Private ruling: Foreign source income - 23AG
Published: December 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Question and answer | Is the salary you earned while employed overseas exempt from income tax in Australia? | No

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You were deployed to work in country X for a reason listed in section 23AG(1AA) of the Income Tax Assessment Act 1936 (ITAA 1936). You are employed by an Australian Government funded agency. Your employer is not a resident of country X. Your remuneration is not deductible in determining the profits of a permanent establishment or fixed base your company has in country X. You were engaged in foreign employment for 91 continuous days. Country X normally taxes salary and wage income. There is a taxation treaty between the Australian Government and country X. There is no agreement between Australia and country X that exempts the income from taxation in the overseas country.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 23AG | International Tax Agreements Act 1953

Reasons for decision: Summary: Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that foreign earnings of an Australian resident derived during a continuous period of foreign service of not less than 91 days employment in a foreign country are exempt from income tax in Australia. Foreign earnings includes income consisting of salary, wages, bonuses or allowances (subsection 23AG(7) of the ITAA 1936). Section 23AG of the ITAA 1936 has been amended so that foreign employment income derived by Australian residents will only be exempt in certain circumstances. These amendments are effective from 29 June 2009. 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: • the delivery of Australia's overseas aid program by the individual's employer; • the activities of the individual's employer in operating a developing country relief fund or a public disaster relief fund; • the activities of the individual's employer being a prescribed institution that is exempt from Australian tax; or • the individual's deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force. In accordance with subsection 23AG(2) of the ITAA 1936, the exemption under subsection 23AG(1) of the ITAA 1936 will not apply if the income is exempt from income tax in the foreign country only because of one or more of the following conditions: • a tax treaty with Australia or a law giving effect to a treaty agreement • the foreign country exempts from income tax, or does not provide for the imposition of income tax on, income derived in the capacity of an employee, income from personal services or similar income, or • a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations applies. In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements. 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. 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 residents of Australia and country X. Article 15(1) of the country X tax treaty provides that salaries, wages and other similar remuneration derived by a resident of Australia in respect of employment shall be taxable only in Australia, unless the employment is exercised in country X. If the employment is exercised in country X, such remuneration as is derived from that exercise may be taxed in country X. Article 15(2) provides that, remuneration derived by an individual who is a resident of Australia in respect of an employment exercised in country X shall be taxable only in Australia if- (a) the recipient is present in country X for a period or periods not exceeding in the aggregate 183 days in the year of income or the fiscal year as the case may be, of country X; and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of country X; and (c) the remuneration is not deductible in determining taxable profits of a permanent establishment or a fixed base which the employer has country X. Your income in country X is not taxable in that country because: • You are resident of Australia, • You worked in country X for less than 183 days, • Your remuneration is paid by an Australian company - an employer who is not a resident of country X • Your remuneration is not deductible in determining taxable profits of a permanent establishment or fixed base in country X There is no other agreement or memorandum of understanding exempting your income from tax in country X. Consequently, as your income is exempt in country X solely because of the country X Agreement, your salary and allowances will not be exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936.