Private ruling: Foreign source income - 23AG
Published: January 2014
Ruling period: Year ending 30 June 2014

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: Yes

Relevant facts and circumstances: You are a resident of Australia for tax purposes. You are serving in the Australian Defence Force. You were posted to country X for approximately 5 months. The purpose of your posting was to attend military training at a military training institution as a full time student. For the duration of the posting you were not required to do any other duties other than to be a full time student. You are not a member of the Australian Embassy; you do not have a diplomatic passport or receive diplomatic privileges. Your passport and visa are Official documents. You will receive your normal base salary. You will also be paid an overseas travelling allowance and uniform allowance. There is a tax treaty between Australia and country X inter alia the ' Agreement between the Government of country X and the Government of Australia for the avoidance of Double Taxation and The Prevention of Fiscal Evasion with Respect to Taxes on Income (signed 22 April, effective from 1 Jul 1993). There is a General Agreement on Development Cooperation between the Government of Australia and the Government of country X. Article 1 (g) states the Programme of development cooperation may include the encouragement and promotion of relations between firms, organisation, institutions and persons of the two countries. Article XI states the income tax liability of Australian firms and Australian personnel shall be borne by the Government of country X. There is an Arrangement between the Department of Defence of Australia for the implementation of the agreement between country X and Australia on the Framework for the security Cooperation and its plan of action on Defence Cooperation. You have stated that your posting to country X falls under the auspices of the Defence Cooperation Program (DCP).

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG. | Income Tax Assessment Act 1997 Section 6-5 | International Agreements Act

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. 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. During the period you are in country X, you will remain an Australian resident employed by the ADF. You are posted to country X to undergo advanced military training as part of your employment with the ADF, and are therefore engaged in service in a foreign country as an employee. During this posting you will receive your normal salary and additional allowances for service overseas. The salary and allowances paid for the duration of your overseas posting are foreign earnings derived from your foreign service. Your foreign service is for a continuous period exceeding 91 days. Your foreign service is of the kind specified in paragraph (d) of subsection 23AG(1AA) of the ITAA 1936, that is, your deployment as a member of a disciplined force (ADF) by an Australian government. However, the existing conditions for exemption will continue to apply. Subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the foreign earnings are exempt from income tax in the foreign country only because of any of the reasons listed in that subsection. One of the reasons listed in subsection 23AG(2) of the ITAA 1936 is where the foreign earnings are exempt from income tax in the foreign country because of a tax treaty. Australia has a tax treaty with country X, so it is necessary to consider whether your foreign earnings are exempt from income tax in country X under this agreement. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The country X Agreement is listed in section 5 of the Agreements Act. The country X agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The country X agreement operates to avoid the double taxation of income received by residents of Australia and country X. | Detailed Reasoning - The country X Agreement: The country X Agreement operates to avoid the double taxation of income received by Australian and country X residents. Article 19 of the country X Agreement provides that remuneration paid by Australia to any individual in respect of services rendered to it (government service) shall be taxable only in Australia. However, such remuneration will be taxable only in country X if the services are rendered in that country and the individual is a resident and citizen of country X, or did not become a resident of country X solely for the purpose of performing the services. The employment income you receive in relation to your posting to country X is taxable only in Australia under Article 19 of the country X Agreement, as the income is paid by Australia in respect of your service in the ADF (government service). This income is not subject to tax in country X by virtue of the operation of Article 19. Consequently, one of the reasons listed in subsection 23AG(2) of the ITAA 1936 is satisfied, as your foreign earnings are exempt from income tax in country X because of a tax treaty. | Detailed Reasoning - Development Co-operation Agreement: You stated that the employment income that you derive while you are in country X is exempt from tax in country X because of another reason not listed in subsection 23AG(2) of the ITAA 1936. That is, because your posting falls under the auspices of the General Agreement on Development Cooperation between the Government of Australia and the Government of country X . You asserted that this Agreement applies because your posting falls within one of the categories of a program of development co-operation, as defined in Article 1 of the Agreement. However, it is not considered enough that a person's activity may be consistent with the aims of the Development Co-operation Agreement for the Agreement to apply to that person. Generally, for an individual to qualify for the exemption from income tax they must be 'Australian personnel' under Article XI of the Development Co-operation Agreement, which states: The income tax liability of Australian firms and Australian personnel shall be borne by the Government of the Republic of country X. To be 'Australian personnel' an individual must be part of a 'Project'. This is because a person only gets the exemptions, rights and privileges of the Development Co-operation Agreement if they are named by the Australian Government as per clause II of Annex A of the Agreement, which states: The Government of Australia shall provide the Government of the Republic of country X in a timely manner with the names of the Australian firms and the Australian personnel and their Dependants entitled to the rights, exemptions and privileges set forth in this Agreement who are engaged in a Project. A 'Project' is defined in Article II of the Development Co-operation Agreement as a self-contained 'Activity' based on a mutually approved design and involving the provision of Australian and country X services and supplies. An 'Activity' is defined in Article II as any discrete unit of development cooperation, which may include any one or more of the forms of a program of development co-operation described in Article I. Activities are chosen by the coordinating authorities for implementation under the program, under Article III of the Development Co-operation Agreement. Accordingly, a person can only be covered by the Agreement if they are 'Australian personnel' of a 'Project' which is part of the program. You have stated that your posting to country X falls under the Development Co-operation Agreement . The employment income that you derived while you were in country X is considered to be exempt from tax in country X under that Agreement. As your employment income derived while posted to country X is exempt from tax in country X due to the tax treaty (the country X Agreement) and the Development Co-operation Agreement , your overseas employment income is exempt from tax. Accordingly, your salary and allowances earned while posted to country X are exempt from 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.