Private ruling: Long service leave - 23AG
Published: September 2017
Ruling period: Financial year ended 30 June 2016 | Financial year ended 30 June 2017
Date scheme commenced: 1 July 2015

Ruling: Question and Answer | Are amounts of long service leave accrued from qualifying overseas employment exempt under Section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | Yes

Relevant facts and circumstances: You are employed by an Australian public agency. You were deployed to foreign locations between 1 July 20XX and 30 June 20XX: Your ordinary salary and wages were exempt under Section 23AG of the ITAA

Relevant legislative provisions: Section 23AG of the Income Tax Assessment Act 1936

Reasons for decision: Summary: Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings are exempt from tax where all of the following requirements are satisfied: ● the taxpayer is a resident of Australia and a natural person; ● the taxpayer is engaged in foreign service; ● the foreign service is for a continuous period of at least 91 days; ● the taxpayer derives foreign earnings from that foreign service; ● the foreign service is directly attributable to an activity that is listed in subsection 23AG(1AA) of the ITAA 1936; and ● the foreign earnings are not exempt from income tax in the foreign country only because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936. 'Foreign earnings' includes income consisting of salary and wages (including payments for LSL), while 'foreign service' includes service in a foreign country in the capacity as an employee (subsection 23AG(7) of the ITAA 1936). As LSL accrues on a daily basis, the portion attributable to the service performed overseas can be separated from the portion attributable to service performed in Australia. Payments for LSL that accrue during a period of foreign service qualify as 'foreign earnings' derived from that foreign service. This will apply regardless of whether a taxpayer takes the LSL during their period of foreign service, takes the LSL after their foreign service has been completed, or does not take the LSL but instead receives a lump sum payment on the termination of their employment for the unused LSL. Providing that the payment (or any part of it) is for LSL that accrued during the period of foreign service, the payment (or the relevant portion of it) is foreign earnings and will be exempt from income tax under subsection 23AG(1) of the ITAA 1936 on condition that all of the other requirements of section 23AG of the ITAA 1936 are satisfied. The amount of tax (if any) payable in respect of the remaining, non-exempt, portion of the lump sum payment received on termination of employment for unused LSL, and any other income, is calculated pursuant to subsection 23AG(3) of the ITAA 1936.