Tax Exemptions for Approved Overseas Projects

Introduction

Austrade works in conjunction with the Australian Taxation Office ('ATO') to administer the income tax exemption available under section 23AF of the Income Tax Assessment Act 1936 ('Tax Act').

Section 23AF should assist the international competitiveness of Australian companies and Governmental organisations competing to win international tenders. This is achieved by granting an exemption from Australian income tax for the earnings of Australian individuals whilst working overseas on approved projects for more than 90 days. The tax exemption should permit project costs to be at an internationally competitive level - that is, in comparison to foreign companies which may operate under similar tax concessions.

The exemption under section 23AF typically applies to projects in countries where income tax is not levied on employment income, such as in a number of Middle Eastern countries, or where income tax is not levied on foreign workers because the project is funded by an international development agency such as the World Bank or Asian Development Bank.

The Minister of Trade has delegated to Austrade the power to grant approved project status for the purposes of section 23AF. The ATO is responsible for the administration of the income tax system in accordance with the Tax Act.

Overview

The following table provides an overview of the section 23AF tax exemption.

  • Who can apply for approved project status?

The relevant applicant will be the eligible contractor. That is, the organisation that will engage the individual (as an employee or under a contract for their personal services) on the approved project.

Generally, the eligible contractor will be the Australian resident company bidding for the overseas project. However, certain Australian and foreign governments or agencies of these governments and certain organisations may also be eligible contractors. See below for more details.

  • Who benefits from the section 23AF income tax exemption?

The individual that is engaged by the eligible contractor (either as an employee or under a contract for their personal services) benefits by having certain income exempt from Australian income tax. The eligible contractor may also indirectly benefit through internationally competitive project costs.

  • What conditions must be satisfied for section 23AF income tax exemption?

To qualify for the exemption, an employee or contractor must derive eligible foreign remuneration whilst engaged in qualifying service on an approved project for a continuous period of more than 90 days.

These requirements are explained in more detail below.

Who can apply?

An exemption under section 23AF will be available where:

  • (A) The eligible contractor has applied to Austrade and the project has been confirmed in writing to be an 'approved project' for the purposes of section 23AF; and
  • (B) An individual lodges an income tax return with the ATO covering the period (in whole or in part), and claims exemption from income tax with respect to eligible foreign remuneration earned whilst engaged on the approved project.

Each of these requirements are dealt with in Part A and Part B below.

Part A - Austrade: Approved Projects

Approved project status may be granted by Austrade (being the approved delegate of the Minister for Trade) to an eligible contractor for an eligible project where Austrade is satisfied that the project is in the national interest.

An eligible project is:

  1. a project for the design, supply or installation of any equipment or facilities
  2. a project for the construction of works
  3. a project for the development of an urban area or a regional area
  4. a project for the development of agriculture
  5. a project consisting of giving advice or assistance relating to the management or administration of a government department or public utility
  6. a project included in a class of projects which may be approved, in writing, by the Minister for Trade. The Minister for Trade has approved the following classes of projects:
  • projects for the development of natural resources
  • projects for the supply of agricultural services carried out on behalf of a government, public utility or a corporation owned by a government or operating under government authority.

In determining whether a project is in the national interest, Austrade relies on the following criteria set by the Minister for Trade ('Minister's Criteria'):

  1. Applications may be submitted by:
    1.1 an Australian resident company with a registered Australian Business Number (ABN); or
    1.2 an Australian resident individual; or
    1.3 an Australian Commonwealth, state or territory government agency; or
    1.4 the government of a country other than Australia or one of its agencies that employs Australian resident individuals on the project the subject of the application
    1.5 an organisation or agency of an organisation of which Australia and a country other than Australia are members, or that is constituted by persons representing Australia and persons representing countries other than Australia.
  2. an application for an eligible project must nominate both the start and finish date for the project. An on-going contract to provide services will not generally be considered to be an eligible project.
  3. the employment of Australians on the project will bring tangible economic benefits to Australia. For example, in the form of sale of Australian goods and/or services and indirect employment benefits.
  4. the association of Australia with the project would be of benefit in terms of goodwill, prestige or some similar benefit and not run counter to Australia's political or trade relations objectives.
  5. there is foreign competition for the project, except where the project is being undertaken commercially on a government to government basis. It should be apparent that the exemption of tax will be used to make the Australian bid or application more competitive.
  6. application for an eligible project must include details of proposed foreign tax treatment and identify whether Australian participants (including companies and individuals) to be engaged on the project will be subject to foreign taxation on earnings.
  7. there will be a net foreign exchange benefit that would accrue to Australia.
  8. proposals primarily aimed at tax avoidance would not be considered to be in the national interest.
  9. proposals to supply personnel to work overseas will not constitute a project in the national interest.
  10. applications for an exemption under section 23AF made after a bid has been submitted for an overseas project will not be considered to be in the national interest since the Australian tax exemption has not assisted in the international competitiveness of the tender.
  11. any other factors that might be relevant or become apparent after consultations with relevant Commonwealth authorities.

Submitting Applications

Applications for approved project status should be submitted via email to:

Manager
Section 23AF Exemptions
Enquiries-23aftax@austrade.gov.au

For any enquiries, telephone Austrade on 13 28 78 (within Australia) or email Enquiries-23aftax@austrade.gov.au.

Download the 11 point format for 23AF applications (doc 31KB)

Part B - Australian Taxation Office: Income Tax Exemption

Whilst Austrade is responsible for granting approved project status, the ATO is responsible for the administration of the income tax system in accordance with the laws set out in the Tax Act, such as section 23AF. An income tax exemption under section 23AF is subject to the ATO being satisfied that all the requirements for exemption have been met.

Conditions for Income Tax Exemption

An income tax exemption under section 23AF is available for eligible foreign remuneration derived by an individual who is engaged in qualifying service on an approved project for a continuous period of more than 90 days.

The basic requirement is that of a continuous period of more than 90 days absence from Australia while engaged on the approved project. However, the provision also allows for the exemption to continue in some cases where a qualifying individual returns to Australia for a short period of time.

Eligible foreign remuneration is income that is directly attributable to service by an individual on an approved project, being:

Employees

(a) income consisting of salary, wages, commission, bonuses or allowances, or certain amounts received from employee share schemes, earned by a person as an employee of an eligible contractor; or

Contractors

(b) income, or certain amounts received from employee share schemes, derived by a person under a contract with an eligible contractor, being a contract that is wholly or substantially for the personal services of that person.

However, eligible foreign remuneration does not include income that is:

  • income from foreign service that qualifies as exempt under section 23AG
  • taxed in the overseas country and is exempt from Australian tax
  • exempt from tax solely because of the operation of a double taxation agreement between Australia and that country.

Eligible contractor means:

  1. a resident of Australia
  2. the Commonwealth, a State, a Territory, the government of another country or an authority of any of these bodies
  3. an organisation:
    • of which Australia and other countries are members
    • or that is constituted by persons representing Australia and other countries
  4. an agency of an organisation to which paragraph 3 applies.

Qualifying service on an approved project is the time that an individual:

  1. is outside Australia and is engaged in the performance of personal services in connection with the approved project
  2. is travelling between Australia and the site of the approved project

Qualifying service may also include the time that an individual:

  1. cannot work on the approved project due to unforeseen circumstances, including accident or illness
  2. is on leave (other than long service leave) that accrued whilst working on the approved project.

Approved project means a project that is approved in writing by the Minister for Trade or approved delegate (currently Austrade).

Individual Income Tax Returns and Assessment

Individuals who are entitled to full or partial exemption under section 23AF will need to lodge income tax returns in Australia as usual. Income that is eligible foreign remuneration should be included in the individual's tax return as exempt foreign income.

Note: Approved overseas projects income is taken into account in calculating Australian tax payable on other income derived by the individual. Tax on the non-exempt income is calculated by applying a notional average rate of tax payable on the sum of the exempt and non-exempt income.

Other Tax Exemptions

The Tax Act also provides for a tax exemption to employees engaged in foreign service. In particular, a tax exemption on earnings derived by employees engaged in foreign service may be available under section 23AG of the Tax Act if foreign tax is payable on the foreign earnings.

The tax exemption under section 23AG is only available for earnings of an employee.

A tax exemption is not available under section 23AF for income to which section 23AG applies.

Information should be sought from the ATO on the application of section 23AG to your circumstances.

Require more information?

To read the full text of sections 23AF and 23AG of the Income Tax Assessment Act, please visit the following links on the ATO website:

For information relating to the application process and approved project status under section 23AF, please telephone Austrade on 13 28 78 (within Australia), or email Enquiries-23aftax@austrade.gov.au

For more information on income tax and the exemption requirements in sections 23AF and 23AG, visit www.ato.gov.au. Within Australia you can also telephone the ATO on:

  • 13 28 61 (for individuals)
  • 13 28 66 (for businesses)
  • 13 72 86 (for registered tax professionals).