Private ruling: Foreign salary and wages
Published: June 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the income you receive for overseas employment exempt under Section 23AG of the Income Tax Assessment Act 1936 ? | A1: Yes

Relevant facts and circumstances: You are an Australian resident for taxation purposes. AusAID has entered into an agreement with an Australian international organisation to provide staffing assistance services through an Australian Government, Australian aid initiative. You have a long term deployment commencing in the relevant financial year. You are to manage Australian and other donor funding provided as budget support under the Program. You will be taking periods of absence from work on personal leave accrued while deployed to the foreign country. The deployment is funded by the Government of Australia (represented by the Department of Foreign Affairs and Trade) under a Direct Funding Agreement to the Government of Country X which provides exemption from taxation. The Country X Government agrees that all the provisions of the current and future Memorandum of Understanding (MOU) apply to this program including taxation exemptions. The Country X Government will grant Australian project personnel engaged under the Program the exemptions, assistance and rights in accordance with Article 10 of the current MOU and relevant provisions of future MOUs. Article 10 of the MOU between Australia and Country X specifies that in order to facilitate the engagement of Australian project personnel required to implement the Australian contribution, the Government of Country X will, in respect of such personnel, grant exemption from income taxes on salaries and allowances.

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 an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Salary and 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, it is not included in the assessable income of a taxpayer. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with overseas employment income. Section 23AG of the ITAA 1936 exempts certain foreign salary and wage income from tax in Australia. The income must be from specified types of employment. 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 Australian official development assistance by the taxpayer's employer (generally provided by AusAID or the Department of Foreign Affairs and Trade (DFAT)); • 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; • the activities of the taxpayer's employer whether 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; • the taxpayer's deployment outside Australia as a member of a disciplined force of Australia (generally considered to be the Australian Defence Force or Australian Federal Police); or • 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). Australian official development assistance (ODA) is assistance delivered through the Australian Government's overseas aid program, as administered by DFAT and/or the Australian Agency for International Development (AusAID). Thus, in practice, individuals involved in the delivery of Australian ODA can include both Australian Public Service (APS) employees and non-APS employees. For the purposes of subsection 23AG(1AA) the delivery of Australian ODA must be undertaken by the person's employer, which includes DFAT and an entity contracted by DFAT to assist in the delivery of Australian ODA. 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 double taxation agreement or a law of a country that gives effect to such an 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. | Detailed Reasoning - Applying these criteria to your circumstances: You are an Australian resident for income tax purposes and you have signed a long term service agreement with an Australian international organisation in Country X. AusAID has entered into an agreement with the Australian international organisation to provide staffing assistance services through an Australian Government, Australian aid initiative. DFAT has a direct funding agreement with the Government of Country X. The aid initiative deployees work with Government Ministries, Statutory Authorities and Pacific regional organisations. The allowances and income you earn while deployed to the Australian international organisation is funded by the Department of Foreign Affairs and Trade and therefore falls under the first category above. There is no tax treaty between Australia and Country X. As a result, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply. As subsection 23AG(2) of the ITAA 1936 does not apply, your income earned in Country X will be exempt from tax under subsection 23AG(1) of the ITAA 1936 and is not included in your assessable income. Furthermore, your income earned in Country X is exempt because of a Memorandum of understanding (MOU) between Australia and Country X.