Private ruling: exempt foreign sourced income
Date of advice: 12 September 2016
Published: November 2016
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Questions and answers: | 1. Are the salary and wages that you derived from your foreign service in country X for period A assessable in Australia? | No. | 2. Are the salary and wages that you derived from your foreign in country X for period B assessable in Australia? | Yes.

Relevant facts and circumstances: You are an Australian citizen and an Australian resident for income tax purposes. You departed Australia to commence an employment contract for entity Z on a project in country X. The project was funded by various stakeholders at various levels. You were engaged in foreign service in country X for various periods followed by periods of absences. The terms of your employment contract are such that your daily remuneration rate had been calculated to incorporate any entitlements to sick, recreational or long service leave. The periods in between your foreign service were spent in Australia with family and friends. When you returned to Australia it was strictly for holiday purposes and you were not engaged in any employment activities. There is a double tax agreement between Australia and country X. Salaries and wages of foreign international staff working on the project in country X are not subject to taxation in country X due to an official agreement between the stakeholders of the project and the Government of country X. You have had Australian PAYG withholding omitted from your salary and wages.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | 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 Subsection 23AG(6A)

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Salary and wages are ordinary income for the purpose of subsection 6-5(2) of the ITAA 1997. Section 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in the list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with exempt foreign employment income. Subsection 23AG(1) of the ITAA 1936 provides an exemption from Australian tax on the foreign earnings derived by an Australian resident individual from foreign service in which they have been engaged continuously for at least 91 days. Subsection 23AG(6) of the ITAA 1936 provides, a period during which a person is engaged in foreign service includes any period during which the person is, in accordance with the terms and conditions of that service: (a) absent on recreation leave, other than: (i) leave wholly or partly attributable to a period of service or employment other than that foreign service; (ii) long service leave, furlough, extended leave or leave of a similar kind (however described); or (iii) leave without pay or on reduced pay; or (b) absent from work because of accident or illness. The terms and conditions of your employment contract did not provide for any sick, recreational or long service leave. Therefore under subsection 23AG(6) of the ITAA 1936, the periods of absences cannot be included in your periods of foreign service. Subsection 23AG(6A) of the ITAA1936 provides that 2 or more periods in which a person has been engaged in foreign service are together taken to constitute a continuous period of foreign service until: a) the end of the last of the 2 or more periods; or b) a time (if any), since the start of the first of the 2 or more periods, when the person's total period of absence exceeds 1/6 of the person's total period of foreign service. In your case you were an Australian resident for income tax purposes and were engaged in foreign service in country X for a number of periods however only period (period A) qualifies as a continuous period of foreign under subsection 23AG(6A). Subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the following: • delivery of Australian official development assistance by your employer; • activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund); • activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia; or • deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force. You were contracted by an corporate entity to work on a project in country X. The project your employer was engaged to deliver was Australian official development assistance funded by the greater part by AusAid. As your foreign service directly relates to the delivery of Australian official development assistance, 23AG(1AA) of the ITAA 1936 will apply to exempt from tax any income derived as a result of your foreign service. Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available in circumstances where an amount of foreign earnings derived 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)); • 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)); and • a law or international agreement dealing with diplomatic or consular privileges and immunities, or privileges and immunities of persons connected with international organisations (paragraphs 23AG(2)(e), (f) and (g)). If your foreign employment income is exempt for a reason other than, or in addition to, the specific conditions listed above, then subsection 23AG(2) of the ITAA 1936 will not operate to deny you an exemption from income tax in Australia. There is a double tax agreement between Australia and country X (the agreement) which operates to avoid the double taxation of income received by residents of Australia and country X. Article 15 of the agreement allows country X Authorities to tax the income of Australian residents whose employment is exercised in country X where (in addition to other conditions) a taxpayer is present in country X for a period of 90 days or more during an income year. Your foreign earnings are not exempt from taxation by the country X Authorities due to the double tax agreement, as your foreign service in country X exceeded 90 days. However the employment income that you derived from your foreign service was exempt from taxation by the country X Authorities due to an official agreement between the stakeholders of the project and the Government of country X. As such, your foreign employment income is exempt for a reason other than those listed in subsection 23AG(2) of the ITAA 1936. Therefore, subsection 23AG(2) of the ITAA 1936 will not operate to deny an exemption from taxation in Australia of the foreign sourced income derived for period A. Therefore, you satisfy all the exemption conditions and your foreign employment income derived during period B is exempt from tax in Australia under section 23AG of the ITAA 1936. | Detailed Reasoning - Conclusion: Accordingly, as you satisfied the provisions under section 23AG of the ITAA 1997 for period B of foreign service employment, the employment income that you derived for this period is exempt from income tax in Australia. However, as your period of foreign service period A did not satisfy the provisions under 23AG of the ITAA 1936, the income derived for this period is assessable in Australia under section 6-5(2) of the ITAA 1997.