THE TAXPAYER And COMMISSIONER OF TAXATION

[2011] AATA 462

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 462

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2010/4813

TAXATION APPEALS DIVISION		)
Re		THE TAXPAYER

Applicant

And  COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Senior Member Bernard J McCabe

Date30 June 2011

PlaceBrisbane

Decision The Tribunal affirms the decision under review.

....................[SGD]..........................

Senior Member

CATCHWORDS

TAXATION — qualifying service — eligible foreign remuneration — decision affirmed

Income Tax Assessment Act 1936, s23AF

REASONS FOR DECISION

30 June 2011 Senior Member Bernard J McCabe

1.The taxpayer sought a private ruling from the Commissioner on the question of whether a lump sum paid to the taxpayer under his income protection policy was properly included in his assessable income for the year ending on 30 June 2007. The Commissioner concluded the amount was assessable income, and the taxpayer has objected. The objection decision has made its way to the Tribunal.

2.The dispute turns on the application of s 23AF of the Income Tax Assessment Act 1936 (“ITAA36”). Section 23AF(1) provides:

Where a taxpayer, being a natural person, has been engaged on qualifying service on a particular approved project for a continuous period of not less than 91 days, any eligible foreign remuneration derived by the person that is attributable to that qualifying service is exempt from tax.

3.The Commissioner says the exemption is not available in this case because (a) the taxpayer did not derive the income in question during a period of “qualifying service” and (b) the income was not “eligible foreign remuneration” because it was paid out under an insurance policy. 

4.The matter was heard on the papers with the consent of the parties.

The facts

5.The taxpayer took out an income protection policy as part of his superannuation arrangements in November 2002. A copy of the policy is reproduced at p 83ff of the documents provided by the Commissioner (the “T-documents”).

6.At the end of 2005, the taxpayer was employed by an Australian firm that provided project management services overseas. He was engaged on a three year contract to act as a team leader on a project the company was managing in India. The taxpayer started work on the project in India in February 2006. He returned home to Australia suddenly in early November 2006 as a result of health problems and other circumstances. He had completed 274 days of his three-year contract by that point. He did not return to work in India or complete his service under the contract. He resigned formally from his role in January 2007. He subsequently made a claim on his income protection policy on the basis that he was unable to return to work. That claim was accepted on 31 October 2008 (see the letter from Cominsure reproduced at p 44 of the T documents) and a lump sum in the amount of $86,616 was paid in respect of the period 3 December 2006 through 2 December 2008.

7.The taxpayer included the insurance payout in his assessable income but sought a private ruling to the effect that it was exempt. He was not happy with the private ruling that was issued on 12 May 2010. He lodged an objection and he has now asked the Tribunal to reconsider the matter.

Did the taxpayer derive the income in question during a period of “qualifying service”?

8.I have already explained that the taxpayer’s claim turns on the interpretation of s 23AF of ITAA36. The taxpayer is able to satisfy most of the requirements imposed by s 23AF(1): he is a natural person, the work in question related to an approved project, and he undertook the work for more than 91 days. But his work was permanently interrupted, and there is a question over whether the payments he received in lieu of the money he would have been paid if he had continued in India might have a different character. The Commissioner has taken the view that the insurance payout was not derived while the taxpayer was undertaking “qualifying service”.

9.The legislation contemplates the possibility of an individual’s service being interrupted by illness or other events beyond his or her control. Section 23AF(3) provides:

Subject to subsections (4) and (5), a person shall be taken for the purposes of this section to be engaged on qualifying service on an approved project during any period during which:

(a)    the person is outside Australia and is engaged in the performance of personal services in connection with the approved project;

(b)    the person is travelling between Australia and the site of the approved project;

(c)    by reason of an incapacity for work due to accident or illness occurring while the person was, by virtue of paragraph (a) or (b), to be taken to be engaged on qualifying service on the approved project, the person is absent from work; or

(d)    the person is on eligible leave, being leave that accrued in respect of a period during which the person was, by virtue of any of the preceding paragraphs, to be taken to be engaged on qualifying service on the approved project.

10.That provision must be read in conjunction with s 23AF(5), which provides:

A person shall not be taken to have been engaged on qualifying service on a particular approved project by virtue of paragraph (3)(c) during a period of incapacity for work unless the person is taken to have been engaged on qualifying service on that approved project by virtue of paragraph (3)(a), (b) or (d) during a period that commenced immediately after the incapacity ceased.

11.In other words, s 23AF(5) appears to suggest s 23(3)(c) is directed to unexpected interruptions to work on an approved project, as opposed to events that caused him to terminate that work. In any event, the taxpayer in this case appears to fall foul of sub-section (5). He had returned home and resigned from his role in January 2007. He did not return to work nor did he subsequently do any of the things contemplated in ss 23 (3)(a), (b) or (d). It follows he had ceased to engage in qualifying service in November 2006. The amounts he was paid under the insurance policy in respect of the period December 2006 - December 2008 are not attributable to qualifying service.

Could the payments be characterised as “eligible foreign remuneration”?

12.I turn now to the second issue. The Commissioner referred me to s 23AF(18), which provides:

"eligible foreign remuneration", in relation to a person, means income (not being excluded income) that is derived by the person at a time when the person is a resident, being:

(a)  income consisting of salary, wages, commission, bonuses or allowances, or of amounts included in a person's assessable income under Division 83A of the Income Tax Assessment Act 1997 (about employee share schemes), derived by the person in his capacity as an employee of an eligible contractor; or

(b)  income, or amounts included in a person's assessable income under that Division, derived by the person under a contract with an eligible contractor, being a contract that is wholly or substantially for the personal services of the person;

that is directly attributable to qualifying service by the person on an approved project and includes any payments received in lieu of eligible leave that accrued in respect of a period during which the person was a resident and was engaged on qualifying service on an approved project.

13.The Commissioner says the payments were not derived by the taxpayer under a contract of service or a contract for service. He says the payments were made pursuant to a contract of insurance. It follows that the income could not be said to be directly attributable to qualifying service - it is directly attributable to a contract of insurance. It cannot be eligible foreign remuneration in those circumstances. I agree.

14.The Commissioner says that s 23AF(6) is also relevant here. That provision says:

Where:

(a)  a person was engaged on qualifying service on a particular approved project; and

(b)  due to unforeseen circumstances, the person ceased to be engaged on qualifying service on that approved project;

the period during which the person is to be taken to have been engaged on qualifying service on that approved project shall, except for the purpose of determining whether income derived by the person is eligible foreign remuneration, be taken to include the additional period after the person ceased to be engaged on qualifying service on that approved project during which the person would, in the opinion of the Commissioner, have continued to be engaged on qualifying service on that approved project but for those unforeseen circumstances.

15.I have already concluded that the taxpayer’s qualifying service ceased in November 2006. Section 23AF(6) says I should not take the period that follows the cessation of service into account for the purposes of ascertaining eligible foreign remuneration, even if that period might be relevant for other purposes.

Conclusion

16.In the circumstances, I am satisfied the Commissioner has reached the correct view in his ruling. The objection decision must therefore be affirmed.

I certify that the 16 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe.

Signed: ........................[SGD]...................................................
  Kerri Smith

Date of Hearing  Hearing on Papers
Date of Decision  30 June 2011