Private ruling: Assessability of foreign income
Published: January 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 2 January 2015

Ruling: Questions and answers | 1. Is the foreign employment income you derived from working overseas exempt income in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)? | Yes. | 2. Are the hardship allowances you receive exempt from income tax under section 23AG of the ITAA 1936? | Yes. | 3. Is the transfer allowance you receive exempt from income tax under section 23AG of the ITAA 1936? | No.

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You will be deployed overseas as an Australian government official as part of the Australian Government's overseas aid program that is administered by the Department of Foreign Affairs and Trade. You will be in Indonesia carrying out the project for more than 91 days. In addition to your salary you will receive various hardship allowances along with a transfer allowance paid to you in preparation of your departure and returning from overseas. There is a Memorandum of understanding (MOU) between the governments of Australia and the overseas country which exempts your salary from tax in the overseas country.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG

Reasons for decision: Summary: 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: • 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. • Deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force. You will be employed by the Department of Foreign Affairs and Trade to work in the overseas country as part of the Governments overseas aid program. You satisfy one of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. Subsection 23AG(2) of the ITAA 1936 provides that no exemption is available under subsection 23AG(1) of the ITAA 1936 in circumstances where an amount of foreign earnings derived from service in a foreign country is exempt from tax in the foreign country solely because of: • a tax treaty or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b) of the ITAA 1936); • the law of a foreign country 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) of the ITAA 1936), or • a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies (paragraphs 23AG(2)(e), (f) and (g) of the ITAA 1936). In order for your employment income to be exempt from tax in Australia under section 23AG of the ITAA 1936, the income must not be exempt from tax in the overseas country only because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936. There is a MOU between Australia and the overseas country. Therefore, subsection 23AG(2) of the ITAA 1936 will not apply to deny the exemption under subsection 23AG(1) of the ITAA 1936. Accordingly, the salary you receive during your employment overseas is exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Overseas allowances: Overseas allowances such as cost of living allowance, cost of posting allowance, hardship allowance and child allowances are paid to cover various costs and hardship of the foreign service. These allowances are paid to cover expenditure while the employee is in the foreign country and engaged in a period of foreign service, and is therefore derived from that foreign service. Accordingly, these overseas allowances are exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Transfer allowance: You receive a transfer allowance. This allowance is paid to cover costs associated with preparing for departure and returning from the deployment. These costs can include hotel accommodation after uplift of goods, taxi fares to and from the airport, loss on sale of motor vehicle, cost of obtaining a dental assessment and excess baggage costs. A transfer allowance is not paid to cover costs arising from the performance of your foreign service. Therefore, the allowances are not derived from foreign service. Accordingly, the allowances are not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. Please note, if the MOU between Australia and the overseas country no longer applies to your circumstances this ruling will not apply to exempt your income from tax in Australia.