Private ruling: Foreign employment income
Date of advice: 14 November 2016
Published: March 2017
Ruling period: Year ending 30 June 20YY | Year ending 30 June 20ZZ
Date scheme commenced: 15 July 20XX

Ruling: Question and answer | Is your foreign employment income exempt from income tax 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 taxation purposes. You are employed by the Australian Defence Force (ADF). You have been posted to country A for more than 91 days. You are engaged in continuous foreign service for more than 91 days. You are not a member of a diplomatic mission and you are not covered by the Relevant Convention or any other similar agreement Australia has entered into regarding diplomatic, consular or other protection. There is no double tax agreement between the Government of Australia and the Government of country A, nor is there any agreement between the two countries that exempts your employment income being assessable in country A. Country A normally taxes income derived in the capacity of an employee.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG Anti-avoidance rules | The application of Part IVA of the ITAA 1936 has not been considered as this topic is in the SBIT low risk PART IVA list as specified in ORCLA.

Reasons for decision: Summary: Section 23AG of the ITAA 1936 provides that where you are working overseas and earning foreign employment income, the income is exempt from income tax in Australia if all of the following applies: ● you are an Australian resident; ● you are engaged in continuous foreign service as an employee for 91 days or more; ● the foreign service is 'directly attributable' to an activity listed in subsection 23AG(1AA) of the ITAA 1936 (the listed activities include deployment outside Australia as a member of a disciplined force); and ● you are not excluded from the exemption by specific conditions listed in the law. 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 effects 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. You are an Australian resident; you are a full time member of the Australian Defence Force; you were deployed to country A; you are engaged in continuous foreign service for 91 days or more. Therefore, your employment income will be exempt from tax in Australia as long as you are not caught by the non-exemption conditions as listed in subsection 23AG(2) of the ITAA 1936. There is no double tax agreement between the Government of Australia and the Government of country A. Country A normally taxes income derived in the capacity of an employee. You have confirmed that the income you derive from your foreign service is assessable in country A. Therefore, subsection 23AG(2) of the ITAA 1936 does not apply. Accordingly, your foreign employment income is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Additional information: If a taxpayer has income in a financial year which is only partially exempt, there is a requirement to apportion the income. Salary and wages which are not exempt foreign earnings should be declared as normal at salary and wages when lodging. Foreign earnings exempt under section 23AG of the ITAA 1936 need to be included as exempt foreign salary and wage income in an individual's tax return. These amounts 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. It is advisable to include a note with lodgement, explaining the method of calculation and reference any applicable private rulings for the periods.