Private ruling: Foreign employment income
Published: June 2012
Ruling period: Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2012

Ruling: Q1: Are the salary and allowances you receive from employment in Country X exempt from income tax in Australia under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: No.

Relevant facts and circumstances: You are an Australian resident for taxation purposes. You are employed by a Country Y company to work in Country X. You are working on a project approved by the government aid organisation of Country Y. You commenced employment in the 2007-08 income year. Your current assignment is for X years, which may be extended. You have only taken breaks which were accrued as a result of your foreign service. You did not work in Australia during your breaks. You receive salary and allowances, including hardship allowances and danger pay. You do not pay tax in Country X as the project you are working on is an approved project by the government of Country Y. There is no tax treaty between Australia and Country X. The laws of Country X provide for the imposition of income tax on employment income and do not generally exempt such income from tax. The terms and conditions of your employment contract form part of the scheme being considered.

Relevant legislative provisions: Subsection 23AG(1) of the Income Tax Assessment Act 1936 | Subsection 23AG(7) of the Income Tax Assessment Act 1936 | Section 23AG of the Income Tax Assessment Act 1936 | Subsection 23AG(1AA) of the Income Tax Assessment Act 1936 | Paragraph 23AG(1AA)(a) of the Income Tax Assessment Act 1936 | Paragraph 23AG(1AA)(b) of the Income Tax Assessment Act 1936 | Paragraph 23AG(1AA)(c) of the Income Tax Assessment Act 1936 | Paragraph 23AG(1AA)(d) of the Income Tax Assessment Act 1936 Subsection 30-80(1) of the Income Tax Assessment Act 1997 | Paragraph 50-50(c) of the Income Tax Assessment Act 1997 | Paragraph 50-50(d) of the Income Tax Assessment Act 1997 | Paragraph 30-85(2)(a) of the Income Tax Assessment Act 1997 | Paragraph 30-85(2)(b) of the Income Tax Assessment Act 1997 Section 30-86 of the Income Tax Assessment Act 1997 | Section 50-5 of the Income Tax Assessment Act 1997 | Regulation 50-50.01 of the Income Tax Assessment Regulations 1997 | Regulation 50-50.02 of the Income Tax Assessment Regulations 1997

Reasons for decision: Summary: Subsection 23AG(1) of the Income Tax Assessment Act 1936 (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 salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936). The foreign earnings must be derived from the foreign service, though not necessarily derived during the period of 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 1 July 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: a) the delivery of Australian official development assistance by the person's employer (b) the activities of the person's employer in operating a public fund covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the Income Tax Assessment Act 1997 (ITAA 1997)(international affairs deductible gift recipients); (c) the activities of the person's employer, if the employer is exempt from income tax because of paragraphs 50-50(c) or (d) of the ITAA 1997 (prescribed institutions located or pursuing objectives outside Australia); (d) the person's deployment outside Australia as a member of a disciplined force by: (i) the Commonwealth, a State or a Territory; or (ii) an authority of the Commonwealth, a State or a Territory; (e) an activity of a kind specified in the regulations. | Detailed Reasoning - Australian official development assistance: The Explanatory Memorandum (EM) which accompanied the Tax Laws Amendment (2009 Budget Measures No 1) Act 2009 (which implemented subsection 23AG(1AA) of the ITAA 1936) states that Australian official development assistance is Australian government assistance intended to reduce poverty and promote sustainable development in developing countries provided directly under programs overseen by the Australian Department of Foreign Affairs and Trade (DFAT) and/or the Australian Agency for International Development (AusAID). AusAID also oversees the delivery of Australian official development assistance under contract with both Australian and international service providers. Australian residents employed to carry out diplomatic and consular activities are performing services of benefit to the Australian government, and therefore their service is not directly attributable to the delivery of Australian official development assistance. In your case, your deployment is not under a program overseen by DFAT or AusAID, or under contract to AusAID, and therefore does not qualify as Australian official development assistance. Employer operating a developing country relief fund or a public disaster relief fund According to the EM, this applies where the continuous foreign service period of a resident individual is directly attributable to the activities of the individual's employer in operating a public fund covered by item 9.1.1 or item 9.1.2 in the table in subsection 30-80(1) of the ITAA 1997. Gifts or donations made to these public funds are tax deductible for income tax purposes to the donor. Item 9.1.1 of subsection 30-80(1) of the ITAA 1997 applies to a public fund declared by the Treasurer to be a developing country relief fund. A developing country relief fund is a fund established by an organisation solely for the purpose of providing relief to people of a developing country. The organisation must be an approved organisation as declared by the Minister for Foreign Affairs and the country must be a developing country as declared by the Minister for Foreign Affairs. These conditions are contained in paragraphs 30-85(2)(a) and (b) of the ITAA 1997 respectively. Item 9.1.2 of subsection 30-80(1) applies to a public fund operated by a public benevolent institution solely to provide relief to people of a developed country who are in distress as a result of a disaster (a public disaster relief fund). A public disaster relief fund is a fund established and operated by a public benevolent institution in response to an event recognised as a disaster by the Minister for Foreign Affairs. The recognition requirement is contained in section 30-86 of the ITAA 1997. A list of deductible gift recipients is available on the Australian Business Register. Neither your employer nor the aid organisation are on the register. Employer exempt from income tax under paragraphs 50-50(c) or (d) The exemption also applies where the continuous foreign service period of a resident individual is directly attributable to the activities of the individual's employer if the employer is exempt from income tax because of paragraphs 50-50(c) or (d) of the ITAA 1997. This applies to a prescribed charitable or religious institution that is exempt from Australian income tax pursuant to item 1.1 or 1.2 of section 50-5 of the ITAA 1997. A list of prescribed institutions for the purposes of paragraph 50-50(c) of the ITAA 1997 is contained in regulation 50-50.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997). A list of prescribed institutions for the purposes of paragraph 50-50(d) of the ITAA 1997 is contained in regulation 50-50.02 of ITAR 1997. In your case, neither your employer nor the aid organisation are on the list of charitable and religious institutions contained in regulations 50-50.01 or 50-50.02 of the ITAR 1997. They are therefore not prescribed institutions exempt from income tax by virtue of paragraphs 50-50(c) or (d) of the ITAA 1997. | Detailed Reasoning - Deployed as member of disciplined force: The EM states that the phrase is intended to mean a defence force (including a peacekeeping force) that is engaged in a non-warlike operation. It also covers a member of a police force, and applies to members of the Australian Federal Police deployed on an International Deployment Group mission who are subject to Commanders Orders to achieve operational policing outcomes. In order for a person's deployment outside Australia as a member of a disciplined force to be by the Commonwealth, a State or Territory, it must be directly affected by an Australian government or an authority thereof. In your case, you are not deployed as a member of the defence forces or Australian Federal Police. | Detailed Reasoning - Activity of a kind specified in the regulations: This is to allow the scope of section 23AG of the ITAA 1936 to be extended. There are currently no regulations gazetted. In your case, you do not satisfy paragraphs (a), (b), (c), or (d) of subsection 23AG(1AA) of the ITAA 1936 as your deployment is not directly attributable to; · an Australian overseas aid program by your employer; · your employer operating a developing country relief fund or a public disaster relief fund as an international affairs deductible gift recipient; · activities by your employer exempt from income tax as a prescribed institution because of paragraphs 50-50(c) or (d) of the ITAA 1997. · your deployment as a member of a disciplined force such as the Australian defence forces and the Australian Federal Police. Consequently, as your foreign employment income is not exempt under any of the paragraphs of subsection 23AG(1AA) of the ITAA 1936, it is not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.

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