Private ruling: Exempt foreign employment income
Date of advice: 18 May 2015
Published: May 2015
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Question and answer | Are the salary and allowances you receive, that are directly attributable to your foreign service, exempt from income tax in Australia? | Yes.

Relevant facts and circumstances: You are an employee or an Australian organisation. You were assigned to Country X on a regional assistance mission. You will remain an Australian resident for tax purposes whilst overseas. In addition to your salary, you receive the following allowances fortnightly: ● Cost of posting allowance ● Cost of living allowance ● Hardship allowance While on assignment, you remain an officer of your domestic employer. You have been engaged in service in Country X for a continuous period in excess of 91 days. Within the framework that you work you perform the following functions and duties: ● provide whole-of-mission advice to your mission organisation on activities and assistance in Country X ● Coordinate and liaise with other mission partners, agencies and stakeholders (including Country X government) to ensure complementarity, visibility and coherence of the mission’s activities and assistance in Country X ● Provide reporting and support on the full range of the mission’s activities and assistance in Country X ● Manage post communications issues and provide support on post security issues ● Assist with the mission’s public affairs and community outreach programs ● Support the executive staff in any other area as required. Under Country X legislation the income you earn while in Country X is exempt from income tax in the Country X as you are a member of the mission’s visiting contingent.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG | Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-15 | Income Tax Assessment Act 1997 Section 11-15

Reasons for decision: Summary: Salary 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 overseas employment income. 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. You have been engaged in foreign service for a continuous period of not less than 91 days. Therefore your earnings derived from that foreign service are exempt from tax in Australia, subject to other provisions listed under section 23AG of the ITAA 1936. Subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the following: ● delivery of Australian official development assistance by your employer; ● activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund); ● activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia; or ● deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force. The functions and duties of your role directly relate to the delivery of Australian official development assistance. Therefore, 23AG(1AA) of the ITAA 1936 applies to exempt from tax any income earned as a result of your foreign service. Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available under subsection 23AG(1) of the ITAA 1936 in circumstances where an amount of foreign earnings derived from service in a foreign country is exempt from tax in the foreign country solely because of: ● a law of the country giving effect to a double taxation agreement (paragraph 23AG(2)(a) of the ITAA 1936); ● a double taxation agreement (paragraph 23AG(2)(b) of the ITAA 1936); ● a law of the foreign country generally exempts from, or does not provide for the imposition of income tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and (d) of the ITAA 1936), or ● a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies (paragraphs 23AG(2)(e), (f) and (g) of the ITAA 1936). Under Country X legislation the income you earn while in Country X is exempt from income tax in Country X as you are a member of the mission’s visiting contingent. This does not meet any of the reasons set out in subsection 23AG(2) of the ITAA 1936. Therefore, subsection 23AG(2) of the ITAA 1936 will not apply to deny the exemption under subsection 23AG(1) of the ITAA 1936, as your foreign earnings are exempt in Country X for a reason other than those listed in subsection 23AG(2) of the ITAA 1936. The salary that you receive that is directly attributable to your foreign service in Country X is therefore exempt from income tax in Australia. Allowances Subject to the additional conditions imposed under subsection 23AG(1AA) of the ITAA 1936, 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(7) of the ITAA 1936 provides that a person’s foreign earnings include income consisting of salary, wages, bonuses or allowances. To qualify for the exemption under subsection 23AG(1), the foreign earnings must be derived from the foreign service. This does not mean that the foreign earnings need to be derived at the time of engaging in foreign service. What is required is that the foreign earnings, when derived, are as result of the undertaking of that foreign service. In addition to your salary, you also receive the following allowances: ● Cost of posting allowance ● Cost of living allowance ● Hardship allowance As the overseas allowances were paid to cover costs incurred while you were performing the foreign service, they are considered to be derived from your foreign service. The allowances that you receive are directly attributable to your foreign service in Country X are therefore exempt from income tax in Australia.