Private ruling: Assessability of foreign employment income
Published: April 2015
Ruling period: Year ended 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Question and answer | Is your foreign employment income exempt from taxation in Australia? | Yes.

Relevant facts and circumstances: You are an Australia resident for income tax purposes. You are an Australian Public Service employee. During the income year ended 30 June 20XX, you were deployed to a foreign country for two periods of foreign service. The first period of foreign service was for a continuous period of over 91 days and the second period was for a continuous period of less than 91 days. The two periods of foreign service were separated by a period of leave of a type that did not constitute a temporary absence that forms part of a period of foreign service. During the income year ended 30 June 20XY, you were deployed to the same foreign country for another period of foreign service which was for a continuous period of over 91 days. You state that your foreign service was directly attributable to the delivery of Australian official development assistance by your employer. The foreign country normally taxes salary and wage income. There is no double tax agreement between Australia and the foreign country. There is a Memorandum of Understanding (MOU) between Australia and the foreign country which provides for Australians to assist that country without the foreign country taxing the employment income.

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(2) | Income Tax Assessment Act 1936 Subsection 23AG(3) | Income Tax Assessment Act 1936 Subsection 23AG(6)

Reasons for decision: Detailed Reasoning - Exemption conditions: Section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where you are working overseas and earning foreign employment income, the income is exempt from income tax in Australia if all of the following applies: • you are an Australian resident; • you are engaged in continuous foreign service as an employee for 91 days or more; • your foreign service is directly attributable to the delivery of Australian official development assistance by your employer; and • you are not excluded from the exemption by specific conditions listed in the law. | Detailed Reasoning - Non-exemption 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 solely because of: • a double tax agreement or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b)); • a law of that foreign country which generally exempts from, or does not provide for, the imposition of income tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and (d)); and • a law or international agreement dealing with diplomatic or consular privileges and immunities, or privileges and immunities of persons connected with international organisations (paragraphs 23AG(2)(e), (f) and (g)). If your foreign employment income 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, your foreign employment income may not be taxed in the foreign country you are working in because there is a MOU or similar agreement between Australia and the foreign country which provides for Australians to assist that country without the foreign country taxing the employment income. | Detailed Reasoning - Temporary absences forming part of a period of foreign service: Subsection 23AG(6) of the ITAA 1936 treats certain temporary absences from foreign service as forming part of the period of foreign service. The Commissioner's view on temporary absences is discussed in Taxation Determination TD 2012/8 Income tax: what types of temporary absences from foreign service form part of a continuous period of foreign service under section 23AG of the Income Tax Assessment Act 1936? For clarity, a person is treated as being engaged in foreign service on days such as weekends, public holidays, rostered days off, days off due to part-time arrangements, flex-days, 'compulsory lay off/over days', 'grounded days' and days off in lieu where those days are part of the normal working conditions for the foreign service. Absences which are taken to form part of the period of foreign service are absences taken in accordance with the terms and conditions of employment that relate to either recreation leave, accident or illness, or an absence related to work duties or training. 'Recreation leave' is leave in the nature of paid holidays to which an employee has accrued an entitlement. Usually it is the employee's accrued annual leave. Leave which fits this description is recreation leave, even if it is not called this. However, recreation leave does not include: • leave wholly or partly attributable to a period of service or employment other than the foreign service; • leave without pay or on reduced pay; • purchased leave; • long service leave, furlough, extended leave or leave of a similar kind (however described); • maternity and parental leave; or • leave that is not in the nature of paid holidays, such as weekends, public holidays, rostered days off, days off due to part time arrangement, flex-days, 'compulsory lay-off/over days', 'grounded days' and days off in lieu. Where an employee takes leave, such as leave without pay, which does not constitute a temporary absence that forms part of a period of foreign service, it needs to be determined whether the continuity of service can be maintained under the '1/6 legislative rule' contained in subsection 23AG(6A) of the ITAA 1936. The 1/6 legislative rule allows two or more periods of foreign service to be joined as a continuous period of foreign service, unless, at any time, the total period of absence (in days) between the periods of foreign service exceeds 1/6 of the total number of days of foreign service. | Detailed Reasoning - Income tax year ended 30 June 20XX: During the income tax year ended 30 June 20XX, you worked in the foreign country for two separate periods of time. In regard to the requirement that the period of foreign service needs to be for a continuous period of 91 days or more, we note that your first period of foreign service was for a continuous period of over 91 days and the second period was for a continuous period of less than 91 days. The periods of foreign service were separated by a period of leave that did not constitute a temporary absence that forms part of a period of foreign service. Therefore, it is necessary to apply the 1/6 legislative rule to your circumstances. In your situation, the period of absence was less than 1/6 of the total number of days of foreign service. Consequently, the two periods of foreign service you undertook in the 20XX income year can be joined together as one continuous period of foreign service. Based on the information you have provided, your foreign employment income will be exempt from taxation in Australia because: • you are an Australian resident; • you were engaged in continuous foreign service in the foreign country as an employee for 91 days or more; • your foreign service was directly attributable to the delivery of Australian official development assistance by your employer; • your foreign earnings were not exempt from income tax in the foreign country because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936; and • your foreign earnings were exempt from tax in the foreign country because of the MOU between Australia and the foreign country. The remuneration you derived from both periods of foreign employment in the income year ended 30 June 20XX is exempt from taxation in Australia. | Detailed Reasoning - Income tax year ending 30 June 20XY: During the income tax year ending 30 June 20XY, you worked in the same foreign country for a period of over 91 days. Consequently, your foreign employment income will be exempt from taxation in Australia because: • you are an Australian resident; • you were engaged in continuous foreign service in the foreign country as an employee for 91 days or more; • your foreign service was directly attributable to the delivery of Australian official development assistance by your employer; • your foreign earnings were not exempt from income tax in the foreign country because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936; and • your foreign earnings were exempt from tax in the foreign country because of the MOU between Australia and the foreign country. The remuneration you derived from your period of foreign employment in the income year ended 30 June 20XY is exempt from taxation in Australia. | Detailed Reasoning - Exemption with progression: Foreign earnings that are exempt from Australian tax under section 23AG of the ITAA 1936 are nevertheless taken into account in calculating the Australian tax on other assessable income derived by the employee as specified in subsection 23AG(3) of the ITAA 1936. Tax on other assessable income will be calculated by applying to the non-exempt income (for example, Australian salary or investment income), the notional average rate of tax payable on the sum of exempt income and non-exempt income. In calculating these amounts, any deductions that relate to the exempt income are allowed as if the exempt income was assessable income. That is, expenses which relate directly to earning the exempt foreign employment income are deductible from the income.