Private ruling: Foreign income - 23AG
Published: November 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Are the allowances you received for volunteer work in country X 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 in country X for approximately ten months. The program is funded by DFAT. You were paid a volunteer allowance to cover your living, accommodation and settlement/resettlement expenses. You did not pay tax in country X and did not have any tax withheld from your allowance. There is a memorandum of understanding between Australia and country X that exempts the income from taxation in country X. The overseas country normally taxes salary and wage income. There is a taxation treaty between the Australian Government and country X.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG | Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Subsection 6-15(2) | Income Tax Assessment Act 1997 Section 11-15

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. New rules apply to foreign income earned from 1 July 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. 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 is administered by DFAT 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. Australia has a tax treaty with country X, the Agreement between Australia and the Independent State of country X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income 1989 ) ATS 37 (the country X Agreement) which operates to avoid the double taxation of income received by residents of Australia and country X. Article 15(1) of country X Agreement provides that salary and wages derived by an Australian resident for employment exercised in country X over a period of more than 90 days in country X income year may be taxed in country X. Country X may tax the employment income you derived in that country as you were present in country X for more than 90 days in country X year of income. However, the employment income you earned in country X is exempt from taxation in country X in accordance with the provisions of the Development Cooperation Memorandum of Understanding between Australia and country X. The exemption provided by the Development Cooperation Memorandum of Understanding 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 volunteer program in country X 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.