Private ruling: Assessability of foreign salary and allowances
Published: November 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Are the salary and allowances you earned while posted to Country X for full-time study exempt from income tax in Australia? | A1: No.

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You are a full-time member of the Australian Defence Force (ADF). You were posted to Country X for a period greater than 91 days for the purpose of full-time study. During your time in Country X, you had no other official duties other than to study at the designated educational institutions. You were considered by the Country X Government to be a foreign student during this time. You were not a member of the Australia Embassy in Country X, and did not receive any diplomatic privileges. You travelled on an official passport and not on a diplomatic passport. During your period in Country X you received your normal salary and associated allowances, as well as additional allowances for service overseas. These additional allowances were designed to cover various costs and hardships during your overseas service. There is a tax treaty between Australia and Country X. Country X taxes employment income under its domestic laws.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG.

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 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 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. In your case, you are an Australian resident individual engaged in foreign service for a continuous period of not less than 91 days. Therefore, your foreign earnings are exempt under section 23AG of the ITAA 1936, provided that all of the conditions in that section are met. 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. In your case, you were posted to Country X to undertake full-time study as a member of the ADF. Paragraph 23AG(1AA)(a) of the ITAA 1936 does not apply to your as your foreign service was not directly attributable to the delivery of Australian official development assistance by your employer. Paragraph 23AG(1AA)(b) of the ITAA 1936 does not apply to you as your employer was not operating a public fund. Paragraph 23AG(1AA)(c) of the ITAA 1936 does not apply to you as your employer is not a prescribed charitable or religious institution. Paragraph 23AG(1AA)(d) of the ITAA 1936 does not apply to you, because although you are a member of the ADF and therefore a member of a disciplined force, you have not been "deployed" outside Australia. In your case you have been "posted" to Country X to undertake full-time study. As paragraph 23AG(1AA)(d) of the ITAA 1936 specifically states that a taxpayer's service must be directly attributable to "deployment outside of Australia" and you have been posted to Country X and not deployed there, you have not met the conditions set out in this paragraph. Your income is therefore not exempt under section 23AG of the ITAA 1936.

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.