Private ruling: exempt foreign income
Published: July 2011
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Question and answer | Is your salary income derived while working overseas exempt from tax in Australia? | Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 6-15. | Income Tax Assessment Act 1936 Section 23AG.

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 during the income year. However, if an amount is exempt income, it is not included in the assessable income of a taxpayer (section 6-15 of the ITAA 1997). Salary and allowances are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. From 1 July 2009 amendments to section 23AG of the ITAA 1936 come into effect. The amendments are 23AG(1AA): However, those foreign earnings are not exempt from tax under this section 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 person's employer; (b) the activities of the person's employer in operating a public fund covered by item 9.1.1 or 9.1.2 of the table in subsection 30-80(1) of the Income Tax Assessment Act 1997 (international affairs deductible gift recipients); (c) the activities of the person's employer, if the employer is exempt from income tax because of paragraph 50-50(c) or (d) of the Income Tax Assessment Act 1997 (prescribed institutions located or pursuing objectives outside Australia); (d) the person's deployment outside Australia as a member of a disciplined force by: (I). the Commonwealth, a State or a Territory; or (ii). an authority of the Commonwealth, a State or a Territory; (e) an activity of a kind specified in the regulations. In your case, your foreign service is directly attributable to the delivery of Australian official development assistance by your employer. Therefore, your foreign earnings are eligible for exemption pursuant to section 23AG. 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 double tax agreement 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). There is currently no double taxation agreement between Australia and the overseas country you are working in. The privileges and immunities of persons connected with an international organisation do not apply to the situation in the overseas country. The foreign earnings that you derive as an employee in the overseas country are not exempt, under a general provision, from income tax in the overseas country. It is specific legislation of the overseas country - the Facilitation of International Assistance Act 2003 which exempts your income from your deployment to the overseas country from taxation in the Solomon Islands. Accordingly, your foreign earnings will be exempt in the overseas country for a reason other than those listed in subsection 23AG(2) of the ITAA 1936. Therefore, subsection 23AG(2) of the ITAA 1936 will not apply to deny the exemption under subsection 23AG of the ITAA 1936. In your case, you are an Australian resident for taxation purposes and are engaged in Foreign Service for a continuous period of not less than 91 days. Accordingly, the salary that you receive from services performed in the overseas country are exempt from tax under subsection 23AG of the ITAA 1936 and are not assessable income under subsection 6-5(2) of the ITAA 1997. | 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. This income needs to be included as exempt foreign employment income in your Australian tax return.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: You work overseas providing aid.