Private ruling: Foreign income exemption
Date of advice: 6 April 2016
Published: May 2016
Ruling period: Year ended 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is your foreign employment income exempt from income tax in Australia under Section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) for the period from December 20XX to March 20YY? | A1: Yes

Relevant facts and circumstances: You are an Australian resident for taxation purposes. You were employed in Foreign Country A. You were seconded to the relevant Program. Your period of employment in Foreign Country A was from December 20XX to December 20YY. You were engaged in continuous Foreign Service for more than 91 days in 20YY financial year. Your foreign service was directly attributable to the delivery of Australian official development assistance (ODA) by your employer. There is a Memorandum of Understanding (MOU) between your employer and the relevant Program. You were treated as a non-resident foreigner in Foreign Country A. Your income was also exempt in Foreign Country A because you were treated as a non-resident foreigner according to the Income Tax Law of Foreign Country A. There is no double tax agreement between the Government of Australia and the Government of Foreign Country A.

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

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 services for 91 days or more; • your foreign service is directly attributable to the delivery of Australian ODA by your employer; and • you are not exclude 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. In your case, you are an Australian resident; you were employed in Foreign Country A and seconded to the relevant Program; you were engaged in continuous foreign services for 91 days or more and your foreign service was directly attributable to the delivery of the Australian ODA. 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. In your situation, there is a MOU between your employer and the relevant Program Section VI of the MOU explains the Legal Status. It states that all specialists deployed to the relevant Program in the host country will be considered as experts on mission within the meaning of Article VI, Sections (22) and (23), of the Convention on the Privileges and Immunities of the United Nations and will benefit from the privileges and immunities accorded by that status. Furthermore, you have confirmed that your income was also exempt because you were treated as a non-resident foreigner according to the Income Tax Law of Foreign Country A. Accordingly, your foreign employment income is exempt from income tax in Australia under section 23AG 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.