, bonuses or allowances…
Foreign service means service in a foreign country as the holder of an office or in the capacity of an employee.
23. Under former subsections 23AG(6A) to 6(E) of the ITAA 1936, applicable to foreign service performed prior to 19 December 2005, a taxpayer accrued an “absentee credit” of 31/334 of a day for each day of foreign service, to a maximum of 31 days. For each day of absence from work, 24 hours’ “absentee debit” was deducted from the taxpayer’s accumulated absentee credit. As long as the taxpayer maintained an absentee credit balance (in whole days), the taxpayer was taken to have a continuous foreign service period.
EXEMPTION FROM TAX
24. Section 6-1 of ITAA 1997 provides that assessable income consists of ordinary income and statutory income but excludes exempt income.
25. Subsection 6-5(2) of ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
26. Salary and wages are ordinary income for the purposes of subsection 6-5(2) of ITAA 1997.
27. Section 23AG of ITAA 1936 provides for the exemption from tax of foreign earnings subject to certain conditions. Foreign earnings may be salary and wages.
TRIBUNAL’S FINDINGS
28. The exemption continued in Subsection 23AG(1) of ITAA 1936 applies to income derived by an Australian resident who has engaged in at least 91 days of continuous foreign service.
29. Although the applicant derived foreign earnings from foreign service in the relevant years, the Tribunal finds that the applicant has not met the requirement of at least 91 days of continuous foreign service required by subsection 23AG(1) of the ITAA 1936 in any of the relevant years (except for the period 11 January 2004 to 14 April 2004 by virtue of the operation of former subsections 23AG(6A) to 6(E) – see para 51 below).
30. The Tribunal notes that the word “continuous” is not defined in the definition provision, subsection 23AG(7) of the ITAA 1936.
31. The Macquarie Dictionary relevantly defines “continuous” as:
1. “Having the parts in immediate connection, unbroken.
2. uninterrupted in time: without cessation.”
32. The Tribunal finds that each return to Australia between the periods of overseas work specified in paragraphs 10 to 14 above constituted a break or interruption in service. The Tribunal refers to applicant’s witness statement dated 16 August 2008 at paragraph 3 where he states he returned to Australia on the completion of contracts and his oral evidence that he “worked from contract to contract” and that between contracts he was “unemployed” as well as Exhibit “A2” referred to earlier which makes it clear that he was employed on a casual basis.
SUBSECTION 23AG(6) DOES NOT APPLY
33. In calculating an Australian resident’s period of continuous foreign service regard must also be had to subsection 23AG(6) of ITAA 1936. This subsection extends the meaning of “engaged in foreign service” for the purposes of section 23AG. It does this by deeming such service to occur where, in accordance with the terms and conditions of the resident’s foreign service, the resident is absent from work because of either:
- recreation leave; or
·accident or illness.
34. In other words, subsection 23AG(6) deems certain temporary absences from a period of foreign service, that are related to the foreign service, to not constitute a break in the period of foreign service.
35. However the following categories of recreation leave are expressly excluded, that is, they are deemed to not involve engagement in foreign service under subsection 23AG(6):
·leave wholly or partly attributable to a period of service or employment other than that foreign service;
·long service leave, furlough, extended leave or leave of a similar kind (however described); or
·leave without pay or on reduced pay.
36. The Tribunal finds that the applicant was neither absent on recreation leave or because of accident or illness during his returns to Australia. Accordingly subsection 23AG(6) does not apply to treat those absences as forming part of his foreign service.
37. In paragraphs 9 to 13 of Taxation Ruling TR96/15, the respondent provides further clarification as to the temporary absences which will not be taken to constitute a break in the continuity of a period of foreign service under section 23AG:
- short business trips to Australia or to another foreign country during a period of foreign service for reasons directly related to that person’s continuing foreign service engagement and made bona fide for this purpose (for example, to attend conferences, training sessions or briefing sessions), provided the trips are not excessive by comparison with the scheduled period of foreign service;
- weekends, public holidays, rostered days off , ‘compulsory lay off/over days’, ‘grounded days’ and flexidays (which are not ‘available days’ spent in Australia ‘available days’ are those where no work is allocated but the employee is available for duty. Available days spent in Australia are not a period of foreign service; TR 96/15 paragraph 11(b)) and days off in lieu of such, which are:
i.authorised by the terms and conditions of the foreign service employment or engagement; and
ii.where the person uses the breaks to visit or return to Australia they must not be excessive when compared with the scheduled period of foreign service or, if the period of foreign service is ongoing, by comparison to the income year.
c.compassionate leave granted because of accident or illness of a person other than the taxpayer, or the death of another person. (Absence from work because of an accident or illness of the taxpayer is covered by paragraph 23AG(6)(b)).
38. In the Tribunal’s view it is clear that the applicant’s breaks between engagements for the Company do not qualify on any basis as temporary absences from a period of foreign service which can form part of the period of foreign service. The Applicant’s temporary absences do not fall within the situations specified in subsection 23AG(6) nor within those identified in paragraphs 9 to 13 of TR 96/15.
39. The Tribunal finds that the applicant’s breaks between engagements for the Company constitute breaks in his foreign service, apart from the period referred to in paragraph 51 below.
APPLICANT’S RELIANCE ON PARAGRAPH 12 OF THE TAXATION RULING TR 96/15
40. The applicant asserted that he was a “part time / casual” employee of the Company and sought to rely on paragraph 12 of TR 96/15 to contend that, as a “part time employee”, his visits to Australia did not constitute a break in continuous foreign service (see the Applicant’s statement of facts and contentions dated 3 June 2008 at pages 4 & 5). Paragraph 12 of TR 96/15 states:
“Similarly, where the foreign service employment or engagement is part time in nature, it will be accepted that visits to Australia or another foreign country would not constitute a break in continuous foreign service provided the visits, etc., do not occur in times that attendance at work is required and there are no other restrictions in the foreign service engagement preventing such visits.”
41. The Tribunal is of the view that there is a clear distinction between a part-time employee and a casual employee which is well recognised in Australian law – see for example the relevant provisions of the Superannuation Guarantee legislation.
42. As noted above the Tribunal finds that the applicant was a casual employee of the Company. He was not a part-time employee.
43. In any event however it is clear that paragraph 12 of TR 96/15 is not to be read in isolation from the preceding paragraphs of TR 96/15. In the Tribunal’s view paragraph 12 merely provides that the permissible temporary absences applying to full time foreign service employment addressed at paragraphs 10 and 11 of TR 96/15 also apply to part time foreign service employment.
44. The Tribunal notes further that Taxation Ruling TR 96/15 is an expression of the respondent’s opinion about the way in which a relevant provision applies and is not binding on the Tribunal.
45. The Tribunal also notes that Section 23AG does not distinguish between full time, part time and casual employees.
46. As noted above, the Tribunal finds that the breaks taken by the applicant between engagements for the Company amount to breaks in the applicant’s foreign service other than for the period referred to in para. 51 below. This is the case irrespective of whether the applicant was a full time, part time or casual employee of the Company.
YEAR ENDED 30 JUNE 2004
Absentee credit balance – former subsections 23AG(6A) to (6E)
47. Even where the continuity of a period of service is broken, the break in service may be disregarded in certain circumstances pursuant to former subsections 23AG(6A) to (6E) of ITAA 1936, applicable to foreign service performed prior to 19 December 2005.
48. Broadly speaking, former subsections 23AG(6A) to (6E) allow, in certain circumstances, successive periods of foreign service, which are broken by a period where the person is not engaged in that service, to be added together to constitute a single continuous period of foreign service.
49. These subsections operate on the basis that, provided a person is not absent from foreign service for a period in excess of an ‘absentee credit balance’ of days accrued during a continuous period of foreign service, the periods of foreign service either side of the period of absence will together constitute a continuous period of foreign service.
50. In other words, provided a person has an absentee credit balance (in whole days) the continuity of the person’s foreign service will not be broken even when there is an intervening period between engagements on a foreign job or jobs.
51. The respondent accepted and the Tribunal finds that in the year ended 30 June 2004 the applicant had a continuous service period for the period 11 January 2004 to 14 April 2004 by virtue of the operation of former subsections 23AG(6A) to 6(E). While the Applicant had a two day break on 27 and 28 March 2004, the respondent accepts and the Tribunal finds that this break can be disregarded for the purposes of calculating his continuous foreign service period as he has an accrued absentee credit (in whole days) at the beginning of the day before the commencement of the second period in excess of the absentee debit.
52. Subject to: (i) the respondent being informed as to the amount of foreign earnings derived by the applicant for the period 11 January to 14 April 2004; and (ii) the applicant satisfying subsection 23AG(2) of the ITAA 1936 – ( see below) the assessment for the year ended 30 June 2004 should be amended accordingly.
53. The Tribunal finds that at no other time in the relevant years has the applicant maintained an absentee credit balance as his absentee debits were always more than his absentee credits at the beginning of the day before the commencement of any subsequent period of foreign service. Therefore the applicant’s absences from foreign service can not be disregarded in calculating his period of continuous foreign service other than as stated above.
54. The Tribunal finds that, with the exception of the period 11 January to 14 April 2004 detailed above, the applicant has not met the requirements of subsection 23AG(1) as he was not engaged in foreign service for a period of at least 91 days in the relevant years and therefore the income he earned from foreign service (except for 11 January to 14 April 2004) is not exempt from Australian income tax.
55. Having regard to the Tribunal’s finding that ss23AG(1) of ITAA 1936 applies to income derived by the applicant from foreign service in the year ended 30 June 2004 subsection 23AG(2) is relevant. That subsection provides that an amount of foreign earnings derived in a foreign country is not exempt from tax under section 23AG if the amount is exempt from income tax in the foreign country only because of any one or more of a number of specified reasons set out therein, for example, a law of the foreign country giving effect to a double tax agreement.
56. The applicant’s representative informed the Tribunal that the applicant paid tax in Singapore on the income derived from foreign service in the year of income ended 30 June 2004. However the applicant has not provided any evidence as to the foreign tax paid by him.
DECISION
57. The Tribunal:
(a) affirms the decisions under review in application numbers 2007/3100, 2007/3101, 2007/3102 and 2007/3104;
(b) sets aside the decision under review in application number 2007/3103 and remits the matter to the respondent with a direction that the income tax assessment of the applicant for the year ended 30 June 2004 be amended if this is found to be appropriate after having regard to any information to be provided by the applicant (such information to be in writing within 30 days of a request by the respondent) as to:
i.the amount of foreign earnings derived by the applicant for the period 11 January to 14 April 2004; and
ii.any foreign tax paid on those foreign earnings.
I certify that the 57 preceding paragraphs are a true copy of the reasons for the decision herein of Mr A Sweidan, Senior Member
Signed: .. (sgd) T Freeman................
AssociateDate/s of Hearing 26 September 2008
Date of Decision 6 October 2008Applicant’s representative Mr Timothy Lee
Respondent’s Representative Ms Angela Mcnally
Australian Taxation Office
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