Private ruling: Foreign source income
Published: March 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Question and answer | Is the foreign employment income you derive from working in Country X and Country Y, under your current employment contract, exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | Yes.

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You are a member of a disciplined force. You were deployed by the Australian Government to work in Country X under your previous employment contract. You served in Country X under your previous employment contract for more than 91 days. Your previous employment contract was superseded by your current employment contract. Under your current employment contract, you needed to keep serving in Country X and then be redeployed to Country Y. You came back to Australia for a short period of time to have recreational leave. The leave was accrued from your foreign service. Your deployment is not an accompanied assignment. There is an agreement (a Memorandum of Understanding) between Australia and Country X that exempts the income from taxation in Country X. There is an agreement (a Memorandum of Understanding) between Australia and Country Y that exempts the income from taxation in Country Y.

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 Subsection 23AG (6) | Income Tax Assessment Act 1936 Subsection 23AG (7)

Reasons for decision: Summary: Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that foreign earnings are exempt from income tax where all of the following requirements are satisfied: • you are a resident of Australia and a natural person, • you are engaged in foreign service, • the foreign service is for a continuous period of at least 91 days, • you derive foreign earnings from that foreign service, Foreign earnings include salary, wages, bonuses or allowances (subsection 23AG (7) of the ITAA 1936). In your case, you were a resident of Australia for tax purposes and engaged in foreign service (and derived foreign earnings from that service) for a continuous period of more than 91 days. The change from your previous employment contract to your current employment contract did not break your continuous period of foreign service. The change of your assignment location from Country X to Country Y did not break your continuous period of foreign service. You coming back to Australia on leave did not break the continuous period because according to subsection 23AG(6) of the ITAA 1936, being absent on recreation leave which was fully attributable to your foreign service is regarded as part of the period of engaging in that foreign service. Subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, provides that foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the following: • delivery of Australian official development assistance by your employer, • 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, or • deployment outside Australia by the Australian government (or an authority thereof) as a member of a disciplined force. In your case, as you were deployed to Country X and Country Y as a member of a disciplined force, you satisfy one of the conditions for exemption under subsection 23AG (1AA) of the ITAA 1936. Further, 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. There is an agreement (a Memorandum of Understanding) between Australia and Country X that exempts your income from taxation in Country X, and an agreement (a Memorandum of Understanding) between Australia and Country Y that exempts your income from taxation in Country Y. This reason is not listed in subsection 23AG(2) of the ITAA 1936. Therefore, the income you derived whilst on foreign service in Country X and Country Y is not excluded from section 23AG only because of the provisions of subsection 23AG(2) of the ITAA 1936. | Detailed Reasoning - Conclusion: The income you earned while in Country X and Country Y under your current employment contract is exempt from tax in Australia under section 23AG of the ITAA 1936.