Private ruling: Foreign income
Published: February 2012
Ruling period: 1 July 2010 to 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is the lump sum payment you received in respect of unused long service leave from employment services performed in Country A in the period 2006 to 2009 as a foreign resident exempt foreign employment income in Australia? | A1:  | Q2: Is the lump sum payment you received in respect of unused long service leave from employment services performed in Country A in the period 2009 to 12 December 2009 as a foreign resident exempt foreign employment income in Australia? | A2: 

Relevant facts and circumstances: You were employed by an Australian Company from 1987continuously until you were made redundant in 2010. You were assigned to work in Country A from 2006 to 2009. You were not an Australian resident in this time. In 2010 you received the following payments on the redundancy of your employment: o Tax free Component of Redundancy o Annual Leave Balance o Long Service Leave The unused long service leave was in respect of the entire period of your service, which included the periods of service overseas. Country A has a tax system in place which provides for the imposition of income tax on, income derived in the capacity of an employee, income from personal services or similar income There was no tax paid in Country A on the unused long service leave. You were not involved in any of the work activities specified in subsection 23AG(1AA) of the Income Tax Assessment Act 1936 (ITAA 1936) after 30 June 2009.

Relevant legislative provisions: Section 23AG of the Income Tax Assessment Act 1936 | Subsection 23AG(1) of the Income Tax Assessment Act 1936 | Subsection 23AG(1AA) of the Income Tax Assessment Act 1936 | Subsection 23AG(2) of the Income Tax Assessment Act 1936 | Subsection 23AG(2)(c) of the Income Tax Assessment Act 1936 | Subsection 23AG(2)(c)(i) of the Income Tax Assessment Act 1936 | Subsection 23AG(7) of the Income Tax Assessment Act 1936 | Subsection 6-5(2) of the Income Tax Assessment Act 1997 | Subsection 6-10(4) of the Income Tax Assessment Act 1997 | Section 10-5 of the Income Tax Assessment Act 1997 | Section 50-5 of the Income Tax Assessment Act 1997 | Section 82-135 of the Income Tax Assessment Act 1997 | Section 83-10 of the Income Tax Assessment Act 1997 | Section 83-80 of the Income Tax Assessment Act 1997 | Regulation 50-50.02 of the Income Tax Assessment Regulations 1997.

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that ordinary income derived by an Australian resident directly or indirectly from all sources, whether in or out of Australia, is assessable. Statutory income from all sources whether in or out of Australia, is also included in the assessable income of an Australian resident's assessable income under subsection 6-10(4) of the ITAA 1997. Salary and wages, including long service leave payments, is considered ordinary income as it is paid directly as a result of the personal services an employee renders for their employer. Payments for unused long service leave on termination of employment are not employment termination payments as they are specifically excluded under section 82-135 of the ITAA 1997. Instead the lump sums are included as assessable income and taxed in accordance with section 83-80 of the ITAA 1997 as statutory income (section 10-5 of the ITAA 1997). Generally, Australian courts have held that the source of employment income is where the employee performs their duties ( Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 7 AITR 76; 11 ATD 288). As the duties of your employment were performed in Country A, the source of the income is from Country A. Subsection 23AG(1) of the ITAA 1936 provides that where a resident taxpayer is engaged in foreign service for a continuous period of not less then 91 days, any foreign earnings derived will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity of an employee (subsection 23AG(7) of the ITAA 1936). The payment for unused long service leave from service overseas satisfies the definition of 'foreign earnings' in subsection 23AG(7) of the ITAA 1936. Subsection 23AG(2) of the ITAA 1936 states that an amount of foreign earnings derived in a foreign country is not exempt from tax if the amount is exempt from income tax in the foreign country only because of any of the following: (a) a law of the foreign country giving effect to a double tax agreement; (b) a double tax agreement; (c) provisions of a law of the foreign country under which income covered by any of the following categories is generally exempt from income tax: (i) income derived in the capacity of an employee; (ii) income from personal services; (iii) similar income; (d) the law of the foreign country does not provide for the imposition of income tax on one or more of the categories of income mentioned in paragraph (c); (e) a law of the foreign country corresponding to the International Organisations (Privileges and Immunities) Act 1963 or to the regulations under that Act; (f) an international agreement to which Australia is a party and that deals with: (i) diplomatic or consular privileges and immunities; or (ii) privileges and immunities in relation to persons connected with international organisations; (g) a law of the foreign country giving effect to an agreement covered by paragraph (f). Paragraphs (e) to (g) do not apply to you. The categories of income prescribed in paragraph 23AG(2)(c) are not limited to a particular subset of employment, personal services or similar income. Therefore, it is all 'income derived in the capacity of an employee' that falls within the first category of income and, for the purposes of subparagraph 23AG(2)(c)(i), it is this entire category of income that must be 'generally exempt' from income tax under the provisions of a law of the foreign country. Income derived in the capacity of an employee is taxed in Country A. Although long service leave is not paid in Country A and consequently there is no provision relating to the taxation of accrued long service leave, such an exemption is not a 'general' exemption afforded to income derived in the capacity of an employee (as required by paragraph 23AG(2)(c)). Accordingly, paragraph 23AG(2)(c) does not apply to deny the section 23AG exemption to the earnings of the taxpayer. At the time that the leave accrued you were a non-resident of Australia. However, when you received the payments for unused long service leave, you had resumed being a resident of Australia. It is a well established principle that salary and wages income, whether for current or past services, is generally derived when received. Taxation Ruling TR 96/15 addresses the issue of whether section 23AG of the ITAA 1936 can apply where the residential status for Australian tax purposes of an individual taxpayer changes from non-resident to resident and, on or after that date the taxpayer receives foreign earnings in respect of a continuous period of foreign service performed whilst a non-resident. Paragraph 5 of TR 96/15 states that while it is a requirement for the operation of section 23AG of the ITAA 1936 that the foreign earnings be derived whilst the individual is a resident for Australian taxation purposes, it's not a requirement that the relevant foreign service be performed whilst the individual is a resident for those purposes. Accordingly, exemption from Australian tax as provided under section 23AG may apply subject to the other conditions of section 23AG of the ITAA 1936. Your overseas service was continuous and for a period of not less than 91 days. In addition, the payment for unused long service leave was wholly attributable to your foreign service and therefore satisfies the definition of 'foreign earnings' in subsection 23AG(7) of the ITAA 1936. From 1 July 2009, there is a limited exemption for foreign employment income from particular types of foreign service- subsection 23AG(1AA) of the ITAA 1936). It provides that foreign earnings will not be exempt under section 23AG unless the continuous period of foreign service is directly attributable to: (a)( the delivery of Australian official development assistance (ODA) by the person's employer. ODA is assistance delivered through the Australian Government's overseas aid program, as administered by the Department of Foreign Affairs and Trade and/or the Australian Agency for International Development (AusAID). Australian ODA aims to reduce poverty and achieve sustainable development in developing countries, in line with Australia's national interest. (b)( the activities of the person's 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 country that has experienced a disaster. (c) the activities of the person's employer, being a prescribed institution that is exempt from Australian income tax , where the employer is a prescribed religious or charitable institution located or pursuing objectives outside Australia which is exempt from Australian income tax pursuant to item 1.1 or 1.2 of section 50-5 of the Income Tax Assessment Act 1997. The prescribed organisations are listed in regulation 50-50.02 of the Income Tax Assessment Regulations 1997 (ITAR 1997). () (d) the person's deployment outside Australia as a member of a disciplined force by the Commonwealth, a State or Territory (or an authority of the Commonwealth, a State or a Territory)( an activity of a kind specified in the regulations. You were not involved in any of these activities. Consequently, the amount of the lump sum payment for unused long service leave which is attributable to the period 2006 to 30 June 2009 is exempt from tax under the provisions of section 23AG of the ITAA 1936. Long service leave accrued after 30 June 2009 is not exempt in terms of section 23AG of the ITAA 1936

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.