Private ruling: Foreign income exemption
Published: December 2014
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 8 March 2012

Ruling: Question and answer | Are the salary and allowances you earned while posted to country X exempt from income tax in Australia? | No

Relevant facts and circumstances: You are an Australian resident for taxation purposes. You are employed by an Australian government department to work in country X on a project funded by DFAT. You were delivering overseas development assistance for your employer. There is a tax treaty between Australia and country X. A Memorandum of Understanding (MOU) exists but it does not outline taxation arrangements.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1936 Section 23AG | International Tax Agreement Act 1953

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. 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. Foreign earnings includes income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936). 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 29 June 2009. 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. The exemption from income tax in Australia does not apply if the income is exempt from tax in the foreign country only because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936. One of these reasons is a tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act). Australia has a tax treaty with country X, so it is necessary to consider whether your foreign earnings are exempt from income tax in country X under this agreement. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The country X Agreement is listed in section 5 of the Agreements Act. The country X agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The country X agreement operates to avoid the double taxation of income received by residents of Australia and country X. Article 19(1) of the country X Agreement provides that remuneration paid by Australia to an individual in respect of services rendered in the discharge of government functions shall be taxable only in Australia. However, such remuneration shall be taxable only in country X if the services are rendered in country X and the recipient is a resident of country X who: (a) is a citizen or national of country X; or (b) did not become a resident of country X solely for the purpose of performing the services. As you do not satisfy either of those conditions Australia retains the sole taxing right to your salary and allowances and the income is exempt from tax in country X. Consequently, one of the reasons listed in subsection 23AG (2) of the ITAA 1936 is satisfied, as your foreign earnings are exempt from income tax in country X because of a tax treaty. If your foreign employment income derived in country X is exempt for a reason other than, or in addition to the reasons listed in subsection 23AG(2) of the ITAA 1936, then it will still be exempt from taxation in Australia. For example, if your foreign employment income is not taxed in country X because there is a memorandum of understanding (MOU) or similar agreement between Australia and country X. You have advised there is a MOU which does not discuss which country has the taxing rights and does not discuss taxation exemptions or arrangements. | Detailed Reasoning - Conclusion: As your employment income derived while posted to country X is exempt from tax in country X due to the tax treaty (the country X Agreement) only , subsection 23AG(2) of the ITAA 1936 applies to deny the exemption from tax on your overseas employment income. Accordingly, your salary and allowances earned while posted to country X are not exempt from tax in Australia under subsection 23AG (1) of the ITAA 1936 and are assessable income under subsection 6-5(2) of the ITAA 1997.