Private ruling: Foreign Source Income
Date of advice: 27 April 2017
Published: September 2017
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the salary you received while deployed in Country A exempt from income tax in Australia? | A1: Yes | Q2: Are the overseas living allowance, hardship allowance, uniform allowance, language proficiency allowances and military service allowance received while you were deployed in Country A exempt from income tax in Australia? | A2: Yes

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You are employed by the Australian Defence Force (ADF). You were posted as a member of the ADF to receive training in Country A for a continuous period that is greater than 91 days. You were posted to undertake an advanced language training course. While posted in Country A you receive a salary and allowances, including an overseas living allowance, hardship allowance, uniform allowance, language proficiency allowance and military service allowance. Your foreign earnings are exempt from taxation in Country A because of a treaty between Australia and Country A.

Relevant legislative provisions: 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), | International Organisations (Privileges and Immunities) Act 1963 and | Income Tax Assessment Act 1997 subsection 6-5(2).

Reasons for decision: Summary: Under paragraph 23AG(1AA)(d) of the ITAA 1936 foreign earnings are exempt from tax under this section if the person's deployment outside Australia is as a member of a disciplined force by the Commonwealth, a State or a Territory or an authority of the Commonwealth, a State or a Territory. You have been deployed as a member of the Australian Defence Force (ADF) by the Commonwealth Government. The definition of both 'deployed' and 'disciplined force' are found in Taxation Ruling TR 2013/17 Income tax: foreign employment income: interpretation of subsection 23AG(1AA) of the Income Tax Assessment Act 1936 . A person is 'deployed' within the meaning of paragraph 23AG(1AA)(d) ITAA 1936 if, and only if, they have been directed to perform duties overseas by the Commonwealth, a State or a Territory or an authority thereof in their capacity as a member of a disciplined force. This includes the member being sent overseas to undertake or participate in study or training activities in their capacity as a member of the relevant disciplined force. The phrase 'disciplined force' in paragraph 23AG(1AA)(d) ITAA 1936 refers to the Australian Defence Force (ADF), AFP and the State and Territory police forces. Subsection 23AG(2) of the ITAA 1936 provides a number of exemptions where an amount of foreign earnings derived in a foreign country is not exempt from Australian income tax for the purposes of section 23AG of the ITAA 1936. If the amount is exempt from income tax in the foreign country only because of any of the following: (a) A law of the foreign country giving effect to a double tax agreement; (b) A double tax agreement (c) provisions of a law of the foreign country under which income covered by any of the following categories is generally exempt from income tax: (i) income derived in the capacity of an employee; (ii) income from personal services; (iii) similar income; (d) the law of the foreign country does not provide for the imposition of income tax on one or more of the categories of income mentioned in paragraph (c); (e) a law of the foreign country corresponding to the International Organisations (Privileges and Immunities) Act 1963 or to the regulations under that Act; (f) an international agreement to which Australia is a party and that deals with: (i) diplomatic or consular privileges and immunities; or (ii) privileges and immunities in relation to persons connected with international organisations; (g) a law of the foreign country giving effect to an agreement covered by paragraph (f). Therefore as outlined in paragraph 23AG(2)(b) ITAA 1936 the exemption does not apply if the income is exempt from tax in Country A under Agreement 1 between Australia and Country A. Article 19 of Agreement 1 between Australian and Country A 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. Taxation ruling TR 2005/8 Income tax: the meaning of particular terms in the Government Service Articles of Australia's tax treaties states that 'governmental functions' is … inclusive of anything that is done by government. This includes being deployed to a foreign country for training purposes. The employment income you received in relation to your posting to Country A is taxable only in Australia under Article 19 of Agreement 1 between Australia and Country A 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 received 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, income earned while posted as a member of the ADF is also exempt from tax in Country A under Article XI of Agreement 2 between Australia and Country A if it is for the purposes outlined in Article 1 of Agreement 2 between Australia and Country A. Based on your circumstances the paragraphs where your posting could be considered are: (g) the encouragement and promotion of relations between firms, organisations, institutions and persons of the two countries; and (h) Any other form of development cooperation which may be mutually agreed upon. Under Article 3(2) Areas and Forms of Cooperation in Agreement 3 between Australia and Country A shall include study visits and exchanges as a form of professional cooperation between Defence Forces. Therefore your posting can be considered a form of development cooperation under Article 1 of Agreement 2 between Australia and Country A and your income exempt under Article XI. The exemption provided by Agreement 2 between Australia and Country A does not fall under any of the other exemption categories in subsection 23AG(2) of the ITAA 1936 and so your income is not only exempt because of the reasons listed in subsection 23AG(2) of the ITAA 1936. You were not posted as a member of an international organisation as defined in the International Organisations (Privileges and Immunities) Act 1963 . For the purposes of your posting you were neither a member of a diplomatic or consular mission, nor covered by an international agreement that would give rise to any privileges or immunities. Therefore none of the exemptions listed under subsection 23AG(2) apply to your foreign earnings. Accordingly, the salary and allowances that you received while posted to Country A as a member of the ADF are exempt from tax under subsection 23AG(1) of the ITAA 1936 and are not assessable income under subsection 6-5(2) of the ITAA 1997.