Private ruling: Foreign income
Published: October 2014
Ruling period: 30 June 2015 | 30 June 2016 | 30 June 2017
Date scheme commenced: 1 July 2014

Ruling: Q1: Are your salary and allowances earned while posted to an overseas country exempt from tax in Australia? | A1: Yes.

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You are a full-time employee of the Australian Government. You have been deployed to the foreign country as part of a disciplined force for over two years. You will be engaged in foreign employment for more than 91 continuous days and intend to only take leave accrued as part of your foreign service. You are posted to provide professional assistance. You are not on a diplomatic passport and you will not receive diplomatic privileges. During your stay overseas, you will continue to receive your normal salary and associated allowances, as well as a number of allowances for service overseas. These additional allowances were designed to cover various costs and hardships encountered during your overseas service. Australia has a tax treaty with the overseas country. The overseas country has a tax system that taxes employment income. Your earnings and allowances are exempt from income tax in the overseas country under the auspices of a particular agreement between the Government of Australia and the Government of the overseas country. Your posting meets the stated aims of the projects under the agreement.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 23AG(1). | Income Tax Assessment Act 1936 Subsection 23AG(2). | Income Tax Assessment Act 1936 Paragraph 23AG(1AA)(d). | Income Tax Assessment Act 1936 Paragraph 23AG(2)(b). | Income Tax Assessment Act 1936 Subsection 23AG(7). | International Tax Agreements Act 1953 Section 4. | International Tax Agreements Act 1953 Section 5 | International Tax Agreements Act 1953 Sch37-Art20. | International Tax Agreements Act 1953 Sch37-Art21

Reasons for decision: Summary: Subsection 23AG (1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that foreign earnings derived by an Australian resident individual engaged in continuous foreign service for not less than 91 days employment in a foreign country are exempt from tax in Australia. Paragraph 23AG(1AA)(d) of the ITAA 1936 provides that such earnings are only exempt from income tax if the foreign service is directly attributable to that person's deployment outside Australia as a member of a disciplined force by an Australian government, or an authority thereof. A disciplined force is intended to refer to a defence force, including a peacekeeping force, and a police force. In a defence force context, the exemption would apply to a person's deployment outside Australia as part of a non-warlike operation. As you are deployed overseas as a member of a disciplined force, you satisfy the conditions for exemption under paragraph 23AG(1AA)(d) of the ITAA 1936. During this posting, you continue to receive your normal salary as well as allowances designated to cover various costs and hardships encountered during your posting. 'Foreign service' includes service in a foreign country in the capacity as an employee and 'foreign earnings' includes income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936). As your salary and allowances are paid in relation to your service they are considered to be derived from your foreign service for the purposes of subsection 23AG(7) of the ITAA 1936. Furthermore as you are posted for a period around two years and you intend to only take leave accrued as part of your foreign service, you satisfy the 91 days continuous foreign service. However, subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from income tax in the foreign country only because of any of the reasons listed in this section. One of the listed conditions is where the income earned by the resident in the foreign country is made exempt by the operation of a tax treaty (paragraph 23AG(2)(b) of the ITAA 1936). Therefore, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act). Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country X Agreement is listed in section 5 of the Agreements Act. The Country X Agreement is located on the Austlii website ( www.austlii.edu.au ) in the Australian Treaties Series database. The Country X Agreement operates to avoid the double taxation of income received by a resident of either Australia or Indonesia. In your case, you are deployed as a member of a disciplined force. Therefore, we considered that the Government services Article is more appropriate. Article 19(1) of Country X Agreement provides that remuneration paid by Australia to any individual in respect of services rendered to it shall be taxable only in Australia. However, such remuneration will be taxable only in Country X if the services are rendered in that country and the individual is a resident and citizen of Country X, or did not become a resident of Country X solely for the purpose of performing the services. Your employment income receive in relation to your posting to Country X is taxable only in Australia under Article 19(1) of Country X Agreement as the income was paid by Australia in respect of services rendered to it. You stated that your employment income derived while you are in Country X is exempt from tax in Country X because it falls under the auspices of the Development Co-operation Agreement between the Government of Australia and the Government of Country X (the agreement). As your employment income derived while posted to Country X is exempt from tax in Country X due to a reason not listed in subsection 23AG(2) of the ITAA 1936, exemption under subsection 23AG(1) can apply to exempt tax on your employment income. Accordingly, your salary and allowances earned while posted to Country X are exempt from tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Note;: Foreign earnings 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. The exempt income needs to be included as exempt foreign salary and wages income in the Australian tax return.