Private ruling: Overseas Income
Published: May 2012
Date scheme commenced: 1 July 2008.

Ruling: Q1: Is the salary you receive from employment in Country A exempt from income tax in Australia under section 23AG of Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: Are the allowances you receive in relation to employment in Country A exempt from income tax in Australia under section 23AG of the ITAA 1936? | A2: Yes. Income periods: Year ending 30 June 2012 Year ended 30 June 2013 Year ended 30 June 2014 The scheme commenced on: 1 July 2008.


Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 23AG(1) | Income Tax Assessment Act 1936 Subsection 23AG(7) | Income Tax Assessment Act 1936 Section 23AG | Income Tax Assessment Act 1936 Subsection 23AG(1AA) | Income Tax Assessment Act 1936 Subsection 23AG(2) | Income Tax Assessment Act 1936 Paragraph 23AG(2)(b) | International Tax Agreements Act 1953 Section 3AAA | International Tax Agreements Act 1953 Section 5 Facts: | You are an Australian resident for taxation purposes. | You've been deployed in a particular role for a specific Australian agency project in Country A since some time in the 2008-09 income year. This was initially for a period of two years, however, it has been extended. | Your particular role involves specific duties for a project. This project is administered on behalf of an Australian Government agency in consultation with the Australian Agency for International Development (AusAID) and the Australian Department of Foreign Affairs and Trade (DFAT). | In addition to your salary, you will also receive allowances which relate to your overseas deployment. | You do not intend to take any breaks in your deployment other than recreation leave accrued as a result of your foreign service. | You will not be performing any work-related duties should you undertake this break in Australia. | Australia has a tax treaty with Country A. | Country A taxes employment income under their domestic law. | Your foreign employment income is exempt from income tax in Country A under the terms of the Development Co-operation Memorandum of Understanding between Australia and Country A (MOU).

Reasons for decision: Summary: Subsection 23AG(1) of the (ITAA 1936) provides that 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 or 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. 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 foreign earnings are not exempt from tax unless the continuous period of foreign service is directly attributable to any of the following: · the delivery of Australia's overseas aid program by the individual's employer; · the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund; · the activities of the individual's employer being a prescribed institution that is exempt from Australian tax; or · the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force. In your case, you've been deployed in a particular role to a specific Australian agency project in Country A. Your role requires specific duties for this project. This project is administered on behalf of an Australian Government agency in consultation with AusAID and DFAT. Therefore, as your deployment is seen to be directly attributable to the delivery of an Australian overseas aid program by AusAID, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. In addition to your salary, you receive some overseas allowances. Salary and Overseas Allowances As you receive a salary from your employment in Country A, this salary is considered to be derived from your foreign service. The overseas allowances are designed to cover various costs and hardship of the foreign service. As they are paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service, they are considered to be derived from your foreign service. Therefore, your salary and overseas allowances are foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936. The exemption 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 (paragraph 23AG(2)(b) of the ITAA 1936). Australia has a tax treaty with Country A (Country A Agreement) which operates to avoid the double taxation of income received by residents of Australia and Country A. An Article of the Country A Agreement provides that remuneration paid by Australia to any individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia. However, such remuneration will be taxable only in Country A if the services are rendered in Country A and the individual is a citizen of Country A, or did not become a resident of Country A solely for the purpose of performing the services. The employment income you receive in relation to your deployment to Country A is taxable only in Australia under an Article of the Country A Agreement as you are an Australian resident and the income is paid by Australia in respect of services rendered in the discharge of governmental functions. As the employment income you receive while posted to Country A is exempt from tax in Country A because of the operation of a tax treaty, paragraph 23AG(2)(b) of the ITAA 1936 would normally apply and the income would therefore not be exempt from tax under subsection 23AG(1) of the ITAA 1936. However, the income you earn while on posting is also exempt from tax in Country A because of the terms of the General Agreement on Development Cooperation between the Government of Australia and the Government of the Republic of Country A. The exemption provided by the agreement does not fall under any of the other exemption categories under subsection 23AG(2) of the ITAA 1936. You satisfy the conditions for exemption under section 23AG of the ITAA 1936. Accordingly, the salary and overseas allowances you receive from employment in Country A are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. Note 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 other income derived by a taxpayer. This method of calculation referred to as exemption with progression prevents the exempt income from reducing the Australian tax payable on the other income. This income needs to be included as exempt foreign salary and wage income in your Australian tax return.

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