Private ruling: Foreign employment income
Date of advice: 13 April 2017
Published: September 2017
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Question and answer | Is the salary you earned while employed overseas exempt from income tax in Australia? | No.

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You are employed by Australian government agency. You were engaged in continuous foreign service of greater than 91 days in country A. You travelled to country A as the holder of a diplomatic passport. Your employment income was exempt from tax in country A. Country A normally taxes salary and wage income. There is a double tax agreement between the Government of Australia and the Government of country A. There is a development agreement between the Government of Australia and the Government of country A. There was a communication to the government of country A which stated that as from 20XX, the agreement did not apply to employees deployed to country A and accredited in country A as diplomatic or consular agents under the Vienna Convention on Diplomatic Relations (1961) or the Vienna 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. Subsection 23AG(1AA) of the ITAA 1936 provides that foreign earnings may be exempt from tax if 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. Notwithstanding the above conditions, 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 only because of one or more of the following: ● a tax treaty with Australia or a law giving effect to a treaty agreement; ● the foreign country does not impose tax on employment; ● a law of the foreign country that corresponds to the International Organisations (Privileges and Immunities ) Act 1963 or an international agreement to which Australia is a party that deals with: − diplomatic or consular privileges and immunities, or − privileges and immunities for people connected with international organisations, such as the United Nations; or ● a law of the foreign country which gives effect to an agreement to which Australia is a party which deals with diplomatic or consular privileges and immunities or privileges and immunities for people connected with international organisations. If your foreign employment income derived in a foreign country is exempt for a reason other than, or in addition to, the conditions listed above, then it will still be exempt from taxation in Australia. For example, if, your foreign employment income is not taxed in the foreign country that you are working in because there is a memorandum of understanding or similar agreement between Australia and the foreign country which provides for Australians to assist that country without the foreign country taxing the foreign employment income. | Detailed Reasoning - Double tax agreement: There is a double tax agreement between the governments of Australia and country A (the agreement), which operates to avoid the double taxation of income received by residents of Australia and country A. The 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 resident of country A who is a citizen or national of country A, or did not become a resident of country A solely for the purpose of performing the services. In your case, you were an Australian resident individual who was paid by the Australian Government in respect of services rendered in the discharge of governmental functions in country A. Therefore, the employment income you derived was only taxable in Australia and exempt from tax in country A under the agreement. | Detailed Reasoning - Vienna Convention on Diplomatic Relations (1961) and the Vienna Convention on Consular Relations (1963): The Vienna Convention on Diplomatic Relations (1961) and the Vienna Convention on Consular Relations (1963) are international agreements that operate to exempt the employment income of diplomatic and consular officials from taxation in the host country the duties are carried out in. In your case, you were the holder of a diplomatic passport while employed in country A. Therefore, the employment income you derived was exempt from taxation in country A under the terms of an international agreement, being the Vienna Convention on Diplomatic Relations (1961) or the Vienna Convention on Consular Relations (1963). Development agreement between the Government of Australia and the Government of country A There is a development agreement between the Government of Australia and the Government of country A that exempts Australian project personnel from taxation on their employment income in country A. The term, 'Australian project personnel' means Australian nationals or permanent residents or other persons who are not nationals or permanent residents of country A who are working in country A on an activity under the agreement and whose salaries or other costs are funded from the contribution of the Australian government to the activity. However, there was a communication to the government of country A which stated that as from 20XX, the agreement did not apply to employees deployed to country A and accredited in country A as diplomatic or consular agents under the Vienna Convention on Diplomatic Relations (1961) or the Vienna Convention on Consular Relations (1963). The effect of the communication was to exclude employees from the definition of Australian project personnel, thus they were no longer covered by the agreement. Therefore, you were not covered by the agreement and the employment income you derived in country A was not exempt from tax in country A because of the agreement. Instead, your income was exempt in country A because of the double tax agreement between the two countries and also an international agreement that deals with diplomatic or consular privileges and immunities, as mentioned above. Consequently, your income was exempt in country A only because of one or more of the conditions listed in subsection 23AG(2) of the ITAA 1936, and was not exempt for a reason other than, or in addition to, those conditions. Therefore, the employment income you derived is not exempt from income tax in Australia under section 23AG of the ITAA 1936.