Private ruling: International - Foreign source income - Section 23AG
Date of advice: 10 April 2019
Published: June 2019
Ruling period: Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021 | Year ending 30 June 2022 | Year ending 30 June 2023
Date scheme commenced: 1 July 2018

Ruling: Q1: Are your foreign earnings (including listed allowances) whilst posted to Country A exempt from tax in Australia under section 23AG of the Income Tax Assessment Act 1936 ? | A1: Yes

Relevant facts and circumstances: You are an Australian resident for taxation purposes. You have been deployed to Country A on a full-time assignment working on a project. Your period of Foreign Service began in early 20XX, and it will cease a few years later on 30 June 20XX, where you will be returning to Australia. As such you will be working in Country A for a period greater than 91 days. You will not be remaining in Country A following your period of Foreign Service. You are planning on taking the following periods of recreational leave each year (which will accrue, and be approved under the terms of your employment contract) during your overseas posting: ● You will be returning to Australia in April each year for the Easter long weekend; ● You will be returning to Australia in the middle of each year to visit family members, for a period of five days; and ● You will be returning to Australia in towards the end of each year for the Christmas holidays, for a period of three weeks. You will not be performing any work related duties for your employer during your visits back to Australia. You have supplied a copy of the employment contract with your employer which confirms that you will be entitled to four weeks of recreational leave per year of service. The employment contract specifies in several sections that you are defined as an employee, and not as a contractor. Whilst undertaking your period of foreign service you will be receiving the following monthly allowances in addition to your salary, and all of these allowances will only be paid to you during the specified period of your employment contract: ● Mobility allowance; ● Mobility allowance supplement; and ● Special location allowance. These allowances are payable to you under the terms of your employment contract. You are not liable for tax in Country A. Australia has signed a double tax agreement (DTA) with Country A. The agreement provides that salaries, wages, and similar remuneration derived by an individual who is a resident of Australia in respect of an employment can be taxed in Country A in circumstances which include where the employment is exercised in Country A for a period or periods exceeding XX days in a year of income. The supplied copy of an Agreement between Australia and Country A relating to the project you are working on confirms that the Government of Country A will grant exemption from income or other taxes on salaries and allowances. You have provided a letter from your employer which confirms that your foreign service is covered under the abovementioned agreement. This letter also confirms that your foreign service is directly attributable to the delivery of Australian official overseas development assistance.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subsection 6-15(2). | 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, whether in or out of Australia, during the income year. Salary and wages are ordinary income for the purposes 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 assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with exempt foreign employment income. Exempt income under section 23AG of the Income Tax Assessment Act 1936 Subsection 23AG(1) of the 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). 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 (except if that employer is an Australian Government Agency); ● 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 your case you meet the conditions of subsection 23AG (1AA) of the ITAA 1936 as you have supplied a letter from your employer which confirms that your foreign service is directly attributable to the delivery of Australian official overseas assistance by your employer. However, subsection 23AG(2) of the ITAA 1936, prevents the exemption under subsection 23AG(1) of the ITAA 1936 where the income is exempt from income tax in the foreign country only because of one or more of the following conditions: ● a double tax agreement or a law of a country that gives effect to such an agreement (paragraphs 23AG(2)(a) and (b)); ● 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 (paragraphs 23AG(2)(c) and (d)); or ● a law or international agreement dealing with diplomatic or consular privileges and immunities, or privileges and immunities of persons connected international organisations (paragraphs 23AG(2)(e), (f) and (g)). In your case, it is evident that your employment income is not exempt from tax in Country A for any of the above reasons that are listed in subsection 23AG(2) of the ITAA 1936. Further, your foreign service is covered under an agreement which exempts your employment income from tax in Country A. Therefore, subsection 23AG(2) of the ITAA 1936 will not apply to deny an exemption under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Conclusion: Accordingly, as you satisfy all the exemption conditions provided for under section 23AG of the ITAA 1936, the income derived and the specified allowances that you are paid which relate to your overseas deployment to Country A are not assessable in Australia under section 6-5(2) of the ITAA 1997.