Private ruling: Foreign income
Date of advice: 6 December 2017
Published: April 2018
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the amount of foreign earnings derived in Country A during the 2015-16 financial year exempt foreign income under section 23AG of the Income Tax Assessment Act 1936? | A1: Yes

Relevant facts and circumstances: You are an Australian resident for taxation purposes. You were deployed to Country A by your employer to deliver an Australian Official Development Assistance program. You were entitled to annual leave and hardship leave that accrued during your deployment. You took periods of leave during your deployment. There is a Memorandum of Understanding between Australia and Country A.

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 1997 section 6-5

Reasons for decision: Summary: Under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936), your foreign earnings are exempt from income tax in Australia 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. ● The foreign service is directly attributable to an activity that is listed in subsection 23AG(1AA) of the ITAA 1936. ● The foreign earnings must not be exempt in the foreign country only for one or more of the reasons covered by subsection 23AG(2) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: As a general rule, and under the provisions of section 6-5 of Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of an Australian resident taxpayer includes all the ordinary income they earn from all sources, in or out of Australia in an income year. Income in the form of salary, wages and allowances are all types of ordinary income. Although a payment may be considered ordinary income and will generally be assessable under the provisions of section 6-5 of the ITAA 1997, there are some instances where ordinary income may be excluded from an individual’s assessable income in Australia. This will be the case for example if a specific provision of the tax law makes the income exempt from taxation in Australia. Subsection 23AG(1) of the ITAA 1936 provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from tax in Australia. Subsection 23AG(1AA) of the ITAA 1936 provides that those 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 an Australian government (or an authority thereof) as a member of a disciplined force. Your position title and duties in Country A indicate that you are engaged in delivering Australian official development assistance (ODA) by your employer. You thus satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. | Detailed Reasoning - Temporary Leave Absences: Temporary leave absences from foreign service can be included in the total foreign service if they are accordance with the terms and conditions of that foreign service and constitute leave on full pay that is attributable to the period of foreign service. You undertook periods of annual leave during your foreign service. As these leave constituted leave attributable to your foreign service within the meaning of paragraph 23AG(6), it does not count as absences which can break the continuity of your foreign service. The entire period of your posting was continuous foreign service and exceeded 91 days. | Detailed Reasoning - Non-exemption conditions: Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available in circumstances where an amount of foreign earnings derived in a foreign country is exempt from tax in the foreign country solely because of: ● a double tax agreement or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b)); ● a law of that foreign country which generally exempts from, or does not provide for, the imposition of income tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and (d)); and ● a law or international agreement dealing with diplomatic or consular privileges and immunities, or privileges and immunities of persons connected with international organisations (paragraphs 23AG(2)(e), (f) and (g)). If your foreign employment income is exempt for a reason other than, or in addition to, the conditions listed above, then it will still be exempt from taxation in Australia. For example, your foreign employment income may not be taxed in the foreign country you are working in because there is a MOU or similar agreement between Australia and the foreign country which provides for Australians to assist that country without the foreign country taxing the employment income. There is a MOU between Australia and Country A which exempts Australian personnel from income tax on salary and wages derived in Country A. Therefore, subsection 23AG(2) of the ITAA 1936 will not apply to deny exemption under subsection 23AG(1) of the ITAA 1936. Accordingly, the salary you received until 30 June 2016 from your employer in Country A is exempt from tax in Australia.