Private ruling: Exempt foreign employment income
Published: September 2011
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 01 July 2011

Ruling: Q1: Is the salary and allowances you receive from your posting in another country by the Australian Government exempt from income tax in Australia? | A1: Yes


Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG | Subsection 23AG(1) | Subsection 23AG(2) | Paragraph 23AG(2)(b) | Subsection 23AG(7) | International Tax Agreements Act 1953 Section 3AAA | Section 4 | Section 5

Reasons for decision: Summary: Section 23AG(1) of the Income Tax Assessment act 1936 (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 includes income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936). As you receive a salary from your foreign employment in the other country, this salary is considered to be derived from your foreign service. Your allowances are designed to cover various costs and hardship of the foreign service. As they are paid to compensate for costs arising from the foreign service and for the hardship attributable to the foreign service, they are considered to be derived from your foreign service. Therefore, your salary and allowances are foreign earnings from foreign service for the purposes of subsection 23AG(1) of the ITAA 1936. 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. As your deployment outside Australia is being a member of a disciplined force of the Australian government, 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. Australia has a tax treaty with the other country (the Agreement) which operates to avoid the double taxation of income received by residents of Australia and the other country. An Article of the 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 the other country if the services are rendered in the other country and the individual is a national or citizen of the other country, or did not become a resident of the other country solely for the purpose of performing the services. The employment income you receive in relation to your deployment to the other country is taxable only in Australia under the Article of the 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 the other country is exempt from tax in the other country because of the operation of a tax treaty, 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 exempt from taxation in the other country in accordance with the provisions under the Treaty on Development Co-operation between the Government of Australia and the Government of the other country. Your foreign earnings derived in the other country are exempt from tax in the other country because of a tax treaty and the Treaty on Development Co-operation. As your foreign earnings are exempt from tax in the other country, apart from a tax treaty, the conditions for exemption from Australian tax under subsection 23AG(2) of the ITAA 1936 have been satisfied. You satisfy the conditions for exemption under section 23AG of the ITAA 1936. Accordingly, the salary and allowances you receive from employment in the other country 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 that are 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. This income needs to be included as exempt foreign salary and wage income in your Australian tax return.

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. | Relevant facts: You are a resident of Australia for taxation purposes. | You are employed by a section of the Australian Government working in another country on a specific posting as part of a specific program. | Your posting commences on the prescribed starting date. | Your employment in the other country is expected to cease on the prescribed finishing date. | You do not intend to remain in the other country beyond your posting and will return to Australia. | While in the other country, you will be receiving the following allowances as a result of your employment: | · attraction allowance: an incentive allowance to attract personnel to service in the other country. | · hardship allowance: paid in recognition of the hardship and limitations placed on personnel posted to this region. | · overseas living allowance: a compensatory allowance for the additional cost associated with living in the other country. | You will accrue the usual amount of days per year recreation leave as a result of your employment in the other country. | You do not envisage taking leave that has not accrued during your deployment to the other country. | You will most likely take your recreation leave in countries other than the other country, primarily in Australia. | You are not required to perform any work duties in Australia whilst on recreation leave. | Liability for taxation in the other country is covered under the Treaty on Development Co-operation between the Government of Australia and the Government of the other country and another Agreement between Australia and the other country.