Private ruling: Assessability of salary payments for leave attributable to foreign service
Published: December 2012
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Question and answer: | Will the salary payments you receive when taking personal leave and long service leave attributable to prior periods of foreign service be exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | Yes.

Relevant facts and circumstances: You were deployed overseas as an employee of an Australian government authority for various periods over several years. During your periods of overseas deployment your income was exempt from Australian income tax under section 23AG of the ITAA 1936 as it was derived during continuous periods of foreign service of not less than 91 days. During your periods of foreign service you accrued personal leave and long service leave which you have not yet used. You are now working in Australia and have arranged to take personal leave and long service leave which accrued during your periods of foreign service.

Relevant legislative provisions: Income Tax Assessment Act 1936 - Section 23AG | Income Tax Assessment Act 1936 - Section 23AG(1) | Income Tax Assessment Act 1936 - Section 23AG(7)

Reasons for decision: Summary: Subsection 23AG(1) of the ITAA 1936 provides that the 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 and 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. Specifically, paragraph 81 of Taxation Determination TD 2012/8 Income tax: what types of temporary absences from foreign service form part of a continuous period of foreign service under section 23AG of the Income Tax Assessment Act 1936? states that where recreational leave that accrues during a period of foreign service is taken at a later time when the individual is employed in Australia, the earnings will be attributable to the period of foreign service and will be foreign earnings derived from that foreign service. Therefore, the salary or wages paid for the period of leave will be exempt from income tax. In your case, you have completed various periods of foreign service that met the criteria for your earnings to be exempt from tax in Australia under section 23AG of the ITAA 1936. You accrued personal and long service leave during your periods of foreign service and intend to use some of this leave while you are working in Australia. You are taking personal and long service leave eave attributable to your periods of foreign service and therefore the salary you receive while taking this leave will be exempt from tax in Australia under section 23AG of the ITAA 1936. | Detailed Reasoning - Note: The amount of tax that is withheld from your salary payments is a matter for your employer to calculate. When discussing this matter with your employer you may use this ruling as evidence of the tax law that applies to your salary payments whilst you are taking leave that is attributable to your foreign service. Should you consider that the PAYG payment summary you subsequently receive from your employer for the 2013 income tax year does not accurately reflect your income and tax withheld you may amend it. The easiest way to do this is to lodge a Request for amendment of income tax return for individuals which is available from our website. 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 the other income derived by you. This method of calculation referred to as exemption with progression prevents the exempt income from reducing the Australian tax payable on any other income. This income needs to be included as exempt foreign salary and wage income in your Australian tax return.

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