Private ruling: Assessability of foreign salary and allowances - official development assistance
Published: September 2012
Ruling period: Year ending 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Questions and answers | Is the salary you receive from employment in Country X exempt from income tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | Yes. | Is the transfer allowance, financial advice and outlay advance you receive in relation to your employment in Country X exempt from income tax in Australia under section 23 AG of the ITAA 1936? | No. | Are the overseas allowances you receive in relation to your employment in Country X exempt from income tax in Australia under section 23AG of the ITAA 1936? | Yes.

Relevant facts and circumstances: You are an Australian resident for taxation purposes. You began working as an employee in Country X in the year ending 30 June 2013. Your foreign earnings are directly attributable to the delivery of Australian official development assistance by your employer. In addition to your salary, you will receive a transfer allowance, a financial advice allowance, an outlay advance allowance and overseas allowances. The transfer allowance, financial advice and outlay advances are paid for costs associated with preparing for departure and returning from your deployment. The overseas allowances are paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service. The service is for more than 91 continuous days. Australia and Country X have a General Agreement on Development Cooperation.

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

Reasons for decision: Summary: Subsection 23AG(1) of the ITAA 1936 provides that the foreign earnings of an Australian resident derived during a continuous period of foreign service of not less than 91 days employment in a foreign country are exempt from tax in Australia. Foreign earnings include income consisting of salary, wages, bonuses and allowances (subsection 23AG(7) of the ITAA 1936). To qualify for the exemption the foreign earnings must be derived from the foreign service. That does not mean that the foreign earnings need to be derived at the time of engaging in foreign service. The important test is that the foreign earnings, when derived, need to be derived as a result of the undertaking of that foreign service. 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 Australia's overseas aid program by the individual's employer; · the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund; · the activities of the individual's employer being a prescribed institution that is exempt from Australian tax; or · the individual's deployment outside Australia by an Australian government or an authority thereof) as a member of a disciplined force. In your case, you are an employee working in Country X. As your deployment is directly attributable to the delivery of an Australian overseas aid program by your employer, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. The exemption does not apply if the income is exempt from tax in the foreign country only because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936. One of these reasons is a tax treaty between Australia and the foreign country. The exemption of income provided for in subsection 23AG(1) of the ITAA 1936 is subject to subsection 23AG(2) of the ITAA 1936 so that the exemption from tax in Australia in subsection 23AG(1) of the ITAA 1936 does not apply if the income is exempt from taxation in the foreign country only because of any of the reasons set out in subsection 23AG(2) of the ITAA 1936. Paragraph 23AG(2)(b) of the ITAA 1936 will not apply because the employment income earned in Country X is not exempt in Country X because of a tax treaty between Australia and Country X. The exemption provided by the General Agreement does not fit within any of the other categories excluding exemption under subsection 23AG(2) of the ITAA 1936. As you are engaged in foreign service for a continuous period of not less than 91 days, your salary will be exempt from tax under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Transfer allowance, financial advice and outlay advance: You receive a transfer allowance, financial advice and outlay advance. These allowances are paid to cover costs associated with preparing for departure and returning from the deployment. These costs can include hotel accommodation after uplift of goods, taxi fares to and from the airport, loss on sale of motor vehicle, cost of obtaining a dental assessment and excess baggage costs. A transfer allowance is not paid to cover costs arising from the performance of your foreign service. Therefore, the allowances are not derived from foreign service. Accordingly, the allowances are not 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 service. These allowances are paid to cover expenditure while the employee is in the foreign country and engaged in a period of foreign service, 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. | Detailed Reasoning - Note: It is important to note that foreign earnings exempt under section 23AG of the ITAA 1936 are taken into account in calculating the tax payable on the other income derived by a taxpayer. This method of calculation referred to as exemption with progression prevents the exempt income from reducing the Australian tax payable on the other income. This income needs to be included as exempt foreign salary and wage income in your Australian tax return.

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