Private ruling: Assessable income - Allowances
Date of advice: 28 June 2018
Published: September 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the living and accommodation allowance you received as a volunteer in Country Y assessable income in Australia? | A1: No | Q2: Is the settlement/resettlement allowance you received as a volunteer in Country Y assessable income in Australia? | A2: Yes

Relevant facts and circumstances: You travelled to Country Y to be a volunteer under the program. The program forms part of Australia’s official development assistance (ODA). The program is funded by the Department of Foreign Affairs and Trade (DFAT). You received an allowance to volunteer in Country Y for 5 months. You remained a resident of Australia for taxation purposes during the period you were in Country Y. The living and accommodation allowance is paid as compensation for costs while you were in Country Y. The settlement/resettlement allowance was paid to you before and after your period of service as a volunteer under the program commenced.

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) | Income Tax Assessment Act 1936 Paragraph 23AG(2)(b) | Income Tax Assessment Act 1936 Subsection 23AG(7)

Reasons for decision: Detailed Reasoning - Detailed Reasoning: Subsection 23AG(1) of the ITAA 1936 provides that 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 or 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. Section 23AG of the ITAA 1936 has been amended so that foreign employment income derived by Australian residents will only be exempt in certain circumstances. These amendments are effective from 29 June 2009. 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: a) the delivery of Australian official development assistance by the person's employer b) the activities of the person's employer in operating a public fund covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the ITAA 1997 (international affairs deductible gift recipients) c) the activities of the person's employer, if the employer is exempt from income tax because of paragraph 50-50(c) or (d) of the ITAA 1997 (prescribed institutions located or pursuing objectives outside Australia) d) the person's deployment outside Australia as a member of a disciplined force by: a. the Commonwealth, a State or a Territory; or b. an authority of the Commonwealth, a State or a Territory e) an activity of a kind specified in the regulations. In your case, you have been appointed to undertake a deployment to Country Y on an Australian Government’s overseas program as an Australian volunteer. As your deployment is directly attributable to the delivery of Australian official development assistance delivered through the Australian Government's overseas aid program, as administered by the Department of Foreign Affairs and Trade, you satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. | Detailed Reasoning - Settlement/resettlement allowance: The settlement/resettlement allowance is paid to you to cover costs associated with preparing for departure and/or returning from your deployment. This allowance is not paid to cover costs arising from the performance of your foreign service. It is paid to cover costs arising before and after the foreign service. Therefore, this allowance is not considered to be derived from your foreign service. Accordingly, the transfer allowance is not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936 as it is not derived from your foreign service. | Detailed Reasoning - Living and accommodation allowance: The overseas allowances are designed to cover various costs of the foreign service. As they are paid to compensate for costs arising from the foreign service, they are considered to be derived from your foreign service. Therefore, your overseas allowances are foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936. Subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country only because of any of the reasons listed in that subsection. One of the reasons listed is where the income is exempt in the foreign country because of a tax treaty (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936). There is no provision in the tax treaty between Australia and Country Y that would preclude the allowance from being assessed in Australia. Therefore, paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936 will not apply. As the laws of Country Y provide for the imposition of income tax and do not generally exempt employment income from income tax, paragraphs 23AG(2)(c) and (d) of the ITAA 1936 will not apply. None of the other reasons in subsection 23AG(2) of the ITAA 1936 apply to your situation. In your case, you are engaged in employment overseas for a continuous period of not less than 91 days, and none of the reasons listed in subsection 23AG(2) of the ITAA 1936 apply in your situation. Consequently, the overseas allowances for living and accommodation expenses you earned during your deployment to Country Y are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Exemption of foreign income: 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 any of the reasons listed in subsection 23AG(2) of the ITAA 1936. One of the listed conditions is where the income earned by the resident in the foreign country is made exempt by the operation of a double tax agreement (DTA) (paragraph 23AG(2)(b) of the ITAA 1936). Therefore, it is necessary to consider not only the income tax laws but also any applicable DTA. Australia has signed a Double Tax Agreement with Country Y. The Country Y Agreement operates to avoid the double taxation of income received by a resident of either Australia or Country Y. An article of the Country Y Agreement 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 Y if the services are rendered in Country Y and the individual is a resident and citizen of Country Y, or did not become a resident of Country Y solely for the purpose of performing the services. The employment income you receive in relation to your deployment to Country Y is taxable only in Australia under an Article of the Country Y Agreement 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 receive while posted to Country Y is exempt from tax in Country Y because of the operation of a DTA, 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, the income you earn while on posting is also exempt from taxation in Country Y because of the terms of the General Agreement on Development Cooperation. The exemption provided by the agreement does not fall under any of the other exemption categories under subsection 23AG(2) of the ITAA 1936. Therefore, subsection 23AG(2) of the ITAA 1936 does not apply and as a result, your overseas allowances for living and accommodation expenses are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Further issues for you to consider: 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 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. The living and accommodation allowance is to be included as exempt foreign income in your Australian tax return in the supplement section Question 20 label N. The settlement/resettlement allowance is assessable foreign source income and is included in your tax return at Question 20 label E.