Private ruling: Foreign earnings
Date of advice: 7 November 2016
Published: February 2017
Ruling period: Year ending 30 June 201X
Date scheme commenced: 1 July 201X

Ruling: Q1: Is the foreign employment income you derived from working overseas exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes. | Q2: Are the allowances you receive exempt from income tax under section 23AG of the ITAA 1936? | A2: Yes.

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You will carry out international aid for a non-government organisation overseas. Your term of employment is for approximately 6 months. You will be overseas working for more than 91 days. In addition to your salary you will also receive an allowance along with reimbursement of accommodation costs. There is a Memorandum of understanding (MOU) between the governments of Australia and the overseas country which exempts your salary from tax in the overseas country.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG

Reasons for decision: Summary: 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: ● Delivery of Australian international aid by your employer (except if that employer is an Australian government agency (within the meaning of the Income Tax Assessment Act 1997 )). ● Activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund). ● Activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia. ● Deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force. You will be employed by a non-government organisation to carry out international aid. You satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available under subsection 23AG(1) of the ITAA 1936 in circumstances where an amount of foreign earnings derived from service in a foreign country is exempt from tax in the foreign country solely because of: ● a tax treaty or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b) of the ITAA 1936); ● the law of a foreign country 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) of the ITAA 1936), or ● a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies (paragraphs 23AG(2)(e), (f) and (g) of the ITAA 1936). In order for your employment income to be exempt from tax in Australia under section 23AG of the ITAA 1936, the income must not be exempt from tax overseas only because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936. There is a MOU between Australia and the overseas country which exempts your income from tax overseas. Therefore, subsection 23AG(2) of the ITAA 1936 will not apply to deny the exemption under subsection 23AG(1) of the ITAA 1936. Accordingly, the salary you receive during your employment overseas is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Overseas allowances: Overseas allowances such as cost of living allowance, cost of posting allowance, hardship allowance and child allowances are paid to cover various costs and hardship of the foreign services. These allowances are paid to cover expenditure while the employee is in the foreign country and engaged in a period of foreign services, and is therefore derived from that foreign service. Accordingly, these overseas allowances are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.