Private ruling: Foreign employment income
Date of advice: 24 September 2015
Published: September 2015
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Are the allowances you received from a volunteer programme for volunteer work in country A exempt from tax under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You took part in a volunteer program as an Advocacy Support Mentor in country A for approximately 10 months. The program is funded by a relevant department. You were paid a volunteer allowance of $ to cover your living, accommodation and settlement/resettlement expenses. You did not pay tax in country A and did not have any tax withheld from your allowance. There is a memorandum of understanding between Australia and country A that exempts the income from taxation in country A. The overseas country normally taxes salary and wage income.

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

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 during the income year. Allowances are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not included in assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act (ITAA 1936), which deals with foreign earnings. Subsection 23AG(1) of the ITAA 1936 provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from tax in Australia. Subsection 23AG(1AA) of the ITAA 1936 provides that those foreign earnings will not be exempt under subsection 23AG(1) of the ITAA 1936 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 taxpayer's employer (generally provided by AusAID or the Department of Foreign Affairs and Trade); (b) the activities of the taxpayer's employer in operating a public fund covered by the deductible gift recipient categories overseas aid fund and developed country disaster relief fund; (c) the activities of the taxpayer's employer where they are a charitable institution or religious institution which is income tax exempt because they are a prescribed institution located outside Australia or pursuing objectives principally outside Australia; (d) the taxpayer's deployment outside Australia as a member of a disciplined force of Australia (generally considered to be the ADF or Australian Federal Police); or (e) an activity of a kind specified in the regulations. Foreign service includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes income consisting of salary, wages, bonuses and allowances (subsection 23AG(7) of the ITAA 1936). The allowances you earned while a volunteer under the program is administered by a relevant department and therefore falls under the first category above. In accordance with subsection 23AG(2) of the ITAA 1936, the exemption under subsection 23AG(1) of the ITAA 1936 will not apply if the income is exempt from income tax in the foreign country only because of one or more of the following conditions: • a tax treaty with Australia or a law giving effect to a treaty agreement • the foreign country exempts from income tax, or does not provide for the imposition of income tax on, income derived in the capacity of an employee, income from personal services or similar income, or • a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies. The employment income you earned in country A is exempt from taxation in country A in accordance with the provisions of the Memorandum of Understanding between the Australian Government and the Government of Country A. The exemption provided does not fall under any of the other exemption categories under subsection 23AG(2) of the ITAA 1936. You satisfy all the conditions for exemption under section 23AG of the ITAA 1936. Accordingly, the overseas allowances you received from the program in country A are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Declaring exempt foreign income in your tax return: Although income subject to exemption under section 23AG of the ITAA 1936 is not taxable in Australia, the amount still needs to be declared as 'exempt foreign employment income' at the appropriate label in your tax return. This is because the amount of exempt foreign earnings it taken into account in calculating the tax payable on other income that you derive.