ATO ID 2011/36: Overseas employment exemption: whether foreign earnings 'generally exempt' from income tax in a foreign country
Date of decision: 28 April 2011
Year of income: Year ended 30 June 2011
Business line: Public Groups and International

Issue
For paragraph 23AG(2)(c) of the Income Tax Assessment Act 1936 (ITAA 1936), is income derived in the capacity of an employee 'generally exempt from income tax' under the provisions of a law of a foreign country where that foreign law only exempts the income from tax in the foreign country for certain persons delivering certain services?

Decision
No. For paragraph 23AG(2)(c) of the ITAA 1936, income derived in the capacity of an employee is not 'generally exempt from income tax' under the provisions of a law of a foreign country where that foreign law only exempts the income from tax in the foreign country for certain persons delivering certain services.

Facts
The taxpayer is a natural person who was an Australian resident for income tax purposes during the 2006-07 and 2007-08 income years. In those years the taxpayer derived foreign earnings in the capacity of an employee, performing certain security services in a foreign country for a period of not less than 91 days. Income derived in the capacity of an employee was taxed in that foreign country. However, under the provisions of a law of that foreign country, particular persons who were not normally resident in that country, and who were involved in the supply of humanitarian aid, construction and reconstruction services and security services, were afforded an exemption from tax on their earnings. As a result, the taxpayer's earnings from those services in that foreign country were exempt from tax in that foreign country. This was the sole reason the taxpayer's income was exempt from tax in that foreign country.

Reasons for decision
Summary: All section references are to sections of the ITAA 1936. Subsection 23AG(1) provides that where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived will be exempt from tax in Australia. Subsection 23AG(7) provides that 'foreign service' includes service in a foreign country in the capacity as an employee, and 'foreign earnings' includes income consisting of salary and wages. However the exemption under subsection 23AG(1) does not apply if the foreign earnings are exempt from foreign tax 'only because of any of the following' reasons set out in subsection 23AG(2). Paragraph 23AG(2)(c) applies if the income falls into at least one of three categories of income that are, by a provision of the foreign country's law, 'generally exempt' from income tax. The three categories of income are: The categories of income prescribed in paragraph 23AG(2)(c) are not limited to a particular subset of employment, personal services or similar income. Therefore, it is all 'income derived in the capacity of an employee' that falls within the first category of income and, for the purposes of subparagraph 23AG(2)(c)(i), it is this entire category of income that must be 'generally exempt' from income tax under the provisions of a law of the foreign country. The word 'generally' is not defined by the ITAA 1936 or the Income Tax Assessment Act 1997 . Therefore, 'generally' should be construed according to its ordinary meaning, and within the context in which it appears. According to the Macquarie Dictionary , the word 'generally' can be defined as: When applied to the word 'generally' in paragraph 23AG(2)(c), these definitions indicate that the relevant taxpayer's income must be exempt from tax in the foreign country under provisions of a law of the foreign country that give a broad based exemption to income derived in the capacity of an employee (or to income from personal services, or similar income). Consistent with the meanings of 'generally' above, in relation to employment income the exemption must 'usually, commonly or ordinarily' apply to income derived in the capacity of an employee; it must apply for 'the most part' to income derived in that capacity and 'without reference to particular' persons or types of service. Support for this interpretation can be found in the Explanatory Memorandum (EM) to the Taxation Laws Amendment Bill (No. 2) 1991 which introduced the existing subsection 23AG(2). A stated objective of the 1991 amendments was to 'modify to a qualified extent the [then] requirement in section 23AG that foreign earnings not be exempt from income tax in the source country so that, in some circumstance (sic), income that is exempt in the source country will ... also be exempt in Australia' (refer paragraph 1, page 79 of the EM). This wording clearly contemplates that there will be circumstances where income which is exempt in the source country will also be exempt in Australia pursuant to section 23AG. Consistent with this intent, paragraph 23AG(2)(c) makes clear that an exemption under section 23AG may still be available in circumstances where the source country does not provide a general exemption to employment income (or to personal services or similar income). In the present case, income derived in the capacity of an employee is taxed in the foreign country. Although a provision of the foreign country's tax laws exempted from tax the employment earnings derived by certain individuals (such as the taxpayer) from specified services (such as those performed by the taxpayer), the Commissioner considers such an exemption is not a 'general' exemption afforded to income derived in the capacity of an employee (as required by paragraph 23AG(2)(c)). Accordingly, paragraph 23AG(2)(c) does not apply to deny the section 23AG exemption to the earnings of the taxpayer.

Legislative references: Income Tax Assessment Act 1936 section 23AG subsection 23AG(1) subsection 23AG(1AA) subsection 23AG(2) subsection 23AG(7) paragraph 23AG(2)(c)
Related public rulings and determinations: Taxation Determination TD 2005/14 | Taxation Determination TD 2005/15
Other references: Explanatory Memorandum to Taxation Laws Amendment Bill (No. 2) 1991
Subject references: Foreign source income Exempt income