Private ruling: Foreign Source Income
Date of advice: 16 March 2017
Published: August 2017
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2016

Ruling: Q1: Are the salary and allowances you earned while deployed overseas exempt from income tax in Australia? | A1: Yes.

Relevant facts and circumstances: You are an Australian resident for income tax purposes. You are employed by an Australian Government Department. You are being deployed as a member of a disciplined force to work in Country A for a continuous period that is greater than 91 days. There is an agreement between Australia and Country A that exempts the income from taxation in the overseas country. Country A normally taxes salary and wage income. There is no taxation treaty between Australia and Country A.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 23AG, | Income Tax Assessment Act 1936 subsection 23AG(1), | Income Tax Assessment Act 1936 subsection 23AG(1AA), | Income Tax Assessment Act 1936 subsection 23AG(2), | International Organisations (Privileges and Immunities) Act 1963 , and | Income Tax Assessment Act 1997 subsection 6-5(2).

Reasons for decision: Summary: Subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that foreign earnings are exempt from income tax where all of the following requirements are satisfied: ● you are a resident of Australia and a natural person, ● you are engaged in foreign service, ● the foreign service is for a continuous period of at least 91 days, ● you derive foreign earnings from that foreign service, ● the foreign service is directly attributable to an activity that is listed in subsection 23AG(1AA) of the ITAA 1936, and ● the foreign earnings are not exempt from income tax in the foreign country only because of one of the reasons listed in subsection 23AG(2) of the ITAA 1936. Given a consideration of the whole arrangement, it is accepted that you meet the above criteria and the income referable to your foreign service is exempt from income tax in Australia. | Detailed Reasoning - Detailed reasoning: Under paragraph 23AG(1AA)(d) of the ITAA 1936 foreign earnings are exempt from tax under this section if the person's deployment outside Australia is as a member of a disciplined force by the Commonwealth, a State or a Territory or an authority of the Commonwealth, a State or a Territory. You have been deployed as a member of a disciplined force by the Commonwealth Government. The definition of both 'deployed' and 'disciplined force' are found in Taxation Ruling TR 2013/17 Income tax: foreign employment income: interpretation of subsection 23AG(1AA) of the Income Tax Assessment Act 1936 . A person is 'deployed' within the meaning of paragraph 23AG(1AA)(d) of the ITAA 1936 if, and only if, they have been directed to perform duties overseas by the Commonwealth, a State or a Territory or an authority thereof in their capacity as a member of a disciplined force. This includes the member being sent overseas to undertake or participate in study or training activities in their capacity as a member of the relevant disciplined force. The phrase 'disciplined force' in paragraph 23AG(1AA)(d) of the ITAA 1936 refers to the Australian Defence Force (ADF), Australian Federal Police (AFP) and the State and Territory police forces. Subsection 23AG(2) ITAA 1936 provides a number of exemptions where an amount of foreign earnings derived in a foreign country is not exempt from Australian income tax for the purposes of section 23AG. If the amount is exempt from income tax in the foreign country only because of any of the following: (a) A law of the foreign country giving effect to a double tax agreement; (b) A double tax agreement (c) provisions of a law of the foreign country under which income covered by any of the following categories is generally exempt from income tax: (i) income derived in the capacity of an employee; (ii) income from personal services; (iii) similar income; (d) the law of the foreign country does not provide for the imposition of income tax on one or more of the categories of income mentioned in paragraph (c); (e) a law of the foreign country corresponding to the International Organisations (Privileges and Immunities) Act 1963 or to the regulations under that Act; (f) an international agreement to which Australia is a party and that deals with: (i) diplomatic or consular privileges and immunities; or (ii) privileges and immunities in relation to persons connected with international organisations; (g) a law of the foreign country giving effect to an agreement covered by paragraph (f). There is currently no double taxation agreement between Australia and Country A or law to that effect. The foreign earnings that you derive as an employee in the overseas country are not exempt, under a general provision, from income tax in Country A. Your foreign earnings are exempt from income tax in Country A under a specific provision not a general provision. There are no general provisions that would ordinarily exempt your income from tax in Country A. You are not being deployed as a member of an international organisation as defined in International Organisations (Privileges and Immunities) Act 1963. For the purposes of your deployment you are neither a member of a diplomatic or consular mission, nor covered by an international agreement that would give rise to any privileges or immunities. Therefore none of the exemptions listed under subsection 23AG(2) of the ITAA 1936 apply to your foreign earnings. Accordingly, the salary and overseas allowance that you receive from services performed in Country A as a deployed member of a disciplined force are exempt from tax under subsection 23AG(1) of the ITAA 1936 and are not assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 .