Private ruling: Exempt income
Date of advice: 14 December 2016
Published: May 2017
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 2 February 2015

Ruling: Question and answer: | Are the salary and allowances that you received from your foreign service in Country Y assessable in Australia? | Yes.

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You are employed by an Australian government agency. You were engaged in continuous foreign service of greater than 91 days in Country Y. While serving in Country Y you were the holder of a diplomatic passport. Your foreign service was directly attributable to the delivery of Australian official development assistance by your employer. There is a double tax agreement (DTA) between the Government of Australia and the Government of Country Y. There is a treaty on Development Co-operation between the Government of Australia and the Government of Country Y. You have derived salary and allowances as a consequence of your foreign service. Your employer has advised that, as confirmed by a Third Party Note (TPN) to the Government of Country Y, from 1 July 2014 the MoU does not apply to employees deployed to Country Y and accredited in Country Y as diplomatic or consular agents under the Relevant Convention on Diplomatic Relations 1961 or the Relevant Convention on Consular Relations 1963.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | 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)

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 allowances 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. In order to qualify for an exemption from Australian income tax under section 23AG of the ITAA 1936, a number of provisions must be satisfied. Notwithstanding the requirement to satisfy the provisions contained under subsections 23AG(1), 23AG(1A) and 23AG(1AA) of the ITAA 1936, 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) a law of the foreign country giving effect to a double tax agreement; (b) a double tax agreement; (c) provisions of a law of the foreign country under which income covered by any of the following categories is generally exempt from income tax: (i) income derived in the capacity of an employee; (ii) income from personal services; (iii) similar income; (d) the law of the foreign country does not provide for the imposition of income tax on one or more of the categories of income mentioned in paragraph (c); (e) a law of the foreign country corresponding to the International Organisations (Privileges and Immunities) Act 1963 or to the regulations under that Act; (f) an international agreement to which Australia is a party and that deals with: (i) diplomatic or consular privileges and immunities; or (ii) privileges and immunities in relation to persons connected with international organisations; (g) a law of the foreign country giving effect to an agreement covered by paragraph (f). | Detailed Reasoning - Country Y Double Tax Agreement (DTA): There is a DTA between the Governments of Australia and Country Y (the agreement), which operates to avoid the double taxation of income received by residents of Australia and Country Y. An Article of the Country Y 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 Y if the services are rendered in Country Y and the individual is a citizen of Country Y, or did not become a resident of Country Y solely for the purpose of performing the services. As you are an individual who is paid by the Australian Government in respect of services rendered in the discharge of governmental functions in Country Y, and you are not a citizen of Country Y the salaries and wages derived will be only taxable in Australia. Therefore your income is not taxable in Country Y under subsections 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936. | Detailed Reasoning - Relevant Convention on Diplomatic Relations (1961) or the Relevant Convention on Consular Relations (1963): You were the holder of a diplomatic passport while employed in Country Y. Therefore the salary and allowances that you received for your foreign service in Country Y are exempt from taxation under the terms of an international agreement, being the Relevant Convention on Diplomatic Relations (1961) or the Relevant Convention on Consular Relations (1963).These exemptions also fall within the items listed in paragraph 23AG(2)(e) and 23AG(2)(f) of the ITAA 1936. In order for subsection 23AG(2) of the ITAA 1936 not to apply to deny an exemption under section 23AG of the ITAA 1936, the salaries and allowances that you received must be exempt from taxation in Country Y for a reason other than those listed under subsection 23AG(2) of the ITAA 1936. | Detailed Reasoning - The Treaty on Development Co-operation between the Government of Australia and the Government of the Country Y (MoU): A reason that may apply to exempt your salaries and allowances from being exempt from taxation in Country Y that would outside the provisions listed under subsection 23(2) of the ITAA 1936 would be if those salaries and were exempt due to the operation of the Treaty on Development Co-operation between the Government of Australia and the Government of Country Y (MoU). Article 12(1)(a) of the MoU provides that the Government of Country Y will allow an exemption from income or other taxes on salaries and wages for the recruitment and employment by the Government of Australia or its contractors, of personnel required for the activities to which this Annex applies. The Treaty on Development Co-operation between the Government of Australia and the Government of Country Y (MoU), in Subclause 1(2) of the Annexure defines: “Australian Project personnel” as persons who are not nationals or permanent residents of Country Y who are working in Country Y on an activity on which this Annex applies and whose salaries or other costs are funded from the Australian contribution to the activity. The term “activity” is defined in subclause 1(5) to mean: 'includes programs and projects arranged pursuant to the Treaty on Development Co-operation, and all other development co-operation activities arranged between the Parties;'. Your employer has advised that, as confirmed by a Third Party Note (TPN) to the Government of Country Y, from 1 July 2014 the MoU does not apply to DFAT (former AusAID) employees deployed to Country Y and accredited in Country Y as diplomatic or consular agents under the Relevant Convention on Diplomatic Relations 1961 or Relevant Convention on Consular Relations 1963. The TPN was the means by which there was a formal communication clarifying the scope of the MoU. The text of the MoU was not amended. The communication via the TPN demonstrates the understanding of the two Governments on this point and we consider this establishes as a fact that you were not covered by the MoU. As you were not covered by the MoU, the only reasons that salary and allowances were exempt from taxation in Country Y was the operation of the DTA between the Governments of Australia and Country Y and the Relevant Convention on Diplomatic Relations 1961 or Relevant Convention on Consular Relations 1963. Therefore, as your salary and allowances were not exempt from taxation in Country Y for a reason other than those listed under subsection 23AG(2) of the ITAA 1936, this provision will operate to deny you an exemption from Australian income tax under section 23AG of the ITAA 1936. Accordingly, the salaries and allowances that you received from your foreign service in Country Y are assessable in Australia under subsection 6-5(2) of the ITAA 1997.