Private ruling: Foreign employment income
Published: May 2015
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Question and answer | Is the income received by you during your deployment to a foreign country exempt from income tax in Australia? | No.

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You are an employee of the Australian Government. You have been assigned to an international deployment overseas on official government business. You are part of a security operations team designed to protect Australian interests in a foreign country. For the income year ending 30 June 2014, you were deployed to a foreign country for periods which were for more than 91 consecutive days and for which you were paid a salary. You have not returned to Australia since last departing for a foreign country. Your situation is not covered by a provision of an agreement between a foreign country and Australia.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG | Income Tax Assessment Act 1997 Section 6-5 | International Agreements Act

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Salary and wages are ordinary income for the purpose of subsection 6-5(2) of the ITAA 1997. Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not included in assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act (ITAA 1936), which deals with foreign earnings. 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 subsection 23AG(1) of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the following: a) the delivery of Australian official development assistance by the taxpayer's employer (generally provided by AusAID or the Department of Foreign Affairs and Trade); b) the activities of the taxpayer's employer in operating a public fund covered by the deductible gift recipient categories overseas aid fund and developed country disaster relief fund; c) the activities of the taxpayer's employer where they are a charitable institution or religious institution which is income tax exempt because they are a prescribed institution located outside Australia or pursuing objectives principally outside Australia; d) the taxpayer's deployment outside Australia as a member of a disciplined force of Australia; or e) an activity of a kind specified in the regulations. During the period you are in a foreign country, you will remain an Australian resident employed by the Australian Government. You are posted to a foreign country as part of your employment with the Australian Government and are therefore engaged in service in a foreign country as an employee. During this posting you will receive your normal salary and additional allowances for service overseas. The salary and allowances paid for the duration of your overseas posting are foreign earnings derived from your foreign service. Your foreign service is for a continuous period exceeding 91 days. Your foreign service is of the kind specified in paragraph (d) of subsection 23AG (1AA) of the ITAA 1936, that is, your deployment as a member of a disciplined force by an Australian government. Subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the foreign earnings are exempt from income tax in the foreign country only because of any of the reasons listed in that subsection. One of the reasons listed in subsection 23AG(2) of the ITAA 1936 is where the foreign earnings are exempt from income tax in the foreign country because of a tax treaty. Australia has a tax treaty with a foreign country, so it is necessary to consider whether your foreign earnings are exempt from income tax in a foreign country under this agreement. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three 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. A foreign country Agreement is listed in section 5 of the Agreements Act. The foreign country agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The foreign country agreement operates to avoid the double taxation of income received by residents of Australia and a foreign country. | Detailed Reasoning - The foreign country Agreement: The foreign country Agreement operates to avoid the double taxation of income received by Australian and foreign country residents. Article X of the foreign country Agreement provides that remuneration paid by Australia to any individual in respect of services rendered to it (government service) shall be taxable only in Australia. However, such remuneration will be taxable only in a foreign country if the services are rendered in that country and the individual is a resident and citizen of a foreign country, or did not become a resident of a foreign country solely for the purpose of performing the services. The employment income you receive in relation to your posting to a foreign country is taxable only in Australia under Article X of the foreign country Agreement, as the income is paid by Australia in respect of your service in the Australian Government (government service). This income is not subject to tax in a foreign country by virtue of the operation of Article X. Consequently, one of the reasons listed in subsection 23AG(2) of the ITAA 1936 is satisfied, as your foreign earnings are exempt from income tax in a foreign country because of a tax treaty. As a result, your foreign income is not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. Nor is it exempt by a provision of an agreement between a foreign country and Australia. Consequently, the income and allowances are assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 and is included in your income tax returns for the relevant income years.