Private ruling: Foreign Income
Published: October 2011
Ruling period: Year ending 30 June 2012. | Year ending 30 June 2013. | Year ending 30 June 2014. | Year ending 30 June 2015. | The scheme will commence in: | January 2012.

Ruling: Q1: Are the salary and wages you are entitled to receive from deployment to Country A in the 2011-12, 2012-13, 2013-14 and 2014-15 income years exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: Is the specific allowance you are entitled to receive in relation to your deployment to Country A in the 2011-12, 2012-13, 2013-14 and 2014-15 income years exempt income in Australia under section 23AG of the ITAA 1936? | A2: No. | Q3: Are the specific overseas allowances you are entitled to receive from deployment to Country A in the 2011-12, 2012-13, 2013-14 and 2014-15 income years exempt income in Australia under section 23AG of the ITAA 1936? | A3: Yes.


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

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 will be appointed to undertake a deployment to Country A on a specific project. As your deployment will be directly attributable to the delivery of an Australian overseas aid program by your employer, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. In addition to your salary, you will receive a specific allowance and specific overseas allowances. | Detailed Reasoning - Specific allowance: The specific allowance will be paid to you to cover costs associated with preparing for departure and returning from your deployment. This allowance is not paid to cover costs arising from the performance of your foreign service. It is paid to cover costs arising before and after the foreign service. Therefore, this allowance will not be considered to be derived from your foreign service. Accordingly, the specific allowance will not be exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936 as it will not be derived from your foreign service. | Detailed Reasoning - Salary and specific overseas allowances: As you will receive a salary from your employment in Country A, this salary will be considered to be derived from your foreign service. The specific overseas allowances are designed to cover various costs and hardship of the foreign service. As they will be paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service, they will be considered to be derived from your foreign service. Therefore, your salary and specific overseas allowances will be 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. A specific 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 will receive in relation to your deployment to Country A will be taxable only in Australia under a specific 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 will 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 will also be 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 specific overseas allowances you will receive from employment in Country A will be exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Note:: 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 wages income in your Australian tax return.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You are a resident of Australia for tax purposes. | You are an employee of a specific Australian government agency. | Some time in the 2011-12 income year, you will be deployed as an employee of a specific Australian government agency to work in Country A. | Your foreign earnings will be attributable to the delivery of Australian official development assistance (ODA). | Your initial deployment will be for a certain period, however, you will have the option of extending it for another certain period. | You are entitled to receive salary and various allowances. | The allowances will include a specific allowance which will be received prior to posting and is associated with going on posting. | You will also receive another specific allowance which will be paid to you as a one-off interest free loan. | The specific overseas allowances will be paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service. | Country A taxes employment income under their domestic law. | You will not take any breaks other than your recreation leave which will accrue as the result of your foreign service. | You will not be performing any work related duties during your recreation leave. | Your foreign employment income will be exempt from income tax in Country A under the terms of the Development Cooperation Memorandum of Understanding between Australia and Country A.