Private ruling: Foreign employment income
Published: March 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the salary you receive from employment in country X exempt from income tax in Australia under section 23AG of the Income Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: Is the transfer allowance you receive in relation to your employment in country X exempt from income tax in Australia under section 23AG of the ITAA 1936? | A2: No. | Q3: Are the overseas allowances you receive in relation to your employment in country X exempt from income tax in Australia under section 23AG of the ITAA 1936? | A3: Yes.

Relevant facts and circumstances: You are an Australian resident for taxation purposes. You are an employee of an Australian aid organisation. You have been deployment to country X for a period of not less than 91 days with an option to extend the contract. In addition to your salary, you will receive various allowances including a transfer allowance and overseas allowances. The transfer allowance is paid to cover costs associated with preparing for departure and returning from deployment. The overseas allowances are paid to cover various costs and hardship incurred while working in country X. You will only take recreation leave that is accrued during your service in country X. You will not perform any work-related duties if you undertake any breaks in Australia. Australia does not have a double tax agreement with country X. Under its domestic law, country X taxes employment income. You state that your income is exempt from taxation in country X under an agreement signed between the government of Australia and the government of country X.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG | Income Tax Assessment Act 1936 Subsection 23AG(1) | Income Tax Assessment Act 1936 Subsection 23AG(1AA) | Income Tax Assessment Act 1936 Subsection 23AG(2) | Income Tax Assessment Act 1936 paragraph 23AG(2)(a) | Income Tax Assessment Act 1936 paragraph 23AG(2)(b) | Income Tax Assessment Act 1936 paragraph 23AG(2)(c) | Income Tax Assessment Act 1936 paragraph 23AG(2)(d) | Income Tax Assessment Act 1936 paragraph 23AG(2)(e) | Income Tax Assessment Act 1936 paragraph 23AG(2)(f) | Income Tax Assessment Act 1936 paragraph 23AG(2)(g) | Income Tax Assessment Act 1936 Subsection 23AG(7) | Income Tax Assessment Act 1936 Subsection 23AG(6)

Reasons for decision: Summary: Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings of an Australian resident derived during a continuous period of foreign service of not less than 91 days employment in a foreign country are exempt from tax in Australia. Foreign earnings include income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936). To qualify for the exemption the foreign earnings must be derived from the foreign service. That does not mean that the foreign earnings need to be derived at the time of engaging in foreign service. The important test is that the foreign earnings, when derived, need to be derived as a result of the undertaking of that foreign service. Section 23AG of the ITAA 1936 has been amended so that foreign employment income derived by Australian residents will only be exempt in certain circumstances. These amendments are effective from 29 June 2009. Subsection 23AG(1AA) of the ITAA 1936 provides that foreign earnings are not exempt from tax unless the continuous period of foreign service is directly attributable to any of the following: · the delivery of Australia's overseas aid program by the individual's employer · the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund · the activities of the individual's employer being a prescribed institution that is exempt from Australian tax · the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force In your case, you have been appointed to undertake a deployment to country X on an Australian aid project. As you deployment is directly attributable to the delivery of an Australian overseas aid program by your employer, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. In addition to your salary, you will receive a transfer allowance and overseas allowances. | Detailed Reasoning - Transfer allowance: The transfer allowance is paid to you to cover costs associated with preparing for departure and returning from your deployment. This allowance is not paid to cover costs arising from the performance of your foreign service. It is paid to cover costs arising before and after the foreign service. Therefore, this allowance is not considered to be derived from your foreign service. Accordingly, the transfer allowance is not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936 as it is not derived from your foreign service. | Detailed Reasoning - Salary and overseas allowances: As you receive a salary from your employment in country X, this salary is considered to be derived from your foreign service. The overseas allowances are designed to cover various costs and hardship of the foreign service. As they are paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service, they are considered to be derived from your foreign service. Therefore, your salary and overseas allowances are foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Continuous period of foreign service: Subsection 23AG(6) of the ITAA 1936 provides that certain temporary absences form part of a period of foreign service, such as recreation leave which is accrued as a result of the foreign service, other than long service leave and leave without pay or reduced pay. In your case, you will accrue recreation, personal and long service leave entitlements whilst deployed. You intend not to take any break in your employment other than the recreation leave which has accrued during your period of foreign service. If you choose to take the recreation leave in Australia or elsewhere during your period of foreign service, you will not be required to undertake any work related duties whilst on your break. This leave will form part of your foreign service, and accordingly the payments for the leave will qualify as foreign earnings. | Detailed Reasoning - Exemption of foreign income: Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available under subsection 23AG(1) of the ITAA 1936 in circumstances where an amount of foreign earnings derived from service in a foreign country is exempt from tax in the foreign country solely because of: a double tax agreement or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b) of the ITAA 1936); a law of that foreign country which generally exempts from, or does not provide for, the imposition of income tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and (d) of the ITAA 1936); and a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations (paragraphs 23AG(2)(e), (f) and (g) of the ITAA 1936). There is no double tax agreement between Australia and country X. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply. As the laws of country X provide for the imposition of income tax and do not generally exempt employment income from income tax, paragraphs 23AG(2)(c) and (d) of the ITAA 1936 will not apply. None of the other reasons in subsection 23AG(2) of the ITAA 1936 apply to your situation. However, the income you earn while working on posting is exempt from taxation in country X because of the terms of an agreement between Australia and country X. An article within the agreement provides that personnel deployed to country X shall be exempt from taxation by country X government on their pay and other emoluments. Accordingly, your salary and overseas allowances will be exempt from tax in country X for a reason other than those listed in subsection 23AG(2) of the ITAA 1936. Therefore, subsection 23AG(2) of the ITAA 1936 does not apply and as a result, your salary and overseas allowances are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Further issues for you to consider: It is important to note that foreign earnings exempt under section 23AG of the ITAA 1936 are taken into account in calculating the tax payable on other income derived by a taxpayer. This method of calculation referred to as exemption with progression prevents the exempt income from reducing the Australian tax payable on the other income. This income needs to be included as exempt foreign salary and wage income in your Australian tax return.

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